The Two Charts That Dictate The Future Of The Economy

Tyler Durden's picture

Authored by Charles Hugh Smith via OfTwoMinds blog,

If you study these charts closely, you can only conclude that the US economy is doomed to secular stagnation and never-ending recession.

The stock market, bond yields and statistical measures of the economy can be gamed, manipulated and massaged by authorities, but the real economy cannot. This is espcially true for the core drivers of the economy, real (adjusted for inflation) household income and real disposable household income, i.e. the real income remaining after debt service (interest and principal), rent, healthcare co-payments and insurance and other essential living expenses.

If you want to predict the future of the U.S. economy, look at real household income. If real income is stagnant or declining, households cannot afford to take on more debt or pay for additional consumption.

The Masters of the Economy have replaced the income lost to inflation and economic stagnation with debt for the past 17 years. They've managed to do so by lowering interest rates (and thus lowering interest payments), enabling households to borrow more (and thus buy more) with the same monthly debt payments.

But this financial shuck and jive eventually runs out of rope: eventually, the rising cost of living soaks up so much of the household income that the household can not legitimately afford additional debt, even at near-zero interest rates.

For this reason, real household income will dictate the future of the economy. If household incomes continue stagnating or declining, widespread advances in prosperity are impossible.

The Masters of the Economy have played another financial game to mask the erosion of real income: inflating speculative asset bubbles to boost the illusion of wealth, a form of financial sorcery called the wealth effect: households that see their stock and bond funds swelling by 50% to 100% in a few years are emboldened to believe this phantom "wealth" is permanent and thus can be freely spent in the present.

The problem with this financial shuck and jive is only the top 5% own enough assets to experience the speculative high of asset bubbles. This is one reason why the top 5% have pulled away from the bottom 95%, a trend that is blindingly obvious in this chart of Real Average Household Income by Quintile and the Top 5% from the always-insightful Doug Short (U.S. Household Incomes: A 49-Year Perspective):

The gains since 1992 reflect the national distribution of wealth very closely: those with minimal financial wealth (the bottom 80%) experienced minimal gains in real income.

Those with some financial wealth (the top 20%) enjoyed substantial gains, but the truly outsized gains were reserved for the top 5%, the class that owns the majority of the nation's wealth.

The problem for the Masters of the Economy is that adjusted for inflation, even the incomes of the top 20% and 5% have gone nowhere in the 21st century. If even those households exposed to the enormous gains of this century's two asset bubbles (2002 to 2008 and 2009 to the present) have stagnated, then all the financial shuck and jive isn't trickling down to real income, which is the bedrock of the real economy.

This second chart from Doug Short reveals the period in which the top 20% pulled away from the bottom 80%, and the top 5% pulled away from the bottom 95%. In 1990-92, the gap between the bottom 80% and the top 20% and 5% was modest. The go-go decade of the dot-com boom saw the income of the top 20% pull away from the bottom 80% and the income of the top 5% leave the bottom 95% in the dust.

All that changed in the Financialization Era of 2000 to 2015. Despite two unprecedented asset bubbles, the inflation-adjusted incomes of the top 40% have at best returned to the levels of 2000, while the real incomes of the bottom 60% have fallen dramatically since 2000.

Please note that this data is from the U.S. Census Bureau. Many of the charts one finds on the web (see an example below) of income/wealth inequality are drawn from data collected by Piketty et al., which as many critics have pointed out, does not include government transfers and social welfare programs that are a substantial (and rising) share of household income for the bottom 60%. These include earned income tax refunds, Medicaid healthcare coverage, rent subsidies, direct welfare payments, subsidized school lunches, direct grants for higher education, and so on.

Anecdotally, the sum of these social welfare transfers can double the effective income of low-income households from $20,000 to roughly $40,000 or more. We can quibble about the total value of these transfers and benefits, but they are undeniably substantial and when included, more accurately reflect the real-world income available to lower-income households.

