Economy

How Shadow Banking and Extreme Wealth Inequality Threaten Us

The systematic exploitation of a majority of the population will continue without redress.

This is an adapted excerpt from the new book, The Economics of Revolution. Read the previous portion of this excerpt here.

IV: Hidden Wealth & Shadow Banking

Tax Justice Network quote

The evidence presented in this report thus far makes a very solid mathematical case for significant systemic change. However, to get a more complete understanding of how corrupt the global economic system is, we also need to factor in wealth that is hidden from public view. Disregarding trillions of dollars in hidden wealth just because the wealthy have the ability to illegally hide it is an absolute injustice. It is completely ignoring a critical aspect of what is now the greatest theft of wealth in human history.

Hidden wealth estimates vary widely. Many of them only take a partial look at the most basic methods of offshoring wealth.  Given the unprecedented growth of wealth over the past generation, the secretive methods used to hide it have evolved far beyond well-known tax havens in Switzerland and small-island jurisdictions such as the Bahamas.  While estimates based on banking secrecy and tax havens help to give us a more accurate picture of overall wealth, they do not give a total view.

Research by Gabriel Zucman, which analyzed banking secrecy, estimated that “around 8% of the global financial wealth of households is held in tax havens.”  If we correlate this 8% with the $82 trillion in accounted for wealth reported by the Federal Reserve, that would be an additional $6.6 trillion for the wealthy, bringing the richest 1% up to roughly $39 trillion in overall wealth.

However, to get a more complete understanding of the reality of the situation, the most wide-ranging look into hidden wealth was done in 2012 by economist John Henry in partnership with the Tax Justice Network (TJN).  They estimated that there was $21-$32 trillion hidden globally at the end of 2010. As shocking as that sounds, that estimate still did not give a complete view of hidden wealth.  As they put it, “We consider these numbers to be conservative. This is only financial wealth and excludes a welter of real estate, yachts and other nonfinancial assets owned via offshore structures.”

We also need to consider that overall US household wealth is up 30% and has increased by $25 trillion since the end of 2010. Globally, High Net Worth Individual investible wealth has increased 19% since then, and has begun to accelerate at a record pace.  In 2013, it increased globally by 14%, with a 17% increase in North America, which is now at an all-time high.  Given these factors, and several others that will be explained below, the higher TJN estimation of $32 trillion in 2012 is conservative today.

Correlating TJN’s wealth estimates with US distribution percentages is not an exact science but it gives a much more accurate total of overall wealth than excluding it.  Based on TJN’s estimation, Ultra High Net Worth Individuals (UHNWI) accounted for 48% of hidden wealth.  If we correlate that to the overall estimate of $32 trillion, it equates to $15.4 trillion for the UHNWI population. The US accounts for 35% of the UHNWI population, which correlates to $5.4 trillion.  In the next tier, High Net Worth Individuals (HNWI) also accounted for 48% of hidden wealth.  The US currently has 42% of the HNWI population, which correlates to $6.5 trillion.  The additional 4% of hidden wealth is estimated to be held below the economic top 1% of the US population, which correlates to roughly $538 billion.

This brings the estimated total of hidden US wealth to $12.4 trillion, with $11.9 trillion of that held within the top 1%.  We can now estimate that the top .01% has $14.5 trillion in wealth, the top .1% has $26.4 trillion and in total the top 1% has $44.5 trillion.

After we factor in estimated hidden wealth, the top 1%’s share of overall wealth increases from 39.8% to 46.9%.  To glimpse the scale of theft, if hidden wealth were spread out evenly over every US household, that would be an extra $111k per household, increasing average household wealth to $823k.  That is approximately 15 times greater than the 2013 median household with only $56k in wealth.  Also consider that the estimated $12.4 trillion that the wealthy have stashed away is roughly equivalent to the $12 trillion in total household debt.

After revealing the 1%’s $32.6 trillion in accounted for wealth, estimating that they have another $11.9 trillion in hidden wealth may seem like an unnecessary risk that will invite attacks to undermine the credibility of this analysis. That is an understandable reaction.  However, in the grand scheme of things, that reaction is based on a dangerously naïve understanding of the global economic system.  In reality, if we ever get a full look at hidden wealth, the top 1% could more realistically own 50% of overall wealth.  It would not be surprising if the top 1% actually has $50 trillion in wealth, with $18 trillion of that held by the .01%.

Hopefully, government apologists, establishment economists, mainstream pundits and well-paid public relations experts will attack these numbers.  Public awareness of hidden wealth and the total amount of accounted for wealth that the ultra-rich have is an urgent priority.  Debate over these numbers will further highlight the absurdly corrupt and scandalous nature of the entire system.

