Is it possible that an economic system based soley upon a monetary rejiggering of its asset prices can flourish? Essentially, that’s what the US (and Western Europe and Japan) has about now. Asset prices have marched relentlessly upward as the supply of assets shrivels relative to the supply of money available for their purchase. Just today, the S & P 500 reached another all-time high, this its first time above 2,000, which marks the umpteenth time it has breached an all-time high in this latest, longest-ever, bull run.
Any asset whose purchase price can be financed, which is to say, pretty much all of them, has hardly paused for a breath over the last five years while climbing two and three times their prices before the Great Recession, which was itself caused by two decades of Federal Reserve monetary mischief, which ironically yielded the most expansive, accommodative monetary policy ever seen in the US.
The Fed should be ecstatic. All of its policies are bearing fruit. Happy days, like it always knew, were just around the corner of easy money street.
Or, at least happy days are here again for the Fed’s most precious constituents—the bankers and the people they lend money to. Bloomberg recently reported that junior bankers on Wall Street stand to get salary increases of 20% or so this year, reputedly to stave off the chance they might defect to other banks. A junior banker on Wall Street is essentially an analyst—a number cruncher who evaluates whether or not a deal or investment is worth doing. When the Fed is doling out free money, and backing either implicitly or explicitly, every last dime of whatever nefarious thing might be done with the free dough by bankers, a monkey shitting in his hand and throwing it at the wall could do the work of a Wall Street junior (or senior) banker.
The rest of the hoi polloi aren’t being so graciously rewarded this year, and haven’t been for, oh, the last half century or so. Wages are stagnant, as they have been since the seventies, barely keeping up with headline inflation, which covers consumer items but not assets bought with borrowed money. The people are getting enough to pay for groceries and electricity while living in some crummy dump, but can’t dream of owning anything of long term value, like a house, because Greenspan, Bernanke and now, Yellen have seen to it that assets they might like to own would always be like that golden ring—just out of reach. Indeed, interest rates are low, but prices for financial assets are the inverse of interest rates—the lower is the rate for money borrowed to buy them, the higher goes the price.
Essentially what is happening in this country is a huge experiment, far greater than Reagan supposedly conducted, in supply side economics. There is a greater disparity in wealth and income distribution today than at any time since the 1920’s. The rich own the assets upon whose continuous appreciation this house of cards depends.
Like the gilded age of yore, the rich are getting fantastically rich; the middle class are becoming poor and the poor are hopeless. There’s not much wealth trickling down, but gushers of it denying gravity to flow uphill.
And in a sense, it is exactly that—a force as strong as gravity—which must be denied for income and wealth inequalities such as are seen in the US, which at a .477 Gini coefficient, is about 25th from the worst, i.e., from being the most unequal. Income in the US is distributed a bit less equally than it is in China, but a sliver better than in sub-Saharan Africa and most of Latin America. Concentrations of wealth or of income are meaningless without which some gravity-defying device can be employed to keep them teetering atop the precipice. The arsenals and armories of the state must be kept well-stocked and manned in order for concentrations of wealth and income to remain so. All those jack-booted thugs seen lately on the television in Ferguson were only scratching the surface at the massive power that can be brought to bear to protect the status quo and its obscene concentrations. But the system still depends, even with all the military forces and power, that the people mainly acquiesce to its continuation. Ask the French what happens when people don’t accept the accumulations as divinely, or at least legitimately, inspired. The invention of the guillotine for use during the Reign of Terror was one of many results. The people who would be asked to put their lives on the line to defend the concentrations of wealth are not the same as the people who own the wealth. They can easily turn their weapons on their employers.
Given that vast accumulations of wealth depend upon people accepting the legitimacy of their acquisition, since 2009, what about wealth accumulations have been legitimate? Sure, there’s Facebook and a few other social media innovators who at least seemed to have made their killings the old fashioned way, having won at a game with agreed upon rules enforced by the only impartial arbiter extant—the marketplace. What of all the rest? They are lackeys of the Federal Reserve’s program of money pandering, which has ensured not only that its favored few financial institutions that are too big to fail, won’t, but also that no one else will either. GM and Chrysler are still making cars. J.C. Penney and Sears are still selling crappy clothes and appliances. Nothing ever fails. Not even when things fail do they go away (Hostess Twinkies; Detroit). This is not a prescription for economic dynamism, particularly not when combined with the massive concentration in wealth that has accompanied it.
The tragic irony is that the rich need the poor as more than just vassals and serfs to protect and service their wealth. Every bit of what they accumulate has value because of its ability to satisfy a human need, want or desire. Every market in which they produce goods and services ultimately arises out of some human need, want or desire. When vast multitudes are left so poor they can barely survive, with the means to only barely meet their needs, let alone fancying their wants or desires, aggregate human demand, the foundation for all the accumulated riches of the wealthy, is suppressed and left wanting. Thus is the present state of the US economy.
The incessant infusions of cash in the economic system by the Fed create a grand illusion, at least among the rich, that things are going well. Prices rise, but producers mistake rising prices for expanding demand, and overproduce. Demand, already weak because of the income and wealth inequities, is oversupplied. Prices crash. The Fed prints more money to resolve the problem caused by too much money. Wash, rinse and repeat. Every post-Cold War recession has followed the same script. This one will too, because all of them are the result of the Fed trying to accommodate capitalists pursuing international wage rate arbitrage (it’s a bit complicated—a story for another day). The economy having just now returned to the pre-recession aggregate employment levels (i.e., the total number of people working, not the people who are “unemployed”), has a few months, perhaps a couple of years, before it peaks too (my guess—July of 2016, after which all hell breaks loose because in a few short months, there will be a new president). It took an excruciatingly long time to return to pre-recession employment levels this time around. Perhaps this “recovery” will also last longer.
But the grinding reality to all of it is that as the rich get richer and richer, manipulating the government to do their bidding at the expense of the people, the rest sink further down the socioeconomic scale. During and after World War Two, there was an aura, a feeling, in the US that we were all in it together. That lasted until about the first oil price shock of the seventies. Now it’s dog eat dog, and the big dogs are eating the little ones, not realizing, or perhaps just not caring, that they’re eating their own kind.
To answer the question posed at the onset, is an economic system that depends for its vibrancy on the monetary rejiggering of its asset price levels a sound and stable system? Obviously no. Prices are relative things whose meanings are diluted with every extra unit of currency printed. Money never buys anything. Only goods and services buys goods and services. This price manipulation won’t end any better than the last half dozen or so.