The Rising Tide Which Lifted All the Yachts
This is an excerpt from David Stockmans book:
As we have seen, The Donald’s economic policy actions and nostrums were thoroughly wrong-headed and counterpro- ductive. But the opposite assumption—that market capitalism was working according to the texts penned by Adam Smith— was also dead wrong and had been for decades. Today’s bailout- ridden crony capitalism is not remotely the real thing, and that’s especially because free markets can’t function efficiently and pro- ductively when they are flooded with cheap credit printed by the central bank.
The ill effects of these perversions are legion, but one of the most obnoxious is the massive financial windfall to a tiny elite of the wealthy and a concomitant depletion of the middle class. Ironically, The Donald was elected and heralded by the latter, but his policies did absolutely nothing to change the system’s long-standing windfalls to the rich.
Here is but one of the smoking guns that can be offered in evi- dence. To wit, in 1989 the collective net worth of the top 1 percent of households weighed in at $4.8 trillion, which was 6.2x the $775 billion net worth of the bottom 50 percent of households. By Q1 2022, however, those figures were $45 trillion versus $3.7 trillion, meaning that the wealth differential was now 12.2x.
In round numbers, therefore, the top 1 percent gained $40 tril- lion of wealth over that thirty-three-year period compared to the mere $3 trillion gain of the bottom 50 percent. Stated differently, there are currently 65 million households in the bottom 50 per- cent, which have an average net worth of just $56,000. This com- pares to the 1.2 million households in the top 1 percent which currently sport an average net worth of $38,000,000.
Needless to say, there is no reason to believe that left to its own devices free market capitalism would generate this 680:1 wealth differential per household. Indeed, three decades ago—and well before the Fed went into money-printing overdrive—the per household wealth differential between the top 1 percent and the bottom 50 percent was barely half of today’s level.
Back in the heyday of America’s post-war prosperity, in fact, President Kennedy’s famous aphorism that “a rising tide lifts all boats” was repeatedly confirmed. But once Alan Greenspan inaugu- rated the current era of rampant central bank money printing, stock market coddling and egregious bailouts, the more accurate charac- terization is that a rising tide mainly has been lifting all the yachts. And it goes without saying that only a teensy-tiny number of MAGA red caps were to be found actually lounging aboard these vessels.
The truth is, Donald Trump’s tenure in the Oval Office wit- nessed the steepest climb ever in the wealth of the top 1 percent. Nor is that surprising. The Donald was relentless in demanding that the Fed push interest rates ever lower and run the printing presses ever faster. Most of the billionaires, however, have never bothered to thank him for the resulting windfall.
There is no mystery, of course, as to why capitalism lost its historic middle class growth mojo during recent decades. Or why that occurred even as financial markets became bubble-ridden fountains, pumping egregious amounts of windfall wealth to the very top of the economic ladder.
The culprit was “financialization.” By inducing relentless debt creation and leveraged speculation, the Fed and other central banks have bloated the financial asset sector out of all historic proportion to the real economy.
Net Worth of Top 1 percent versus Bottom 90 percent, 1989 to 2022.
Thus, between 1954 and the mid-1990s, total household finan- cial assets oscillated around 2.5x–3.0x GDP, as tracked by the purple line below. But once the Fed’s printing presses went into high gear under the Greenspan “wealth effects” doctrine and the serial bailouts that flowed thereafter, the ratio escalated steadily skyward, reaching nearly 5.0x GDP in 2021.
The fact is, there was no sustainable or sound basis for the eruption shown in the chart below. As we indicated with respect to total assets in Chapter 2, this ratio amounts to the price-earnings (PE) multiple for the entire economy. And since the trend rate of economic growth and productivity has deteriorated notably sincem the turn of the century, if anything the macroeconomic PE multi- ple should have been falling, not rising.
Nor is this eruption of the de facto macroeconomic PE ratio merely an academic curiosity. At the 1954–1987 average of 2.7x GDP, household financial assets in 2021 would have totaled $64 trillion, not the actual level of $114 trillion. That is to say, finan- cialization has generated upwards of $50 trillion of extra house- hold financial assets out of thin air. And about three-fourths of that bloated asset total is held by the top 10 percent of households.
Financialization of the US Economy: Financial Assets as Multiple of GDP, 1948 to 2021.
What has kept the financialization ratio trending skyward was the very opposite of sound, sustainable economics. After 1990 the savings rate dropped precipitously, even as the debt-to-GDP ratio rose to new heights. America did not save its way to solid financial prosperity but borrowed its way to a fantasyland of phony wealth for the few and deteriorating economics for the many.
The cornerstone of long-term growth and wealth creation is net savings from current economic output. The latter measures true savings or the amount of economic resources left for new investment in productivity and growth after government borrow- ings have been subtracted from private household and business savings.
But as to the current trend, fuhgeddaboudit. This measure aver- aged a healthy 7.5 percent to 10 percent of GDP in the economic heyday before 1980. But especially after the money-pumping era of Greenspan and his heirs and assigns commenced in the early 1990s, the net national savings ratio headed relentlessly south. By 2022 the ratio was an anemic 1.0 percent of GDP—a sheer rounding error in the sweep of post-war history.
Again, the actual net national savings in 2022 was just $260 billion, but that figure would have computed to $1.96 trillion at the 7.5 percent net savings rate of the pre-1980 period.
That $1.7 trillion of net national savings has gone missing, of course, does make a huge difference. Gross savings by the private sector had fallen sharply, and then The Donald came along and enabled governments to scarf-up most of the available new sav- ings to fund massive, serial budget deficits.
So, the obvious question answers itself. A true MAGA policy would have reversed the Fed’s long-standing war on savers via dramatically higher, normalized interest rates, while at the same time getting the US Treasury’s sharp elbows out of the bond pits by balancing the federal budget.
That would have generated the surge in net national savings needed to revitalize investment in productivity and growth. Alas, sound money and fiscal rectitude were not terms that the Donald had any familiarity with whatsoever. In fact, his stance on these crucial matters was worse than that of every Democrat presi- dent of modern times, starting with Joe Biden and going all the way back through Obama, Clinton, Carter, Johnson, Kennedy, Truman, and FDR.
That’s right. At the end of the day, The Donald’s monetary and fiscal policy bacchanalia amounted to an outright war on capi- talist prosperity. That alone should disqualify him from another berth on the Republican ticket and term in the Oval Office.
The nation can ill-afford four more years of The Donald’s apos- tasy on the core issues of central banking and the public debt. That’s because neither public nor private debts liquidate them- selves over time. If the badly unbalanced income/outgo rela- tionship is not addressed, chronic cash shortfalls from current operations just cause debts to accumulate and compound.
It is not surprising, therefore, that during the past half century the nation’s combined public and private debt-to-income (GDP) ratio soared skyward. In fact, the 150 percent debt-to-GDP ratio which had prevailed through the 1970s went vertical thereafter, reaching 358 percent by the time of the Great Financial Crisis, where it remains stranded to this day.
As it happened, once the Fed got into the money-printing busi- ness after 1970, everybody joined the debt accumulation parade— governments, businesses, financial institutions, and households, too. Accordingly, the $1.7 trillion of total public and private debt outstanding on the eve of Nixon’s dollar default in August 1971 rose to $10.7 trillion upon Greenspan’s arrival at the Fed in August 1987; and it then reached $50.0 trillion on the eve of the Great Financial Crisis in late 2007, stood at $66 trillion when The Donald was sworn in, and totters at just under $95 trillion at present.
In effect, continuous
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