It's also necessary to include capital gains, i.e. income from invested wealth and speculative gains reaped from asset bubbles. Data collected by Piketty et al. includes capital gains.


source: 11 Charts That Show Income Inequality Isn’t Getting Better Anytime Soon

The point here is that no source of data on income disparity captures all these income streams or equivalents of income. I prefer to rely on I.R.S. tax records as the most reliable and least gamed source of income data, but the I.R.S. doesn't tax Medicaid benefits, rent subsidies, etc., so it seriously under-represents the effective income of lower-income households.

That said, the incomes of the top 20% are mostly taxable and thus more accurately reflected in the data presented here.

If you study these charts closely, you can only conclude that the US economy is doomed to secular stagnation and never-ending recession as long as real income for all segments is stagnating or declining (other than the top of the wealth apex, i.e. the top .5% of households).

Every other economic measure other than real household income is shuck and jive, statistical trickery, or phantom "wealth" conjured into existence by unsustainable credit/asset bubbles. If the Masters of the Economy can't move the needle of real household income for the bottom 95%, they'll end up with a banquet of consequences that extend deep into the social and political orders.

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LawsofPhysics's picture

Yes, The Fed is enabling a "let the majority eat cake" monetary, political, social, and economic experiment...   ...by design.

We all know how this will end.  Get long sharecropping and guillotines.

froze25's picture

I said it once, I will say it again, if you want to see what the future has in-store for the US and most of Europe look no further than the last 15 years in Japan.

LawsofPhysics's picture

Unfortunately, this is happening all over the world.  Global Weimar is on as there can only be one "Japan"...

NidStyles's picture

Funny that same time period coincides with the start of Jewish dominance over the government... Funny how that works, almost like a (((coincidence))).

Ghost of PartysOver's picture

Share of Total Income by Percentil:  That is recipe for torches and pitchforks.  "Let them eat Cake!"

JRobby's picture

It's been 22 to24 years in Japan. They have an older demographic, hurting consumption and their banks never recovered from the 91/92 recession where the Japanese banks were"marginalized" (by design) and eliminated from lucrative corporate lending syndicates among other areas of business.

Then of course there was the "rise" of the rest of Asia at the expense of existing developed economies.

Hikikomori's picture

Big difference is, Japan has not allowed millions of illegal immigrants in.  In fact, they don't allow many legal immigrants in.

Simplifiedfrisbee's picture

And so we have a president who benefited from these policies. A person must be mentally disturbed to believe that a rich man will provide him with a higher quality of life. Either allow the rich to enjoy a higher living or limit inequality.

Fuck you tylers.

Big Brother's picture

So, a solution would be to have lots of babies, go on welfare, strip-mine the assets / income of the top 5% with taxes and money-printing (inflation).  Got it.

froze25's picture

Welfare first then the babies.

Stormtrooper's picture

Welfare with Obamaphones and Obamaflix.

LawsofPhysics's picture

money printing has in fact benefitted the financial sector because they have access to it first...

but then again, perhaps all these useless fucking paper-pushers better define "money".

Once the producers of real products, especially those things required for survival or a decent standard of living, decide not to accept their bullshit paper/digits, then we get to eat the "rich". But I digress, the "smart and savy" will find a way to kill off all those welfare babies soon enough, they always do.

"Full Faith and Credit"

tick tock motherfucker.

MisterMousePotato's picture

"Once the producers of real products, especially those things required for survival or a decent standard of living, decide not to accept their bullshit paper/digits ... ."

In pertinent part: "[D]ecide not to accept."

Never happen. Never, ever.

Why?

Every year, in or about April, those "bullshit paper/digits" become enormously valuable for fending off the I.R.S.

Every year, in or about April and December, The State dispatches armed agents to collect some of those "bullshit paper/digits" if one wants to keep their house.

Repeat ad infinitum.

Nothing else is accepted by The State.

So long as this is true (and I sure don't see this changing any time soon, if ever), those "bullshit paper/digits" will be valuable. It may be a game. It may be that the 'value' of "bullshit paper/digits" is thus artificially created, but if Chuckie Cheese tokens did the trick, they'd be enormously valuable, too.

