The Federal Reserve Finally Admits Failure

Yesterday CNN Money officially declared the rich are getting richer.

The article, Super Rich are Getting Super Rich,draws on data contained in the recent release of the US Federal Reserve’s Study of Consumer Finances.

Over the past 25 years, the wealth divide between rich and poor has widened dramatically.

In 1989 the wealthiest 3% of US households held 44.8% of the nation’s riches. Today the figure is 54.4%.

Conversely, the bottom 90% of households saw their share of the wealth pie shrink from 33.2% in 1989 to today’s level of 24.7%

When considering the trend in these numbers, my mental image is of a wishbone being slowly pulled in either direction. The question is how long before the wealth wishbone snaps?

The same dynamics are at play in Australia and the rest of the Western world. The wealth divide is growing. The once comfortable middle class is being squeezed — food, electricity, fuel, insurances, rates, all are eating away at disposable income. While mortgage rates may be low, debt levels are high, so loan servicing costs also take a fair chunk of household income.

Remember the Fed’s great theory called ‘The Wealth Effect’? Create the wealth for the top few percenters and the wealth will trickle down to economic underlings.

Well the Federal Reserve got the first part of the equation correct, creating the wealth for the privileged few.

According to the Fed’s own report (emphasis mine): ‘Data confirm that the shares of income and wealth held by affluent families are at modern historically high levels. The gains in income and wealth shares have been concentrated among the top few percentiles.

Excuse me, if you read between the lines, this is a major admission of a monumental historical cock-up.

Savers have been brutally punished. Trillions of dollars created ex-nihilo. Buying bonds to aid and abet government to continue borrowing on the never-never.

The Fed has inadvertently admitted their idiotic policies have made the rich richer and screwed those who stoke the engines of the economy. Parallels with the Titanic are easy to see.

The rich will man the lifeboats first; the masses in steerage class and the boiler room will go down with the ship. The only twist in the story is that unlike the Titanic’s noble Captain Edward Smith, Captains Yellen, Bernanke and Greenspan will be flown far away from the wreckage in Ben’s helicopter.

The Fed’s own report, in a backhanded way, damned their strategies. Why isn’t mainstream media all over this? Because they know most people don’t have the time to think too deeply about why they feel the way they do. So why shine the light on the policymakers abject failure when the ‘crowd’ is not yet baying for blood?

Day by day, the ‘crowd’ goes about life — working, paying the bills, taking the kids to sports — and simply don’t have time to consider why life is harder than it was last year. However, one day, a fraction too much pressure is going to be applied to the wishbone, and it’ll snap. Then mainstream media will be all over it. Too late. Damage done.

The following graph shows US median incomes (adjusted for inflation) are back to 1989 levels. Zero real income growth in 25 years.

Median incomes fall 12%

Yet, according to the following chart, household debt over the same period has more than quadrupled.

Households and nonprofit organizations credit market

How can you service four times the debt with no increase in income?

Simple. Drop interest rates to their lowest level in 200 years.

The world we now inhabit is going to occupy the pages of economic textbooks in years to come. We are making history for all the wrong reasons:

  1. Unprecedented money printing efforts in the US, Japan and Europe

  2. The lowest (and most sustained period of low) interest rates in history

  3. Never before seen negative interest rates in Europe

  4. Historically high levels of wealth concentration amongst the top 3%

  5. Share indices reaching record highs

  6. Record levels of youth unemployment

  7. Historically high levels of public debt in both dollar terms and as a percentage of GDP

  8. Valuation metrics (Tobin Q ratio, Shiller P/E 10) that exceed Great Depression levels

  9. The greatest level of real income shrinkage since the Second World War

  10. The lowest inflation readings in Europe since the Great Depression

Every meaningful economic and financial indicator is registering at the extremes. For obvious reasons these extreme periods are rare in history. They also all end very badly.

Tomorrow’s economic historians will tell the story of how the printing presses gradually replaced productivity. The consensus will be that the experiment in ‘wealth creation without effort’ appeared to work well for a couple of decades, but then the rot set in. Society grew ever more dependent on debt and government handouts to realise the promise of their new lifestyles.

The final chapters of the history books will outline policymakers’ immoral efforts to mask the truth from the public, once they recognised the Frankenstein monster they’d created,

Spin doctors were employed to repeatedly profess ‘everything is on track for recovery next year’. The public was dumbed down.

If you believe the policy makers’ spin, Dr Frankenstein’s monster is really George Clooney on a bad hair day. When you have an inkling of what is really going on, the deception is galling.

The conclusion will be that sadly the ‘next year’ never came. The economic Titanic sank. And there were few survivors.

On average, the data indicates Australian workers have fared a little better than their US counterparts. However there will be some Aussies who’ve felt the pinch a bit more than others — a number of business sectors have made staff redundant, imposed wage freezes, reduced working hours, made staff part-time.

If the global slowdown gathers pace and the Chinese property bubble bursts (or even deflates), then a lot more Aussie workers are going to have to make ends meet with a lot less income.

The Great Credit Contraction (the equal and opposite force of the 30-year Great Credit Expansion) is tightening its vice on the global economy.

The pressure is on. In this world of extremes, there’s a very good chance we’ll have a historic outcome.

And the wealth of those who buy into the Fed’s spin will be history too.


Vern Gowdie+
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Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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