The summer is slipping away. In the morning, mists hang over the fields. The chestnut trees have already turned a rust color. We start a fire in the kitchen fireplace to keep our mother warm.
It wasn’t much of a summer in Europe this year. Still, we’re sorry to see it go. This weekend we will pack up the house…turn off the water…close the shutters…and head for the airport.
We’re headed to China first. Stay tuned…
A puzzling paradox
Meanwhile, the first revision of the GDP numbers for the second quarter. We expected them to show substantial weakness. Instead, they show what looks like strength. The US economy expanded at a 4.2% rate in the second quarter, adjusted for inflation.
The economy may be growing. Stocks may be near a record high. But the typical American owns no stocks and his prospects are depressing. Here is a report from the New York Times:
‘For five years, the United States economy has been expanding at a steady clip, the stock market soaring, the headlines filled with talk of recovery. Yet public opinion polling shows most Americans still think the economy is pretty miserable.
‘What might account for the paradox? New data from a research firm offers a simple, frustrating answer: Middle-class American families’ income is lower now, when adjusted for inflation, than when the recovery began half a decade ago.’
This is hardly news to us. We’ve been following the real economy — as best we could — for the last 15 years. Dear readers already know household income, hourly wages and household wealth were all down — for most people.
The averages are distorted by the few at the very top, but the typical American suffered a big plunge in wealth in 2008-09…and has never recovered. In fact, he is worse off today than he was at the bottom of the hole in 2009.
In June of that year, according to Sentier Research, the median family earned $55,589. Today, that figure is $53,891, adjusted for inflation. That ‘median’ family is right at the middle of all US households. So, half of the people you see on the streets or in the shopping malls have suffered even bigger income losses.
A deeper problem
But it wasn’t just the damage done by the crisis of 2008-09 that has lowered incomes. The problem is bigger, deeper. It’s the core defect in the debt-fueled growth model.
As we explore in our new book, Hormegeddon, a little bit of debt may be a good thing. But add more, and it depresses growth. Keep adding debt, and the whole shebang blows up.
Sentier’s numbers show the deterioration in household income began at least 14 years ago. Today, the typical middle-income family earns less than it did when the 21st century began — despite the biggest wash of cheap credit the world has ever seen.
In other words, policymakers’ efforts to increase real demand have failed miserably.
But our guess is the Federal Reserve will not spend much time figuring out why their ‘stimulus’ model doesn’t work. It’s the only tune they know. As it fails, they will merely keep singing, louder.
Bypassing the banks, they will put their newly digitized money directly into the hands of the people whose votes they need to buy. This kind of flagrant money creation is becoming intellectually respectable, as a kind of final solution to the problem of insufficient demand.
Martin Wolf, the influential chief economics commentator at the Financial Times, has already suggested it publicly. Now, here comes an article in Foreign Affairs magazine titled: Print Less and Transfer More: Why Central Banks Should Give Money directly to the People.
Recognizing that QE and ZIRP are not making it to the top of the charts, the establishment is getting behind more direct inflationary measures. The article explains:
‘It’s well past time, then, for US policymakers – as well as their counterparts in other developed countries – to consider a version of Friedman’s helicopter drops. […]
‘Many in the private sector don’t want to take out any more loans; they believe their debt levels are already too high. That’s especially bad news for central bankers: when households and businesses refuse to rapidly increase their borrowing, monetary policy can’t do much to increase their spending. […]
‘Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly.’
Are you still holding government bonds, dear reader? Make sure you get rid of them before the music stops.
For Markets and Money