For the past near 40 years, more and more U.S. income has become concentrated at the top, as the average worker has earned less and less adjusted for inflation, and yet this had not been reflected either in what businesses could sell, or how most Americans lived. A rising share of Americans had a car, had more than one car, lived in bigger housing units with more bathrooms, had color TVs, had more than one TV, had air conditioners, ate meals prepared by others, and traveled on airplanes. Falling inflation-adjusted wages, particularly for younger generations, were offset by more workers per household as more women entered the labor force, and at first overall household income (and spending) kept rising. Then by lost future income, as defined benefit pensions were replaced by defined contribution retirement plans in the private sector, and then the defined contributions stopped. That didn’t effect past spending, but it will lead to much less spending by retirees when the affected younger generations reach old age. In the final phase, millions of Americans went on a debt binge to keep the spending going as real wages kept falling. That finally collapsed, leaving soaring public debts as the only source of demand preventing consumer-based economies from a downward spiral.
The questions for the wealthy, U.S. businesses and older generations are this: Who are you going to sell your product or service to, now that not only your employees but everyone else’s employees (or former employees) don’t have any money and can’t borrow anymore? When you want to sell stock or your home, how much can the next generation pay for it, given that they are much worse off? I’ve been saying this for some time. The surprise – the shock really – is that suddenly a bunch of economists and financial analysts now seem to understand this, as this article on Bloomberg News lays out essentially the same argument. Read it, to the end, where the dicussion of political effects is followed by a discussion of economic effects.
The last time we had a comparable crisis of demand was the Great Depression. The developed would had been through an industrial revolution that vastly increased the supply of goods, leading Karl Marx to believe the productivity of capitalism has solved the age-old problem of supply. But because the resulting income was not evenly distributed, there was a series of crises of demand with downward spirals for wages, prices and asset values. The 1920s saw rising consumer credit, but falling farm wages at a time when half of all Americans were still on the farm. The Great Depression followed, and that particular form of capitalism collapsed.
What replaced it was a highly regulated, highly unionized, big business dominated (and anti-entrepreneurial) form of capitalism that kept U.S. living standards rising for 30 years – or at least White Male earnings. But it turned out the problem of supply had not been solved at the level of living standards Americans aspired to. Corporations turned into bureaucracies, workers in unionized industries goldbricked and turned out shoddy goods at soaring prices, and there was little incentive to save and invest. This form of capitalism deteriorated into its own breakdown in the 1970s.
The current era of debt-fueled consumption in the U.S. driving the economy of the whole world started soon thereafter – with the integration of the developing world into the global economy creating an increase in supply comparable to the original industrial revolution. But rising inequality has created another crisis of demand similar to that of the early 20th Century.
Now we are facing another collapse. If the so-called free-market had been allowed to take its course in 2008, the value of most stocks and bonds – and wealth of most of the wealthy and most of the assets of public employee pension funds – would have disappeared in a blaze of bankruptcy as companies, institutions and governments fell like dominos. It would also have created an immediate, gut wrenching adjustment and mass unemployment. Similar upheavals brought in Hitler and Stalin, so the outcome might not have been benign.
Great Depression scholar Ben Bernanke sees that disaster as a financially-driven episode that could be avoided. But now I wonder if the U.S. is so deep in debt that the debts must either be inflated away, as in Weinmar Germany, or defaulted away, as in the U.S. from 1929 to 1932. In the end, everyone will be starting at zero. Have these outcomes been avoided, or merely postponed? The total debt in the U.S. economy is down only slightly compared to its massive rise from 1980 to early 2009, and even that decline (and the associated loss of net free money) has made President Obama very unpopular. Has the collapse been stopped or only postponed, because the fundamental issue remains in place?
Read the article. Here is the last section.
“For many consumers, easy access to credit today is a thing of the past. Government fiscal policy — in the form of payroll tax cuts and transfer payments — is filling the gap between income and consumption the way easy credit did during the boom years.”
“The missing credit temporarily is being filled in by fiscal measures,” said Feroli. “But we have yet to understand or see how a post-leverage, post-fiscal support household sector will behave.”
“The government’s response to the financial crisis may also have exacerbated the rich-poor gap by shifting liabilities from private banks to taxpayers. Households and businesses have trimmed their debts since the 2008 peak while government borrowing — to recapitalize the nation’s banks and battle the recession — has exploded.”
“As a result, total domestic nonfinancial sector debt topped $36.5 trillion at mid-year, compared with $32.4 trillion in mid- 2008. And that massive load leaves the economy vulnerable to future shocks.”
“In the current climate, if nothing is done about income inequality there may be recurring crises,” says Kumhof, adding: “Leverage has not significantly improved. In terms of the danger of another crisis, we’re right back where we started.”
They are saying exactly what I have been saying for years, as debt levels exploded. I’m stunned. The Bloomberg News article pretty much sums it up, minus the differing effects on different generations. Including the fact that it is a crisis for business and the wealthy, as well as everyone else.
This isn't just a matter of politics, it was and is a Social Tsunami in the era of Generation Greed. The question is who will bear the brunt of the adjustment, and who will be exempted from sacrifices? Mostly what I hear is those who have the best deals doing the whining, and pointing fingers at each other. The sold out young don’t know what is going on, and what if anything they can do about it. So who will manipulate them to gain further unearned privileges? That seems to be the question.