"If left unchecked, the trend in income inequality in this country will continue to widen.
It will lead to an increasingly dysfunctional economy, heightened political polarization,
paralyses and a level of anger andmistrust that this nation has not seen since the Great Depression"

 

"Income Inequality: The Trend is Not Your Friend," Bill Schmick, Oct. 26, 2012

 

The country is divided. Immigration and the economy are leading election issues. Inflation has soured attitudes. Labor unions are on the rise. Students are demonstrating and demanding we divest U.S. holdings in Israel. If I said that all the above issues are related and have a common economic cause, would you believe me?

 

We have seen all of this before. Maybe not in the exact same way but in the 1930s and 1960s dissatisfaction, unrest, what's fair and what's not led to conflict, assassinations, changes in economic and social policies and ultimately to regime change. Political analysts call it populism "a political approach that strives to appeal to ordinary people who feel that their concerns are disregarded by established elite groups."

 

Gathering populism around the world indicates to me that regime changes are coming. In the latest New York Times/Siena polls of swing states, 69 percent of respondents said that both the economic and political systems in this country need major changes or should be entirely torn down. You might ask how did we get to this place and, more importantly, where are we going?

 

While history does not repeat itself, it can generally rhyme, and a look back to our founding fathers might help us gain perspective. The philosophies of Thomas Hobbes and John Locke were popular back then and gained influence with those who drafted our constitution and form of government.

 

The natural state of mankind in short was a state of war of one man against another. Call it survival of the fittest, dog eat dog, or free market capitalism, the concept is the same. The way to escape this natural chaos is through a social contract to be agreed upon by the people to be governed and the government. It is where concepts such as fairness, equity, equality and community come together.  

 

Our political and economic system developed and succeeded because we melded the two ideas together in a system of checks and balance where free markets existed and flourished.

 

While not perfect, democracy thrived and functioned somewhat like a pendulum. When one or the other idea gained too much sway in the country, conflict arose. These crises triggered changes in laws, regulations and existing practices correcting abuses and extremes until the system gradually righted itself and swung back the other way.

 

These cycles are multi-year occurrences, and we have many of them in our history. At times, the pendulum bordered on the extreme, but thanks to our system of government these so-called regime changes have kept us in business. Some of our greatest breakthroughs as a country have come from these changes. The Civil War was one exception. We managed to survive even that bloody event, but it took several generations before that regime change was reconciled and repaired.

 

Our present problems are the result of a swing in the pendulum that has us so far in one direction that the nation is truly unbalanced. The "winner takes all" atmosphere of free markets and capitalism has over the past forty years reached an extreme. Income inequality among Americans has reached a point where even the Roman Empire had a lesser degree of income inequality.

 

I have been warning readers of the consequences of this condition as far back as 2010.   In a column entitled "Income Inequality: The Trend is Not Your Friend," I wrote "If left unchecked, the trend in income inequality in this country will continue to widen. It will lead to an increasingly dysfunctional economy, heightened political polarization, paralysis, and a level of anger and mistrust that this nation has not seen since the Great Depression."

 

That time has come to pass. Next week, I will explain how and why that inequality occurred with the full cooperation and urging of corporations and both political parties. We will also examine the role the Federal Reserve Bank played in this disaster and how we are still applying outdated 40-year-old policies to fix something that requires radical new approaches.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.