Makes no sense to those living in Christendom, but, if you lived amongst vampires, garlic and crosses (wooden stakes, too) would serve as 'money'.

4johnny's picture

Gates and Bezos wallets are almost hitting the 100billion mark.  It's a wonderful world.

Captain Chlamydia's picture

The Masters of the Economy have replaced the income lost to inflation and economic stagnation with debt for the past 17 years. 

 

Make that 70 years.

XBroker1's picture

Does the mother jones chart look like someone getting inseminated or is it just me?

are we there yet's picture

Government does not create all economic solutions, it creates all economic problems that it then claims to have the solution for. How do you end the fed, get smaller government, and end anyone Jewish from working in any financial business or agency, and print our own money? We are cursed until that is done. Americas greatest economic expansion was between 1880 after the civil war but before the creation of the FED.

SunTzu2U's picture

The Japan comparison is apt. A large part of this is fighting demographics, a losing battle, that is poised to get more difficult. If the Fed stops pumping money, the music stops and there are very few chairs. 

PitBullsRule's picture

The majority of this wealth disparity, is the fault of the stock market.  The public blindly throws its retirement savings at a handful of hot companies, and the CEO's and presidents of those companies give themselves hundreds of millions of dollars a year in stock options or stock bonuses.  So we wind up with multi-billionares like Zuckerberg who really haven't contributed much to our economy.  Meanwhile other countries, like Japan, are making much better products because Japanese workers get to participate in the success of the companies.  In the US, most of the working class is living the life of a Soviet worker from the 1980's, no way to get ahead, no sense working hard, just make the minimum effort to get by.

moorewasthebestbond's picture

Last chart is a true inequality death cross.

TrustbutVerify's picture

The question must be asked: How much has the culture of buying "discount" and thus buying an increasing share of foreign made goods contributed to the "lower 90%s" job and income troubles? Buying strictly on price is THE recipe for the ruination of the American job market. One of the largest retail outlets in the nation - Wal-Mart - is essentially an import house. More importantly, its parking lots are full of those whose job picture the most negatively effected by buying cheap imports.
At least at some level Americans seem too stupid to make changes that will help their situation. How much can a self-destructive population that seems unable to and unwilling to make things better for themselves.

But I get it. Its not easy with so many phony "American brands" that are foreign made. But some effort could be made by the American people to help themselves.

CJgipper's picture

IN other words; tariffs and good trade deals work for a country like us who can make anything we want to.

MATA HAIRY's picture

1) stop all immigration except dentists and medical doctors (which should be at least doubled)

2) stop all racial preferences by law, e.g., affirmative action etc

3) curtail actions of the Fed bank

4) cut the military

5) deport the aliens

6) institute medicare for all

7) outlaw most housing construction laws, zoning, regs, ordinances etc

 

vasallo7g's picture

you dont need to deport the aliens if you dont hire them in the first place

CJgipper's picture

single payer healthcare and ruining our domestic medical profession..... what could possibly go wrong (aside from bankruptcy)

surf@jm's picture

I remember Nancy Pelosi, and Harry Reid, saying that larger government spending on social programs has a positive multplier effect on the economy......

You mean they were wrong, now that we have the largest amount of people on welfare in history, but don`t have the largest growing economy in history?.....

Makes you just want to run out and elect a democrat.......for the economys sake........LMAO!....

InnVestuhrr's picture

The PRACTICAL message for individuals =

IF you are only a wage-earner, then you are DOOMED in multiple ways, eg inadequate + declining income, frequent job losses, etc.

The ONLY way that you have any reasonable chance of prosperity is by earning far more than a wage-earner, eg owning your own business, high-income occupations, etc

CJgipper's picture

I'm in a "high income" profession.  The competition and expectations are UNREAL.  They're truly not human.  And you could make the same money with any two other jobs having less stress.  The only way to get ahead is to be running your own gig.

