How the rich blew up the banks

By: Charles R. Morris
September 12, 2011 04:45 AM EDT

Gold is a traditional inflation hedge. Yet it has been hovering near record real levels, even as the economy careens toward an inflation-killing double-dip recession. Treasury rates are resolutely stuck at near-zero as the U.S. financial position goes to hell in a hand-basket. Watch for the skies to start raining frogs.

An intriguing paper by Zoltan Pozsar, a senior International Monetary Fund researcher, sheds a new light on these phenomena. A massive buildup of free cash in the hands of companies, hedge funds and rich individuals may be turning many of the canons of conventional banking on their heads.

The cash balloon is hardly a surprise. The top 1 percent of American households has been collecting a 20 percent to 25 percent of taxable income for some years now. At some point, you run out of pockets to stuff it in.