Progressive Wealth and Oppressive Wealth - Have Central Banks Inhibited Progress?

29/11/2012 10:32 GMT | Updated 28/01/2013 10:12 GMT

Wealth is a topic of much debate. Some people want to know how to become wealthy and some think it should not exist at all. I think there is an assumption that wealth is uniform in nature. I personally do not agree with that view. I classify the divisions of wealth into two categories, progressive wealth and oppressive wealth.

Progressive wealth is wealth generated from production. Entrepreneurs who start businesses and provide employment, which in turn create goods and services are a prime example of progressive wealth. Wealth in this context is generated from the 'engine of production' that benefits society and enriches the lives of the population.

Things improve with progressive wealth. Employment rises, incomes increase, skills are developed and technology is improved. The wealth generated by the people involved in these processes is an incentive to encourage others to become productive and also provides capital for future investment.

This progressive wealth serves a beneficial function to society that drives innovation. On the other end of the wealth spectrum there is a form of wealth that counteracts the benefits of progressive wealth. Oppressive wealth which is generated by the control and exploitation of scarce resources not only produces little if anything, but prevents progressive wealth creation.

The legal ownership and allocation of certain assets and resources can inhibit the effective production of an economy. The main asset used to generate oppressive wealth is property. In recent years property prices have risen significantly pushing up mortgage and rent payments. Any growth in the economy has been swallowed up by higher living costs.

The majority of people have not benefitted from the 'growth' or 'boom' that occurred over the ten to fifteen years before the financial crisis began. Although incomes may have increased over the last decade the rising cost of home ownership or rent has taken away the benefits that should have come along with the upturn in the economy.

The beneficiaries of the 'boom' were the existing property owners and landlords. Although lots of money was put into the economy it was not in the form of progressive wealth that would have created innovation and improved living standards. There was an oppressive wealth creation movement that transferred money from the entrepreneurs and innovators to the property owner and landlord class.

Not only has this created a greater disparity in the economy between rich and poor, but it has made the country uncompetitive and unproductive in real terms. So why has it happened? My personal view is the actions of the central bank, which lowered the interest rate, made the property market an oppressive wealth creation tool.

Over the last fifteen years interest rates have been historically low. The lending restrictions were also lifted enabling, and in some cases forcing, property buyers to pay more for their property than they would have before the central banks' actions. House prices were pushed up, causing mortgage and rent payments to rise as a result of the artificial demand the low interest rate created.

A greater percentage of workers income was taken to pay for the increase in the cost of housing counteracting the benefits of perceived 'growth'. Workers living standards did not rise, the only increase seen in consumption came from the increased borrowing the low interest rate allowed.

Not only have the low interest rates created huge public and private deficits but they have transferred wealth to a small group of people redirecting capital from the progressive wealth movement preventing effective resource allocation and production. The monetarist economic model has made the West uncompetitive with the emerging BRIC economies due to the impact oppressive wealth has had on the economy and living standards.