Labor’s Got It All Wrong; THIS Is Why the Poor Remain Poor

You’ve likely heard of trickle-down economics. But what about trickle-up economics?

The former is where you make things easier on corporations and the super wealthy. Usually this is through tax cuts.

The expectation is that additional private wealth will be invested in the economy. It will create new businesses and jobs.

The benefits of those investments will trickle-down and be felt by those at the bottom.

The latter is the opposite. Forget the rich. By-pass all that stuff and just give the benefits directly to the poor.

Now, which kind of policy do you think wins more votes? The one that talks about benefits for the super wealthy, or the one that talks about benefits for the poor?

Clearly voters like hearing the latter. It’s easier on the ears.

Yet the trickle-up plans the government talks about does little to nothing for the poor. They might get a temporary benefit. But it doesn’t drastically improve standards of living long-term.

Of course, this doesn’t matter.

The idea, at least initially, is to win votes, not get results. Both parties want to make a difference. But they can’t do that unless they get voted in. So they say anything to jump that first hurdle.

It’s why you see the Australian Labor Party talk about giving more power to workers, which could potentially ruin Australian industry…

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How to win the socialist vote

The wage market is broken. Supply and demand doesn’t work anymore, Bill Shorten says.

His plan is to restore workers’ negotiating power.

It sounds like he wants to bring back more collective bargaining agreements. These are agreements between employers and a collective group of workers.

The idea is that, as a collective, workers can bully employers into to paying higher wages, with the threat of complete strikes in the background.

Maybe I just don’t understand, but do workers have no power today? Are they forced to sign employment contracts with their employers? Are they being forced to work for minimum wage? Don’t they have the freedom to shop around for different employment opportunities?

Or is Shorten just trying to win the socialist vote, playing to the bullies that would love to take underserved profits from others?

The Australian Financial Review (AFR) reports:

…one of the solutions that Mr Shorten is offering in his referendum will do anything to produce a sustained increase in wages or prosperity.

He would not douse suggestions that Labor would back the ACTU’s call for the minimum wage to be a “living wage”, literally taking Australia back more than a century to the 1907 Harvester decision, written for a different age and an utterly different labour force, and which would mean a massive increase in the wage floor by edict.

The ACTU’s call for a return to industry pattern bargaining would be a recipe for the industrial strife, as the unions reinforced their remaining strongholds to lift the economy-wide wage floor with no account of individual workplaces.

The topic does bring up a problem many see in our society, though. It’s a problem within most developed societies.

People are now more jaded toward wealth inequality. Take a look at how wealth has grown between the wealthiest and the poorest in Australia…

Money Morning

Source: Roy Morgan
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It’s understandable why we have inequality. Only pockets of people in our society truly work harder than the rest. The minority, not the majority, usually end up succeeding beyond their wildest dreams.

And that’s all fine.

Who cares if someone has more money than you? As long as you’re well off and you have a loving family, more wealth does nothing for your long-term happiness.

But it is interesting why the wealthiest are rapidly getting more wealth and why the poorest, in some cases, are actually getting poorer.

Are the poor just terrible with money? In the majority of cases the answer is probably yes. I’ve yet to see a person persistently poor who is fabulous with money.

Or are poor people just unlucky? In the minority of cases I would think some are. We all fall on hard times now and again.

But do you want to know what’s really keeping the poor, poor and the rich, rich?

It’s not greedy corporates or a group of elites trying to keep you down.

It’s the banks and the central bank.

Banks fund pollies to keep you poor

Have you ever wondered why you don’t just pay simple interest on loans? Instead we’re all paying interest on top of interest.

Banks are supposedly humble financial intermediaries. Why then do they expect you to pay the principle of your loan, plus that same amount in interest?

It’s because banks are not financial intermediaries. You can watch a video, where we discuss what banks actually do, here.

If they were, then surely simple and non-compounding interest would be enough?

Because the poor are generally terrible with money, they make poor financial decisions. They rack up credit card debt and borrow, rather than paying cash for depreciative assets.

This is how the poor stay poor. They leverage themselves to the hilt. And it becomes a never-ending battle to get out of that hole (thanks to compounding interest).

OK, then how do banks help the rich get richer?

Well, if you’re rich, chances are you’re asset rich, not cash rich.

Few, even the really wealthy, have millions laying around in a savings account. A majority of their net worth is in stuff like property, stocks and similar appreciative assets.

Not only do these assets appreciate by themselves, the central bank comes along and puts more fuel in the rocket.

Do you know what open market transactions are?

This is when a central bank goes into the bond market and even the stock market and starts buying. They buy in bulk. I’m talking billions here.

The idea is to pump more cash into the system. But by buying financial assets, central bankers are transferring newly created money to the owners of these financial assets.

And with this newly created money, the bond or stock holders can now increase their spending within the economy.

But is that what people do when prices are rising? Did people jump out of crypto when the market was rapidly rising? Did they jump out of property when prices were jumping up 10% annually?

No. They all piled in!

The same happens when the central bank tries to pump more money into the economy. All this buying pushes prices up. Newly created money gets trapped in financial markets. And everyone else, from fear of missing out, piles on.

Who owns a majority of these assets again? The rich.

It’s why they’re becoming richer and richer. Central bankers are inflating the assets they own. So, on paper, the rich look wealthier than ever.

Luckily our central bank doesn’t buy too many bonds or stocks. Over in the US, however, it’s rampant. It’s why the wealthiest three guys in the US have more than the bottom 50%.

They all own shares and businesses. And these values have been pushed sky high by the US Federal Reserve.

Money Morning

Source: Inequality.org
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So what can pollies learn from this?

Well, if they really wanted to help the poor, maybe they’d start looking at the banking system.

Maybe banks could still create money. But a majority of that money would have to go toward value-added activities, rather than consumption. This is the stuff that produces new goods and services along with jobs.

But they’re not going to do that, are they? Both Labor and the Libs continue to accept donations from banks.

It helps fund their ad campaigns and speech writers. Anything to win a vote, right?

Even if it keeps the poor, poor.

Your friend,

Harje Ronngard,
Editor, Money Morning

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Harje Ronngard is the lead Editor at Money Morning. He’s also the Editor of Wealth Eruption and Gold & Commodities Stock Trader, and co-Editor of the Third Wave Portfolio.

The aim of both Wealth Eruption and the Third Wave Portfolio is to find misunderstood opportunities. These are the type of investments that multiply small amounts of money five- to 10-times in size.

Harje has an academic background in investments and valuation. He’s had experience across a range of asset classes, from futures to equities.

For any investment, Harje believes you only need to ask two questions. What is it worth? And how much does it cost? These two questions alone open up a world of opportunities, which Harje shares with Money Morning readers five days a week.


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