The Greatest Wealth Transfer In History (2024)

The biggest story in the news these days is about the debt ceiling and what a default on the government's debt might mean.

Government deficits are almost sacred, and the growth of government debt is really just a sideline to the main story.

Government budget policy in the United States is, at its foundation, Keynesian in philosophy. Government deficits are aimed at spurring on economic growth, reducing unemployment, and providing resources and benefits for the less wealthy.

The concept of the Phillips Curve supplements these goals with the idea that with a little more inflation, unemployment can achieve new lows.

And what is the result of all this government activity?

"The Greatest Wealth Transfer in History."

Talmon Joseph Smith writes in the New York Times that

"In the era of surging home and stock values, U.S. family wealth has soared."

"In 1989, total family wealth in the United States was about $38 trillion, adjusted for inflation. By 2033, that wealth had more than tripled, reaching $140 trillion...."

The wealthiest 10 percent of households will be engaged with "a majority of the riches."

The top 1 percent holds about as much wealth as the bottom 10 percent.

This is where we are today, on the edge of transferring all this wealth to the next generation.

What Is Behind This Wealth Growth?

I have been writing about this phenomenon for over ten years now in this post.

The foundation for this growth, to me, has been the government policy I have called "credit inflation."

This policy attempts to use the credit base of the United States to generate sustainable flows of funds into asset classes, hoping to generate increases in asset prices, increases that will not spill over into consumer price inflation.

A lot of the analysis that Mr. Smith presents begins in the early 1980s, the time when more sophisticated investors realized that the government was directing lots and lots of money into the financial and housing markets and not into the "aggregate demand" vehicles that were the basis of former Keynesian deficit spending programs.

And, as it turned out, both Republicans and Democrats provided the same kind of stimulus. So, as far as the wealth makers were concerned, it really didn't matter which party was in office.

Politicians wanted to get re-elected, and so they turned to economic stimulus programs that created wealth and helped them get returned to office. Politicians that followed this kind of strategy were generally very successful.

Consumer price inflation got killed in the early 1980s as Paul Volcker and the Federal Reserve finally crushed consumer price inflation.

This, however, was the time that "credit inflation" really got started with the focus on asset prices.

The Success

Mr. Smith writes,

"The average price of a U.S. house has risen about 500 percent since 1983...."

"The stock market, as measured by the benchmark S&P 500 index, is up by more than 2,800 percent since the beginning of 1983."

And, Mr. Smith does not even mention that Ben Bernanke and the Federal Reserve focused on raising stock prices in order to get the U.S. economy going again after the Great Recession. To Mr. Bernanke, rising stock prices increased wealth, and this rising wealth would stimulate more and more spending.

Mr. Bernanke was right on the mark.

But, Mr. Smith also notes that those that benefitted most from the rising asset prices were "in general, already rich...."

The Question

The question that these results raise to me is about the government's use of debt to drive the growth of inequality in the United States.

At least, in listening to the politicians, increasing wealth inequality in the United States was not their primary goal. Their efforts were directed at higher rates of employment, raising the salaries of workers, and creating a more inclusive work environment.

But, the conclusion seems to be that the government's programs have just increased the wealth inequality of the country and have created greater lines of separation than existed before.

And, to this, we add that the country has a tremendous debt load, a debt loan that is becoming harder and harder to manage...and justify.

The Debt Ceiling

The debt ceiling needs to be eliminated.

The emphasis on the government's economic program of credit inflation needs to be altered.

The government needs to focus on developing programs that help spur economic growth and that support the advancement of all the people.

In this respect, supply-side programs may a better approach to the generation of government programs than demand-side programs that just help to underwrite credit inflation.

With a new look at government stimulus programs, we may find that government deficits and the creation of government debt are less beneficial to economic stimulus than thought and the management of deficits and debt may become more rational and responsible than the current approach allows.

The crucial issue is that government spending may not be the optimal solution to solving some problems that its supporters believed.

Get rid of the debt ceiling. Reduce the emphasis upon government stimulus programs. Manage the government's budget more responsibly.

John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.