Bubbles Are the Super-Rich's Best Friend

What's better than stocks for the long-run? Stocks for the short-run. As long as you pick the right short-run.

The above chart compares real GDP with quarterly inflation-adjusted S&P prices, both indexed to 100 in 1947. They've gone up roughly the same amount the past 65 years. They've just taken very, very different paths to get there.

Who cares? The top 0.1 percent, that's who.

The fortunes of the super-rich are closely tied to the fortunes of the markets. It wasn't always this way. In the three decades following World War II, markets jumped considerably, but there was considerable little jump in incomes for the top 0.1 percent. Then things changed. After 1980, markets and top-end incomes began moving in tandem. Inequality spiked.

The rentiers have returned. But rentiers wouldn't be quite so rich if the rents they extracted weren't, well, so damn high. That's where bubbles come in. Consider the above chart. Up until the mid-1990s, stocks and GDP moved within a decently narrow band. Stock overperformed in the 1960s, underperformed in the 1970s, and caught up in the 1980s. Then they really took off around 1998 or so. We've been living in a bubble economy pretty much ever since.

It's not immediately obvious why this is good news for the super-rich. Frothy markets have given back vertiginous gains once the boom has turned to bust. So have top-end incomes. But this misses a key point: the top 0.1 percent aren't necessarily the same people year-to-year. And that creates all kinds of perverse incentives.

On Wall Street, it's known as "I'll-Be-Gone, You'll-Be-Gone" (IBGYBG). Traders don't worry about the long-term consequences of their trades. They know they'll be long-gone by the time any trades blow up -- past bonuses in hand. The boom-bust cycle is worth it to them. And it gives them every incentive to pump up a bubble and ride it while it lasts.

They've become the ultimate day-traders. Except instead of trading individual stocks, they're doing so with the economy.

The story of the super-rich rising and rising isn't just about them latching onto markets. It's about markets unlatching from any economic fundamentals -- or rules. With better regulation and enforcement, it's hard to imagine either of our most recent bubbles going quite so far. Mortgage fraud was systemic during the housing bubble, while underwriting standards collapsed during the tech bubble. The top 0.1 percent reaped enormous rewards. Few else did.

If we want to get serious about inequality, we have to get serious about fixing our markets.