Forget the Madeleines. Eat the Rich (or where is gold in Piketty’s thesis?)

2nd May 2014 by Adrian Ash

The week’s highlights

Poverty crisis drives 1 million to food banks,” said a headline in UK freesheet Metro recently. “Your home probably earns more than you,” said another.

Inequality is widening, in short. At least on paper. Because owning is better than earning, even if you can’t spend the gains until you sell (or use them to pay tax). London’s average pile of bricks and mortar rose £63,000 in the last year alone, well over twice the national average wage.

This isn’t news. But it does face what the obvious idiots think is a new answer, thanks to another damn’d thick, square book.

Capital in the 21st Century by French academic Thomas Piketty says the rich are getting richer because the returns to capital are greater than growth in the economy. If you already own lots of business or investment assets, your share of the cakes will grow. And if you don’t, then hard cheese.

It’s like the 20th century never happened. Because while today’s pensioners cream unearned income off their savings like petits rentiers (a big worry for French media coverage last autumn), today’s uber-rich oligarchs gorge on the fruit of hard-toiling labour like the robber barons and aristocrats of 100 years ago.

“We are back in Proust’s time,” said last summer’s review of the book in French newspaper Le Monde. But forget the madeleines. Piketty’s solution is to eat the rich instead. Regretfully, with a sad face. He claims to hate Socialism and Communist solutions.

Instead, Piketty urges a nasty tax on mega-wealth. Say, over $1 billion. Say, at a rate like the “confiscatory taxes” imposed by FDR in 1930s’ America. Modern aristos in Britain might recall the 95% on unearned income which made tax exiles of the Stones, Bowie and everyone whose eyebrows played James Bond in the ’60s and ’70s.

So make it global, says Piketty (who isn’t…ummm…a Communist?). Or at least ensure rich citizens can’t hide their over-sized share just by putting it elsewhere. That way, the rich can’t escape being taxed.

Piketty’s book may be big, but his analysis isn’t too subtle for such soundbites (and it’s not subtle enough by half for US economic historian Brad DeLong). His solution however, as parcelled up and sold to politicians, taxpayers and wealthy tax-dodgers alike by the current media storm, comes in just two simple parts:

What are the odds? The forlorn hope of “punitive taxes” is getting all the coverage for Piketty’s book. Yet stage one is already here. Cross-border data sharing in fact starts May Bank Holiday for UK banks and financial institutions, with the deadline for FATCA registration with the US authorities. Upper-income tax dodgers might take fright. Lovers of liberty, and of the City’s financial success, likewise. But while this smacks of a fishing expedition, any specific individual that the tax authorities believe needs investigating has long been open to scrutiny. And contrary to Piketty’s prescription, neither FATCA nor the existing KYC/AML framework is about catching the multi-squillionaires anyway.

In case you haven’t noticed, Carlos Slim, Bill Gates, the Duke of Westminster and the rest still have most of the money. That might well be “unfair”, and there might well be votes in vowing to attack them. But there’s no money in it, not for the politicians and placemen hoping to bag an ancien regime-style pension. So as the charts littering Piketty’s book show, the One Per Cent are surely safe for as long as war – plus the capital destruction, wipe-out inflation and taxation it unleashes – doesn’t break out. Even Tsarist Russia needed defeat by Japan and then the catastrophe of 1914 to meet the bigger disaster of Sovietism.

Where is gold in all this? Exactly. Piketty’s huge data collection says wealth inequality is back to pre-World War I levels. That marked the end of the high classical Gold Standard. His analysis also shows inequality fell until 1970-1980, before starting to rise again. That marked the end of the official Gold Standard worldwide.

Only an idiot would see those latter dates and assume that gold-backed currency levels the table for rich and poor. Step forward the New York Sun, spouting Jacques Rueff (he was French, right?) to link the growth of inequality with the last 40 years of unfettered credit creation. But while credit-access-for-all must, over time, shovel a greater share of wealth into the pockets of lenders, the 1980s and ’90s deregulation was in truth accompanied by Gold Standard-like rates of real interest on cash deposits. So killing the price-inflation which abandoning gold helped create, whilst also enabling monetary inflation to continue, thus gave the owners of capital a double whammy of high rates, easy lending.

Piketty doesn’t mention the yellow metal (well, not as BullionVault‘s French manager Thomas Podvin or myself can find it. It’s a big book in either language, with no index). Nor do Piketty’s reviewers, fans and fawns now catching up with the story in the English press. People queuing at food banks can’t eat gold of course. But it never paid the rich any rate of return either, not unless they lend it out. Today that has become a minority sport in a tiny niche, given the credit risk and monetary inflation which most physical gold owners are trying to defend against.

Meantime, if a punitive global wealth tax worries you and your money, the short version of Picketty’s book might appeal. Good to know your enemy, right? Executives can already buy an “executive” summary. No kidding.

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