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The 80/20 Rule Is Crushing The Economy
Submitted by Lance Roberts via STA Wealth Management,
In business, the 80/20 rule states that 80% of your business will come from 20% of your customers. In an economy that is more than 2/3rds driven by consumption, such an imbalance of the "have" and "have not's" impedes real economic growth.
I have often written about the disconnect between Wall Street and Main Street. As shown in the chart below, while asset prices were inflated by continued interventions of monetary policy from the Federal Reserve it only benefitted the small portion of the population with assets invested in the market. Cheap debt, excess liquidity and a buyback spree led to soaring Wall Street and corporate profits, surging executive compensation and rising incomes for those in the top 20%. Unfortunately, the other 80% known as "Main Street" did not receive much benefit.
This divide is clearly seen in various data and survey statistics such as the recent survey from Bankrate.com which showed 30 million Americans borrowed from their retirement plans over the last 12-months. Importantly, "baby boomers" were the most likely to take a premature withdrawal as well as incur a tax penalty for doing so. A full 2/3rds of Americans agreed that the effects of the "financial crisis" are still being felt in the way they work, live and spend.
How can it be that in an environment where Central Bank interventions have fostered surging asset prices, there are 30 million American's tapping retirement plans to meet current expenses? Of course, the picture is much worse when looking at a variety of measures I discussed previously in "Don't Blame Boomer's For Not Retiring:"
"Let's start with the retirement of the boomer generation. Recent statistics show that the average American is woefully unprepared for retirement. On average, 40% of American families are NOT saving for retirement, and of those who are, it is primarily about one year's worth of income. Furthermore, important to this particular conversation, one-fourth of those at retirement age postponed retirement with only 18% being confident of having enough saved for retirement."
Despite the Fed's best intentions that inflating asset prices would spur consumer confidence, the problem is that it only benefitted those with the ability to invest. Of course, inflating asset prices for those that already have wealth does not increase spending within the economy to any great degree.
Conversely, for the bottom 80% there has only been minor increases in household incomes due to an economy that is growing at the slowest rate in history. As I discussed in "Dimon's Delusionary View Of Economic Realities:"
"While "creating 10-million jobs since the end of the recession sounds like a strong accomplishment it was not sufficient enough to absorb the increase in the population. In other words, for every job created there are more individuals actually 'needing' a job."
"With roughly 94-million individuals not counted as part of the 'official labor force,' the downward pressure on wage growth due to the increasing demand for available jobs remains a pervasive force. Of course, since individuals must produce first to consume, the expectations for stronger future growth rates are likely to be disappointed in an economy which is almost 70% based on consumption."
This downward pressure on wage growth has been dramatically offset by the real cost of living which includes food, energy, healthcare and education costs that have far outpaced any increases in incomes. With an inability to further leverage the household balance sheet to any great degree, the differential between incomes and expenses have depleted the majority of household savings.
This can be clearly seen in the latest survey data from the Census Bureau for the year 2014 which showed the median national household income to be just $54,041. The problem, as I addressed previously, is on average it requires $58,000 to support a family of four today.
Importantly, this is the MEDAN national income of all Americans. When applying the "80/20 rule" a far more discouraging picture emerges.
The chart below breaks out the national income for the top 5% of the population, the top 20%, and the bottom 80%. See the problem here?
In 1967, the bottom 80% of the country had a national median income of $5,755. Today, nearly fifty years later, the national median income for the bottom 80% has risen to just $42,564.
This is in contrast to the top 20% who saw incomes rise from $17,280 in 1967 to $194,053 today. But even that increase pales in comparison to the top 5% whose incomes rose from just $28,110 to $332,347 today. The difference in incomes between the top 20% and bottom 80% is a staggering $151,489 annually.
These statistics explain why despite falling oil and gasoline prices in recent months, any "savings at the pump" were not redeployed into additional consumption. Of course, that mistaken belief by the majority of economists was based on a false assumption of both human behavior and household economic realities to begin with. To wit:
"Simply put, lower oil and gasoline prices may have a bigger detraction on the economy that the 'savings' provided to consumers. Newton's third law of motion states:
'For every action there is an equal and opposite reaction.'
In any economy, nothing works in isolation. For every dollar increase that occurs in one part of the economy, there is a dollars' worth of reduction somewhere else."
But it is in this data that we find the real reason, despite repeated monetary interventions, both economic growth and inflationary pressures have failed to take hold.
Note: During the analysis of median incomes, the following chart of the annual rate of change in incomes (all brackets) suggests that the economy may actually be closer to the next recession than not. Historically, when the national median income has experienced a sharp decline it has been coincident with a recession. In 2014, the national median incomes declined from a 5.01% annual growth rate to just 0.56%.
While the ongoing interventions by the Federal Reserve have certainly boosted asset prices higher, the only real accomplishment has been a widening of the wealth gap between the top 20% of individuals that have dollars invested in the financial markets and everyone else. What monetary interventions have failed to accomplish is an increase in production to foster higher levels of economic activity.
Furthermore, the structural transformation that has occurred in recent years has likely permanentely changed the financial underpinnings of the economy as a whole. With the average American still living well beyond their means savings will continue to be diverted from productive investment into debt service. This suggests that the current state of slow economic growth is likely to be with us for far longer than most anticipate. It also puts into question the ability of the Fed to extract its monetary support before the cracks in the economic foundation begin to widen.
In the meantime, stop blaming "baby boomers" for not retiring - they simply can't afford to.
