The US and UK Central Banks were complicit in inflating the housing bubble by keeping the interest rates too low for a long time. While this theory has been discussed by many, Albert Edwards of Société Générale takes a different angle on why the Central Bankers kept encouraging the housing bubble.

A post in FT Alphaville quotes Albert with his following argument:

The US and UK have seen a huge rise in inequality over the last two decades, as growth in national income has been diverted almost exclusively to the top income earners (see chart below). The middle classes have seen median real incomes stagnate over that period and, as a consequence, corporate margins and profits have boomed.

Some recent reading has got me thinking as to whether the US and UK central banks were actively complicit in an aggressive re-distributive policy benefiting the very rich. Indeed, it has been amazing how little political backlash there has been against the stagnation of ordinary people’s earnings in the US and UK. Did central banks, in creating housing bubbles, help distract middle class attention from this re-distributive policy by allowing them to keep consuming via equity extraction?

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Source: FT Alphaville

I believe that the central bankers did not help encourage the housing bubble to divert attention from the growing inequality. However they failed to perform their duties leading the financial system to almost collapse a couple of years ago.

Most developing and resource-rich countries offer high subsidies for fossil-fuel consumption. Subsidies for oil, natural gas, electricity and coal vary among countries depending on the natural resources present in the respective country in addition to other factors.

In the developed world, subsidies for oil is mostly non-existent despite some of the countries blessed with large reserves of oil. For example, the U.S. produces millions of gallons from places like Alaska, Texas, etc. and offshore fields. However the price of gasoline at the pump is not subsidized by the state and is determined by the market. Hence gas prices vary widely on a daily basis. The following chart shows the U.S. retail gas prices and the price of crude oil for the past five years:

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Source: www.gasbuddy.com

The average retail price plunged to the lowest in the end of 2008 at the height of the credit crisis but has recovered to reach well above $3.00 per gallon now. For the most part, gas prices track the global crude oil prices.

Compared to the market-based pricing in the developed countries, emerging and oil-rich countries offer heavy subsidies for consumption of fossil-fuels primarily to simulate economic growth, alleviate poverty, etc.

The following chart shows the subsidies offered by select countries for different types of fossil fuel consumption:

Source: World Energy Outlook 2010, IEA

Oil-rich countries such as Saudi Arabia, Iran, Iraq, Malaysia, Venezuela, Mexico, etc. have high subsidies for oil consumption.

Related ETFs:

The United States Oil Fund (USO)
United States Gasoline Fund (UGA)
PowerShares DB Energy Fund (DBE)

Disclosure: No Positions

The world population crossed the 7 billion mark this year. The majority of this population lives in the developing world. According to The Global Wealth Report published last by Credit Suisse last year, about 92% of the world’s population can be classified as part of the middle, the upper middle and the lower classes. The 334 million in the upper middle class presents a large group for significant earnings growth potential for the banking industry. The Occupy protest movement in the US and other the developed countries is a manifestation of the class struggle between those at the bottom of the pyramid (the 99%) vs. those at the top of the pyramid (1%).

The Global Wealth Pyramid

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Source: The Global Wealth Report, The Credit Suisse Research Institute