InnVestuhrr's picture

The struggle is ALWAYS relentless and can be vicious and brutal in many roles, at the top or bottom of the income ladder. But much better to be earning more $$$ for the struggle than less $$$.

Note that even after you "retire" the struggle for prosperity will continue as the central bankers destroy the income-earning capacity of your savings from your previous period of struggle.

 

Knave Dave's picture

And, yet, will Charles H Smith go the next step and blame trickle-down economics.

Two factors create the following scenario:

"The Masters of the Economy have played another financial game ... inflating speculative asset bubbles to boost the illusion of wealth, a form of financial sorcery called the wealth effect.... The problem with this financial shuck and jive is only the top 5% own enough assets to experience the speculative high of asset bubbles. This is one reason why the top 5% have pulled away from the bottom 95%, a trend that is blindingly obvious...."

It is blindingly obvious, and one of the key factors that create the situation is also blindingly obvious: central banks creating and moving all money toward investment in stocks and bonds, which is a market that primarily the rich play in. It is where they make most of their wealth. Those with less money cannot afford the risks and don't have any money to play with in these big casinos.

The other factor is equally obvious and, yet, missed by so many on the right (including maybe Smith, in that he fails to mention it):

Trickle-down economics is built primarily on a capital-gains tax break, which is supposed to spur investment that trickles down to the rest of us. Who mainly pays capital gains taxes? The very same people in that top 5% that Smith is talking about -- the very same people who make money on the "financial shuck and jive" that Smith says is the reason for this huge disparity in income increases. Like central bank money, the money saved on cap-gains taxes also goes directly back into buying more stocks and inflating the stock asset bubble. Little escapes the casino to trickle down below the realms of the rich.

So, think about it. It's simple: 1) Banks give all the new money to people and insititutions who will spend all of it on stocks to "create a wealth effect." 2) Goverment gives special tax breaks to people who make their income in that manner.

Is it any wonder that with 1) more money to play with and 2) more of that money retained for playing with through special low tax rates ... that the 5% in that game would see their incomes expand exponentially while the rest of us sit stuck in the mud?

The shameful part is that the mudders keep voting for trickle-down economics. Therefore, they deserve all the economic squelching that they get because they keep drinking the swill that is given to them and bragging about how fair they are being for taxing the rich at a lower rate than themselves. Until people smarten up and recognize that "trickle-down economics" is the second key to why ALL wealth creation is happening in the top 5%, they deserve to be stuck in the stagnant 95% because they keep voting for policitians that promise to keep you there.

Let's just say that the word "trickle" in the trickle-down formula was NEVER EMPHASIZED STRONGLY ENOUGH. It is one insignificantly tiny trickle by the time you create all the wealth at the top and then tax that kind of income at a lower rate so the poor wealthy can hold on to more of it. That trickle is a mere thread of drizzling honey, dripping out of a pin hole in the bottom of an enormous vat that has 5% written on the side of it. 95% get to lap up honey from the ground beneath the pin hole.

Enjoy. Because, until you get mad at yourself for buying into the trickle-down garbage (if you've been voting for it) and for giving the rich a lower tax rate on the one area of income that they most enjoy and you rarely see, you get to keep drinking from the pin hole and being glad for what little you can lap up from the dust. Get mad at yourself first for ever buying into this baloney, and THEN get real mad at the people who snookered you into it. I want you to get mad at yourself for being taken in by something that has proven for decades not to work as promised because, until you get really mad at yourself, you're not going to get really mad at the people who conned you with this false promise. I mean, imagine that you believed you could create demand in the economy by giving special tax breaks to the supremely rich. (Without demand, how are the rich going to sell their supply?) Imagine that you actually believed the rich would spend the money they saved on their speculative gains by creating things nobody can afford in new factories in the US when they could make so much more money so much easier by just speculating on stocks in companies that save money and increase productivity by building factories overseas. Imagine that you believed any of that!

RedBaron616's picture

Everyone has charts, charts, and more charts, but where does the underlying data come from? If it comes from any branch or agency or government, know that those figures are probably incorrect by a decent factor.