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10 dollar an hour nursing aid jobs for all! Enjoy your prosperity, bitchez!
"The U.S. economy is alive and kicking," said Phil Lachowycz, an economist at Fathom Consulting in London. (quoted in a Daily Mail article today).
The economy right now is more a death rattle. And wait til those jihadist killers come ashore from the Middle East. Expect wars between the different drug gangs - the new arrivals selling heroin and hash competing with the already established players. You know, the DEA, the Sinaloa and Zeta drug cartels, the Columbians and local drug dealing police forces everywhere.
Do your duty for the economy. Borrow money. Go to college. Support bureaucrats.
Just to be Mr. Language Person for the day:
When applied to business, the 80/20 rule usually states that 80% of your profits will come from 20% of your customers. Also 80% of your customer support costs, usually from a different 20%.
It's always TLDR if the author can't even get the first line right.
TLDR, indeed.
And the second sentence made no sense whatsoever.
DUH!!
Its basically the reason the world by the end of the 19th century had outlawed slavery. Slaves can't consume.
Problem is the Western Anglo-American Bankers and the MIC have painted themselves into a similar corner Joe Stalin and his buddies found themselves at the end of WWII.
Stalin and his henchmen could see what was going on at Nuremberg-and they looked around the room at one another-and promptly dropped the iron curtain-until they themselves had all died of old age. They assumed-quite correctly-that an open door policy would lead them to the same courtrooms.
The current pack of crooks and theives know that in a just and open world-they too would be in a courtroom but for the electronic Iron Curtain they have assembled. The freedoms compromised by that electronic iron curtain assembly have choked off business worldwide and created monopolies behind legislative, judicial and electronic firewalls that are virtually impenetrable-except eventually by the impoverishment of those outside.
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This 80/20 rule is not crushing anything. Insane policy of the rich for the rich, their debt piled on our backs, is way ahead in line.
Rapidly becoming the 99/01 rule
If you like to use the 80/20 rule (for whatever) it can be made even more efficient by doing 80/20 on your intial 80/20.
Correlation is not necessarily causation.
Narco / MIC / Ponzi Debt Psychopaths are killing the economy.
Please add Facist Business Model to your list.
"Rebuilding America one bridge at a time"
Your tax dollars at work"
I have to drive by those road signs every fckng day!
Ramp starting early. Did Bulltard say something about MOAR QE?
Every month the number of retirees, welfare and bartenders outweigh any real job growth and so while it may be more like 60-40 today, no question it is heading to 70-30 at which point the political clout of those voters will be unmovable (expect only those that promise handouts to be elected in both parties) and the deficit to widen to a yawning gap as productivity collapses under new taxation and medical deductibles, school debt. while taxes collected declines. Really is a frightening future ahead in the next 10-20 years here. Can see why Germany is welcoming young Syrians to their country in a desperate attempt to forestall the demographic declines.
Even households making $100,000 a year say they are broke.
There are many points wrong with this picture, among them these:
1. Until recently, multi-generational families Always lived together. The media (funded by builders and real estate companies along with the sellers of household goods...see: Walmart, et al) promote endlessly that you are a loser and a slob if you "live at home." So instead of letting our kids pay off their loans and get on their feet, even start their families, while living with their parents who can provide emotional support and some babysitting service, we promote to kids that they should spend 100% of their income so they can "live on their own" aka be parasictically controlled by their daily living bills: rent, electric, water, cable, et all.
2. What is a "household?" Considering the number of women dropping babies and being supported by government sucking business dry with various "fees and taxes," if these women are counted as a "household," then clearly this will pull those numbers down.
3. Funny how we are told how "poor" these households are but this particular group seems to find plenty of money for marijuana and other drugs and Another tattoo. Recently Bloomberg did a video segment interviewing "millenials" under the title (something like) Are Millenials Screwed When It Comes To Working? Then they interview a bunch of idiots who are tattooed (a woman with both arms massively tattooed) and who whine about how much they've spent on their education...now note that these "loans" have been overly generous allowing students to buy cars and other accoutrements of life, rather than live on top ramen, as students have always done. And someone needs to tell millenials that just because it's your "passion" you don't get paid for it...many of us have worked jobs because Bills Needed To Be Paid.
4. And, of course, no one is more right than Trump. Get rid of the 30 MILLION Illegals and suddenly you've got a lot of jobs in the US, maybe not great jobs but who hasn't worked a job just Because You Neede the Money!Duh.
5. Stop rewarding women for dropping welfare babies and you'll immediately raise "household" wealth because life will change in America.
Lets be honest here, the only benefit "Main Street" got was whatever money the bankers spent at the strip club, that trickled down from the strippers thong to the bouncers/club/their families.
And you know thats not a lot.
The bailouts would of saved the global economy if instead of bailing out banks, they were allowed to fail and the debt on their books was extinguished (everyones CC bill/Mortgage went poof), and bailout funds were used to over-fund FDIC.
The entire global economy would of reset.
BUT NO.
We the tax payers (the people forced into debt by these scumbags) bailed out the banks so they can take our money and use it to persecute us.
lol
There is no government of the people for the people by the people.
Its a government of the banks, for the banks, by the banks.
Nothing else matters to govt, all that matters is what do we do to keep the banks running and taxes coming in to keep the banks running, we should just get rid of the government already and let JPMorgan and Goldman run the country, there is no need for the facade anymore everyone sees through it already there is no more civility in this world, only greed and corruption.