Juggling Dynamite

A recent AP/Equilar study found that chief executives now make about 257 times the average worker’s salary, up sharply from 181 times in 2009.

Extreme forms of inequality achieved by huge jumps in income for the world’s highest-paid are becoming a serious macroeconomic issue, author Thomas Piketty told CNBC on Tuesday.

“There’s no problem with inequality per se. The problem is when inequality gets too extreme and if the top is rising three times faster than the average, you can see that this cannot continue forever,” Piketty said.

“At some point this will have to stop and we should try to have more transparency about income and wealth.”

“People should not be afraid of my book. They should be afraid of the reality and they should try to see how we can deal with that,” Piketty said. Here is a direct video link.

Following yesterday’s Senate hearings on High Frequency Trading (HFT) and conflicts of interest in the current broker/exchange payment structures, IEX Group president & CEO Brad Katsuyama shares his experience and impression of probable outcomes. Here is a direct video link.

Gary Shilling, president of A. Gary Shilling & Co., talks about the outlook for U.S. Treasury yields, Federal Reserve monetary policy and economic outlook. Here is a direct video link.

The financial world makes the most fees on equity products hence the bias is always to recommend equities. Shilling reminds us of this when he explains that every year the equity herd starts with strong growth forecasts and a bias against bonds…

Gary’s excellent Monthly Insight Letter (subscription only) for June reminds that deflation is actually the norm in peacetime and has reigned in 168 of the past 264 years, versus just 96 years where inflation dominated.  However governments, central banks and financial firms hate the idea of deflation and forecast inflation every year notwithstanding.  Reasons for this systemic bias include:

• deflation reduces nominal tax revenue as corporate revenues, profits and household incomes fall causing taxpayers to drop to lower tax brackets;
• the idea of cutting social security cheques which are indexed to inflation annually (and so should be reduced in deflation) is politically abhorrent, even though real income increases in deflation;
• debt payments in nominal terms remain fixed even while income to service those payments stagnates or declines.  Thus deflation is hard on individuals and governments who are heavily indebted, even while it means increased purchasing power for those who are not in debt;
• given that central bank rates are already at the zero bound, deflation stymies monetary policy since rates cannot be reduced further to prod consumption.  Thus central bank magicians are rendered powerless–their worst nightmare;
• deflation can develop a momentum of its own if consumers forestall purchasing today on the expectation that items will be cheaper in the future.  Although this is only applicable to some discretionary items, since in many items and services, consumers have no ability or interest in holding off present consumption;
• corporations count on inflationary forces to drive sales (corporate earnings, share prices and their executive compensation packages) higher year over year.  Deflation makes meeting these financial targets much more challenging.