Here’s how TJN summed up the situation:

“Despite taking pains to err on the conservative side, the results are astonishing. First, this hidden offshore sector is large enough to make a significant difference to all of our conventional measures of inequality.  Since most of missing financial wealth belongs to a tiny elite, the impact is staggering.

For most countries, global financial inequality is not only much greater than we suspected, but it has been growing much faster…. it turns out that this offshore sector – which specializes in tax dodging is basically designed and operated, not by shady no name banks located in sultry islands, but by the world’s largest private banks, law firms, and accounting firms, headquartered in First World capitals like London, New York, and Geneva.

Our detailed analysis of these banks shows that the leaders are the very same ones that have figured so prominently in government bailouts and other recent financial chicanery….  it is scandalous that official institutions like the Bank for International Settlements, the IMF, the World Bank, the OECD, and the G20, as well as leading central banks, have devoted so little research to this sector. This scandal is made worse by the fact that they already have much of the data needed to estimate this sector more carefully.”

The bottom line, there is overwhelming evidence proving that the Federal Reserve, global central banking system and the US government are a front for the ultra-rich.  In short, we know that the biggest players on Wall Street engaged in trillions of dollars in fraudulent activity and the Federal Reserve created trillions of dollars out of thin air, mostly in secrecy, to cover it up and continue the looting of wealth. Instead of holding people accountable, the US government bailed them out.

The stock market is now a blatantly rigged wealth extraction operation.  To name just a few of the more well known rigging operations; high frequency trading, dark pools, Quantitative Easing (QE) and the Zero Interest Rate Policy (ZIRP), which gives interest free money to a select handful of “primary dealers” on Wall Street.  All of these highly corrupt schemes enrich the .01% at the expense of the overwhelming majority of the population.

Shadow Banking

Another major aspect of the wealth extraction operation that the public is not allowed to see, which also makes the $12.4 trillion in hidden wealth a conservative estimate, is the shadow banking system.  The .01% participates in a secret unregulated derivatives market that is worth an estimated $2010 trillion in notional value. The global financial crisis was a result of this secret market, which features credit default swaps.  The truth is, the public and the government have no idea what is happening within this market, and neither do economists who try to reveal how much wealth the .01% truly has.  Look behind the curtain of the Federal Reserve and shadow banking system and the true neo-feudal nature of the global economy is revealed in spectacular fashion.

A public understanding of how much wealth the ultra-rich truly have will create a critical mass of people who are aware that the global economy and US government have zero legitimacy. The essential elements that keep this scam going are the extensive propaganda system that paid off and uninformed mainstream media pundits uphold, and a military, intelligence and police complex that protects the perpetrators of the greatest theft of wealth in human history.  As far as the corrupt government is concerned, the theft of trillions is too big to reveal.  If the people have to suffer as a consequence, so be it.

The emperor has no clothes. He’s standing right in front of you, with $50 trillion in wealth, as you go deeper into debt and toil in economic insecurity.

V: The Aristocracy & The Death of Liberty

Franklin Roosevelt quote

From the “monied aristocracy” to the “Gilded Age” and the “Roaring 20s,” extreme wealth inequality has always threatened freedom and democracy. Many of the most respected US presidents have highlighted the fight against concentrated wealth as the first priority of a free society.  Even in times of war, presidents have referred to bankers as being a bigger threat to the country than enemies on the battlefield.

Visionaries and leaders such as Buckminster Fuller and President Franklin D. Roosevelt saw the modern advancement of technology and increase in productivity and wealth creation occurring.  They began to envision a near future where people could regain their freedom from the dreary compulsion of industrialism.  Roosevelt proposed an Economic Bill of Rights that would guard against unhealthy levels of inequality and guarantee economic security for every citizen. He equated the concentration of wealth to “fascism” and “gangster rule.”  Upon accepting his second nomination as President, before World War II started, Roosevelt declared a war for economic freedom against the .01%.  He compared the wealthiest members of society to the British monarchy during revolutionary times:

“… the average man once more confronts the problem that faced the Minute Man…. The savings of the average family, the capital of the small-businessmen, the investments set aside for old age – other people’s money – these were tools which the new economic royalty used to dig itself in…. For too many of us the political equality we once had won was meaningless in the face of economic inequality.

