So they got away with $9 trillion. And they did it right before our very eyes. Let me show you how they did it. The thieves counterfeited $6 trillion in ‘printed’ money and then washed that money through the US markets resulting in manipulated gains of $12 trillion. Now obviously the thieves are the policymakers. Unfortunately we all share in the additional $6 trillion of debt equally. And yes the wealthy do pay more in taxes but they do not bear a larger burden of that debt because that’s not how debt works in the US. America does not pay down principle it rolls it over. And so while there are tremendous costs to that debt, taxation is not a material one. And so we share equally in those costs.
The breakdown is about $4.8 trillion to the bottom 80% and about $1.2 trillion to the top 20%. However, when we look at the gains derived from the heist, we see the bottom 80% realized about $600 billion out of what should have been $9.6 trillion, while the top 20% (mostly to the top 1%) realized $11.4 trillion in gains.
That is about a 1000% return for the top 20% and a loss of about -800% to the bottom 80%. This is because, as the following chart depicts, the bottom 80% of the nation captures only about 5% of the gains in stocks since 2009.
To show you that there could be no other result allow me to walk you through the monetary relationships of the past 6 years from the very beginning of QE. I’ve talked ad naseum about the fact that you cannot have GDP growth while income distribution is below some critical point. The theory is that no matter how high total income is, when the vast majority of it goes to a very small percentage of the population, economic growth is impossible. Diminishing marginal utility of consumption makes it so. Imagine an economy with 100 people and $100. If one man gets all $100 he may spend $60 of it and he will bank $40. However, if each man receives $1 then all $100 gets put to work and economic growth is much more likely. The place we find ourselves today unfortunately is the prior (and I’m not suggesting everyone should make the same amount it’s just an example to show the effect of income distribution).
Let me put some perspective on this for you. If, over the past 4 years, we had been allocating money as efficiently as we were between 1996 and 2000, given the amount of money printed over the past 4 years, current GDP would be about $25T today. You can replicate these figures by using M2 Velocity rates, GDP levels and money injections. To see what’s been actually happening to GDP over a long time period let’s look at change in growth rates of GDP and M2 money stock. Data is from St. Louis Fed but I used excel to show the polynomial trend lines for both M2 Stock growth (dark blue line) and GDP growth (green line).
I apologize for the tiny font but what we see is that GDP growth rates were steady until the late 1960’s when LB Johnson’s spending spree took off for the programs of the ‘Great Society’. And then very quickly after Nixon cancels Bretton/Woods in 1971 we see a very sharp decline in growth rate. If we look at just the past 6 years vs the last 6 years of the 1990’s we see average GDP growth rate of .3% vs 1%, respectively. For M2 growth we have 1.2% vs .6%, respectively. So the past 6 years have had much slower economic growth from much higher M2 growth than we had in the 1990’s. Now I know I’ve talked a lot about declining real median incomes lately, but honestly it tells us so many stories about the state of things. I’m going to show it again but here I’m using it as a proxy for income distribution. You see average incomes don’t account for distribution while median income, although not perfectly, does account for distribution to an observable degree. And what we should see is that real median incomes should increase from 1994 to 2000 but decline over the past 6 years. Let’s have a look.
I honestly did not pull up that chart until I wrote the above lead in. This is exactly what one would expect. The reason is that, as we discussed previously, GDP growth is a function of expenditures. Expenditures is a function of both total income and income distribution. However, below a certain point of income distribution the growth coefficient of total income to GDP is 0, while the income distribution coefficient to GDP and its gamma become very large. Or in layman’s terms below a certain level of income distribution, total income does nothing to boost economic growth while income distribution becomes incredibly effective in boosting economic growth.
The point of this is that as a policymaker in 2009 knowing that income distribution had been declining for 10 years and drastically declining at that time, the right policy to boost economic growth was not to focus on total income or wealth (trickle down) but income distribution (bottom up). This is because of the coefficient relationships we just discussed above. And so rather than huge injections of money into the banking system to create assets bubbles for a trickle down recovery (which we now know is a fairytale told by the wealthy class), a much more effective policy would have been dropping corporate tax rates to zero for any firms that increased fixed capital investment expenditures by 10% of the three year average (or something to that effect).
We could have then printed money to make up budget deficits for far less than we printed in QE. The end result may have been the same amount of debt increase over the period (although very unlikely) but we would be coming out of this with a truly healthy job market rather than the dire situation we face today. The reason is it would have incentivized corporate investment here in the US by significantly increasing ROC’s and not creating a guaranteed alternative investment that would cannibalize all other investments in the economy i.e. guaranteed stock market. In fact, I would argue that the one action we absolutely should not have considered was targeting higher stock prices. And that is not a matter of hind sight being 20/20 that is a very probable hypothesis that even using just common sense would have gotten the average person to the right answer. Targeting higher stocks prices was probably the one very objective that by all common sense would destroy any hope of maintaining, let alone accelerating, corporate fixed capital investment i.e. jobs.
It makes one wonder, if an unknown simpleton economist like myself can derive such accurate hypotheses about policy, then why is it that these economists we put on pedestal and give full control over our money and monetary policies with apparently no accountability chose the one policy that absolutely could not work? There are only two answers to this riddle. The first is that these folks have a very misguided understanding of economics and monetary policy. Much more likely in my opinion is that their stated objective was not their true objective. However, I will leave that for each of you to make up your own minds. But the proof is in the pudding.
To wrap this up the overall message is that the continuation of the ‘trickle down’ recovery simply cannot boost economic growth. That is because we are currently below that critical point of income distribution. Until our policymakers focus on income distribution rather than mere total income, America will continue to slide into a deeper depression. With the current policies, we have about 8 years before GDP falls into a quite permanent state of contraction. So the next time you hear or see someone point to the all time highs in the stock market your involuntary reaction should be to cringe not to smile. For what it means is that what’s left of your hard earned money is being grossly misallocated and will ultimately result in your ruin. Unless of course you can make it into that .1%. And if so, well happy days my good fellow but it will be a lonely existence there at the top.