The Feedback Loop Between The Fed & The Elite

I often show the “gap” between the “standard of living” and real disposable incomes. In 1990, incomes alone were no longer able to meet the standard of living. Therefore, consumers turned to debt to fill the “gap.” 

Feedback Loop Fed Elite, #MacroView: The Feedback Loop Between The Fed & The Elite.

However, following the “financial crisis,” even the combined income and debt levels no longer filled the gap. Currently, there is almost a $2150 annual deficit facing the average American. (Note: this deficit accrues every year, which is why consumer credit keeps hitting new records.)

The Rest Have Debt

The debt-to-income problem keeps individuals from building wealth, and government statistics obscure the fundamental reality. We discussed this point in detail in the “Illusion Of Soaring Savings.”

The median net worth of households in the middle 20% of income rose 4% in inflation-adjusted terms to $81,900 between 1989 and 2016. That is the latest available data. For households in the top 20%, median net worth more than doubled to $811,860. And for the top 1%, the increase was 178% to $11,206,000.

The value of assets for all U.S. households increased from 1989 through 2016 by an inflation-adjusted $58 trillion. A full 33% of that gain—$19 trillion—went to the wealthiest 1%, according to a Journal analysis of Fed data.”  – WSJ

Feedback Loop Fed Elite, #MacroView: The Feedback Loop Between The Fed & The Elite.

Of course, if the Fed’s actions to inflate asset prices worked, then wealth distribution would be more even. Importantly, we wouldn’t see more than 50% of Americans unable to meet a $500 emergency.

Feedback Loop Fed Elite, #MacroView: The Feedback Loop Between The Fed & The Elite.

The single truth of a decade of monetary and fiscal interventions is this:

“The top 10% of the economy has assets, the bottom 90% has the debt.” 

 

The Fed Does Have A Choice

The Fed does have a choice that could alter the current wealth inequality dynamic:

  1. Allow capitalism to take root by allowing corporations to fail and restructure. A needed process after spending a decade leveraging themselves to the hilt, buying back shares, and massively increasing executive wealth while compressing workers’ wages. Or, 
  2. Continue to bailout “bad actors” and further forestall the “clearing process” that would rebalance the economy and allow for increased future organic economic growth.

As the Fed’s balance sheet rises past $7-Trillion, they chose to impede the “clearing process” once again. By not allowing for debt to fail, corporate restructuring, and “socializing the losses,” they removed the risk of speculative practices.

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