Worsening Wealth Disparities Reflect Downside of Excessive Money Creation

Recently, Jeff Harding described The Bifurcated Economy.  There is some additional information out regarding this phenomenon, courtesy of Rasmussen Reports, commissioned by Discover Financial.  The report is titled Discover® U.S. Spending Monitor^SM Consumer Confidence Remains Flat in May.  The subtitle describes the findings:

Majority of Consumers Planning Less Discretionary Spending; High Gas Prices, Unemployment Pressuring Budgets and Finances

Here are some of the survey’s findings that relate to Jeff’s observation about bifurcation.  They are stark:

The results of May’s Monitor reflect different attitudes between households that make more than $75,000 a year and those that earn less than $40,000 annually.

For households that earn less than $40,000 annually, 60.2 percent said in May that they would not have money left over after paying bills at the end of this month. That figure is a record for the 4-year-old Monitor and a jump of 7.2 points from April.

At the same time, 77.7 percent of households making more than $75,000 annually said in May that they would have money left over after paying bills, which is the second-highest figure ever recorded in the Monitor and a 4.2 point jump from April. The only time sentiment for that question was higher was in August 2007, when 78.1 percent of those households said they would have money left over after paying bills.

There is more worth reading in the article, but I want to focus.  The most important takeaway from this report for me is that 60.2% of respondents are, more or less, broke, not to put too fine a point on it.  There is nothing positive about this.  It supports the view, expressed frequently by me at Econblogreview going back to its founding in 2008, that the “Great Recession” is but a euphemism for a small ‘d’ depression– nothing so bad as the Great Depression but a chronic depression nonetheless, and that all that has happened since the official (NBER) end of the recession is a relatively minor cyclical upswing in business, much of it related to organic growth in other countries, but no real “recovery”.

The bifurcation that Jeff described is worrisome.  The surprisingly corporatist Obama administration has pushed vast amounts of money into the economy, much of it ending up in the pockets of companies and the non-corporate rich and super-rich (think actors, athletes, and hedge fund managers).  Meanwhile the money flood has lulled the investing middle-/upper-middle class to sleep with the classic Keynesidan “money illusion”.  So much new ”capital” has been created that all financial asset classes are up in nominal terms:  stocks, bonds and commodities.  But it’s not “real” capital.  It’s only new dollars, which despite having been created in massive amounts still have not even improved the financial condition of the average American.

Gold “knows” that the newly created dollars are not real capital.  It knows that lots of real capital was wasted on unproductive activities in the boom.  Thus at the end of the boom of the aughties, both oil and stocks were much more highly valued relative to gold than now.  Oil peaked near $150/bbl and the S&P 500 peaked around 1500.  Gold peaked in 2008 around $1000.  You can do the math.  Today those ratios have both moved to revalue gold upward by a significant amount.  The market has been saying that it needs real money (gold) a lot more than it believed it needed it during the boom, when Ponzi finance had taken over.  My guess is that gold will keep sending the same message for a while longer and that the ratio of gold’s price to those of stocks and oil will continue on trend and will likely expand in the months ahead.

The above-referenced worsening financial stresses on the average American are posing a terrifying problem for the politicians.  They are unwilling to do the correct thing and let the free market liquidate the over-investment in housing (and any other assets that a free market sees fit to liquidate), probably because that would necessitate a “Swedish solution“:

Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.

Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.

The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.

The US policy of extend and pretend, and recapitalizing the banks by printing so much money that eventually the losses will disappear due to inflation, has pushed up the price of gold and led to booms in Internet 2.0 stocks (and Silicon Valley real estate once  again), but just as Austrian economists predicted, it has been a disaster for the real people who, as George Bailey reminded Mr. Potter in It’s a Wonderful Life, do most of the living and dying (and voting) around here.  Unfortunately they are last in line to receive the benefits of newly-created money.

Consistent with the Rasmussen/Discover survey and as stock prices reflect, people are trading down from Wal-Mart and Target to deeper discounters such as Ross Stores and Dollar Tree.  This is simply not supposed to be happening so far beyond the end of a recession.

The easy ”solution” is for the authorities to engage in more paper operations until, they hope, something seriously good happens in the economy.  I’m not always so repetitive, but because in my view the economic data likely to continue to reflect stagnation for some months to come,  the major trend in financial markets will favor the purest forms of money as it revalues downward growth-oriented assets.  I believe that the purest form is gold.  In a debt-based financial system in which dollars are typically created by central bank purchase of Federal debt, then (strangely) Federal debt is the second purest form of money.  Thus, relative to the alternatives, I remain bullish on gold and gold shares, the latter of which are horribly out of favor.  Paradoxically, I also remain “constructive”, as they say, on US government debt (though bond prices have risen a lot recently, so this is not a short-term timing call) until the economic seers take off their rose-colored glasses and adjust their growth expectations down far enough that a flight to “safety” in government debt will have run its course.