A small group had concentrated into their own hands an almost complete control over other people’s property, other people’s money, other people’s labor – other people’s lives…. Against economic tyranny such as this…. the collapse of 1929 showed up the despotism for what it was…. The royalists of the economic order have conceded that political freedom was the business of the government, but they have maintained that economic slavery was nobody’s business….

These economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power. In vain they seek to hide behind the flag and the Constitution. In their blindness they forget what the flag and the Constitution stand for. Now, as always, they stand for democracy, not tyranny; for freedom, not subjection; and against a dictatorship by mob rule and the over-privileged alike….

America we are waging a great and successful war. It is not alone a war against want and destitution and economic demoralization. It is more than that; it is a war for the survival of democracy…. I accept the commission you have tendered me. I join with you. I am enlisted for the duration of the war.”

The war against the .01% was temporarily derailed when World War II began.  However, even at the height of WWII, during Roosevelt’s 1944 State of the Union address, he kept the focus on the .01% and said that they were “the greatest problem” facing the nation.  He called out “a noisy minority” which “maintains an uproar of demands for special favors for special groups.”  He described them as, “pests who swarm through the lobbies of the Congress and the cocktail bars of Washington, representing these special groups as opposed to the basic interests of the Nation as a whole….”

Roosevelt saw World War II as an extension of the deeper battle against “economic slavery,” wealth inequality and the .01% who prevailed in the 1920s and led the nation into the Great Depression.  Here’s another excerpt from his 1944 State of the Union address:

“We are united in determination that this war shall not be followed by another interim which leads to new disaster… that we shall not repeat the excesses of the wild twenties… if history were to repeat itself and we were to return to the so-called ‘normalcy’ of the 1920′s — then it is certain that even though we shall have conquered our enemies on the battlefields abroad, we shall have yielded to the spirit of Fascism here at home….”

When looking at the unprecedented level of wealth inequality in today’s society, it is obvious that “the spirit of Fascism” has prevailed.  Instead of increased productivity and wealth being a very good thing for overall society, the shortsighted greed of the .01% has systematically taken the increase in wealth for themselves, robbing everyone else of a life of liberty, economic security and freedom.

The “gangster rule” that Roosevelt warned against is now the norm.  The .01% acts with impunity, totally above the law, engaging in trillions of dollars in fraudulent activity without being held accountable. In fact, they are rewarded with all-time recording-breaking bonuses and ever-increasing wealth.

The .01% “economic royalists” hand down their dictates through centrally planned economic policy and government legislation designed to keep the population economically insecure, subservient and enslaved in debt.  Through their ownership of mainstream media companies they keep the masses in ignorance, wholly unaware of the paradigm shift in technology and wealth creation that should have provided economic security and made life much more enjoyable for everyone well over a generation ago.

We now live in a neo-feudal society. The evidence is undeniable.  The indentured servant is now the indebted wage slave. A recent scientific study revealed that the United States government is subservient to the whim of the .01%.  Political office is now merely a stepping-stone and initiation process that politicians go through to be accepted into the aristocracy.

The .01% aristocracy is exactly what the first American Revolution was against. It was Thomas Jefferson’s understanding of the aristocracy’s ability to consolidate wealth and subvert government that led him to believe that every generation required its own revolution.  Here are two prophetic quotes from Jefferson:

“Our country is now taking so steady a course as to show by what road it will pass to destruction, to wit: by consolidation of power first, and then corruption, its necessary consequence.”

“I hope we shall take warning from the example and crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country.”

In discussing “the spirit of the people” and the need to “nourish and perpetuate that spirit,” Jefferson also said, “I am not among those who fear the people. They, and not the rich, are our dependence for continued freedom. And to preserve their independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude.”

Peer passed propaganda and you will see that the aristocratic “spirit of fascism” has conquered the “spirit of the people.”  As wealth and power have been consolidation in unprecedented fashion, the overwhelming majority toils in “servitude” and“perpetual debt.”  Economic tyranny is the new normal.

The Coming Revolution

Strobe Talbott quote

We present this report as a declaration of the causes which impel our separation from a corrupt and oppressive government. After analyzing current policies and economic conditions, it is now evident that the systematic exploitation of a majority of the population will continue without redress.

The need for significant systemic change is now a mathematical fact. Corruption, greed and economic inequality have reached a peak tipping point. As more people grow aware of the deliberate systemic nature of their unnecessary suffering, exploitation and oppression, there will soon be a critical mass who will insist upon nothing less than absolute revolution. The delusional political class and mainstream media uphold the status quo as if it is insurmountable.   In reality, it is highly unstable, unsustainable and collapsing at an increasing rate.

Gustave Le Bon quote
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