Large income disparities are very destabilising for any economy. In the UK this is a very real problem. This graph shows the Gini Index for the UK to 2009. (With kind permission of the Institute of Fiscal Studies which owns the copyright.)

 

 

 

 

 

 

 

 

A coefficient of 1 would mean one person receives all income, while 0 gives everyone an equal share. Among all developed countries the UK has the largest growth in income inequality. By contrast, Scandinavian countries, France and Germany have actually managed narrow ‘the gap’.

Most people were appalled by the excessive salaries and bonuses that bankers paid to themselves and found the practice immoral and bad business ethics. The government told us that it only concerned a few bankers and we should accept this to stay competitive in the global market.

Monetary Financial Institutions are of concern because they should fulfil key socio-economic functions, i.e. providing liquidity to consumers and small businesses. However they have become a self-serving industry more occupied with gambling and speculation for their own profit interests and quite disconnected from the needs of the rest of us.

But, let’s face it, if you could create money from nothing and 65% of your income came from interest, wouldn’t you want to create and lend as much as possible? This, combined with a compensation policy that encourages this behavior, is one of the major drivers for the widening of ‘the gap’.

In the five years 2004 to 2008 the money supply (M4) in the UK almost doubled in five years. £1.3 trillion was created by our MFI’s and lent, with interest, to consumers, businesses and the Government. The relevant part of the Gini index – below – shows that wealth at this time accumulated increasingly to the rich. ‘The gap’ widened.

 

 

 

 

 

 

The chart below divides the taxpaying population into 10 deciles, each containing roughly 3 million people; the poorest to the left and the richest to the right. As you can see, the richest ten percent got 37 percent of total compensation while the poorest ten percent actually lost 1.3 percent of theirs.

 

 

 

 

 

 

About 1.3 million people work in the banking industry (4.2 percent of total employees in the economy). Of them, 702,000 are represented in the top decile. In other words, 23 percent of the richest 10 percent are bankers.

The next chart compares the growth in banking compensation with the rest of the economy. Up to 2008, banks ran at 11 percent compared with 4.3 percent for the rest of the economy. After that the banks booked £30 billion in losses and remuneration dropped by 8%. But, as you can see (green line), it was only a short interlude, then remuneration continued at the rate they had become accustomed to.

 

 

 

 

 

 

Part of the banks’ 11 percent growth rate could be explained by the increasing number of employees but this would only explain about 2-2.5 percent. And it doesn’t explain why compensation grew again after 2009 when employment actually declined sharply and has still not reached the level of 2008.

The red caps in the next chart show the amount bankers received over and above the ‘rest of the economy’ growth rate of 4.3%. This amounts to an average £6.4 billion per year.

 

 

 

 

 

To set this into perspective; The poorest 3 million in this country receive only about £10 billion out of the total compensation pot, those little red caps would make a huge difference to their standard of living. Or, if the government received this extra cash, it could reduce the deficit by a massive four to five percent per year.

Yes, fiscal measures can help distribute wealth more fairly but, really, we need to redesign our banking system; one that stops private banks creating money from nothing, stops them taking risks on the back of taxpayers and compensates employees for the right reasons. Such systemic changes will stabilise our economy, end those boom and bust cycles that victimise mainly the poor, and liquidity will start flowing to where it actually produces something real.

Many lessons in history teach us that the path we are on at the moment will lead to revolt and socio-economic instability and, eventually, the collapse of society and depression. Could the recent riots be a portent?