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Most Ignore This Potentially Fatal Problem in the U.S. Economy Lombardi Letter 2017-09-04 06:24:34 U.S. economy economic collapse social inequality economic disparity russiagate civil war pitchforks U.S. economic outlook As the Dow Jones flirts with 22,000 and investors seem reluctant to observe the inherent weakness that social inequality has on the U.S. economy. News,Stock Market Crash,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2017/07/U.S.-Economy-150x150.jpg

Most Ignore This Potentially Fatal Problem in the U.S. Economy

U.S. Economy - By |
U.S. Economy

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Social Inequality Could Be the Biggest Risk for the U.S. Economy

On July 16, 2007, the Dow Jones Index closed for the first time in its history above the threshold of 14,000 points. A financial crisis exploded just over a year later with the biggest stock market crash since 1929 and the deepest recession (depression) that led to a global economic collapse. Today, the Dow Jones is flirting with 22,000 and investors seem reluctant to observe the inherent weakness of the U.S. economy.

Before we discuss stock market performance or the U.S. economic outlook, it’s worthwhile to note how the average person is living. After all, the economy is the aggregate of the “product” of all the single individuals that work, earn, and spend. If people don’t earn enough to spend, especially when it comes to some luxuries, the economy suffers.

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It doesn’t matter if the Dow Jones hits consecutive records. If the base is hurting or not performing, eventually even the most bullish of markets will fail, financial models be damned. In 2014, there was a story about a woman working four jobs just to survive. She was found dead in her car, while napping between jobs. (Source: “Maria Fernandez, who worked four jobs, Dies while napping in Car,” HuffPost, August 28, 2014.)

Maria Fernandez’s case, sad as it might be, was probably not unique in 2014. It’s not unique today. The overwhelming majority of people survive by working two or more jobs. But are they living, and how long can an economy, much less a society, function if such extremes are needed to survive? And we are talking about the U.S. economy, which remains the world’s strongest by far.

The Stock Market Doesn’t Tell the Whole Story

Three years and one very pro-business president later, the U.S. economy appears to be setting new records. But this is where that old saying about not judging books by their covers comes into play. The U.S. stock market is setting new daily records. That’s true. But the U.S. economy still has to confront some harsh realities.

Without going into too many details, the vast economic underbelly of the United States, the so-called “blue-collar economy,” continues to suffer. More specifically, blue-collar salaries in some cases have dropped since the 2008 financial crisis, while “knowledge workers” have seen theirs grow. (Source: “As Knowledge Workers Thrive, Blue Collar and Service Sectors Left Behind,” Apartment List, June 20, 2017.)

As much anger as I can experience given some liberal tendencies, which you will forgive, there are solid economic reasons why the more finance- and economics-minded should care.

If the vast army of workers at the bottom remains unsatisfied, it makes the lives of those who are better off more difficult. Differences in wealth and social disparity affect the way people live directly. When societies are more egalitarian, that is when the difference between the highest paid and the lowest is either minimal as in northern Europe, crime is low. The wealthy can enjoy their wealth.

The opposite occurs when there is a deep divide between a rich minority and a poor majority as in Venezuela or Brazil. In those cases, crime is high. Even the “middle classes” have to hide the benefits of prosperity. That’s why, San Paulo, Brazil’s business capital, “enjoys” the highest pro capita use of helicopters in the world. The rich want to avoid traffic in the city in order to reduce the risk of being robbed. Thus, they fly from the suburbs directly to their office building downtown.

At the practical level, if the poorer strata of society are getting poorer, they will spend less. They will buy fewer things, and that hurts the U.S. economy where two of the biggest companies are involved in retail: Amazon.com, Inc. (NASDAQ:AMZN) and Wal-Mart Stores Inc (NYSE:WMT).

If workers’ salaries stagnate, they won’t be able to buy cars or houses, especially as banks have gotten tighter with credit. Conversely, given that cars and a place to live are indispensable, they find alternative and riskier credit. That’s what happened in 2008 with the subprime bubble. That’s what could happen now with the subprime auto loan bubble.

Economic inequality is not just a “liberal” problem. It hurts the richest as well as the poorest. High disparity—apart from any ethical considerations—is the very opposite of the ideal economy. Indeed, inequality brings with it effects that hurt the economy in general. Simply put, aggregate demand falls.

This Is the “Russiagate” They Should Be Talking About

Thus, as Nobel laureate economist Joseph Stiglitz—and others—has noted, inequality acts against economic growth. It follows that inequality fuels the risk of economic collapse. Trickle-down economics suggests the opposite. But that model went out in the 1980s with the yuppies. The major global financial institutions, such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) consider inequality a threat to economic growth and press for some remedy.

Moreover, in the United States, the current and heated political climate spurned by the Democrats’ insistence on talking about “Russiagate” is exacerbating social inequality. Instead of dealing with the real problems in the United States, the “liberals,” who once provided a small outlet for the poor to vent their problems, would rather discuss the Kremlin’s alleged ghosts in Washington.

That leaves the average workers, who gained rights and a decent wage in the 1950s and 1960s thanks to unions, with no voice. The risk is social upheaval and even a new civil war. A prosperous portfolio won’t save you from the pitchforks. There is a real possibility that in a few years, the U.S. could turn into early 20th-century Russia, say circa 1917, when the pitchforks came out and overturned an entire ruling class. That’s the real Russiagate that no party in Washington is talking about.

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