Fed Admits The Failure Of Prosperity For The Bottom 90%

Authored by Lance Roberts via RealInvestmentAdvice.com,

As the stock market hits all-time highs in its 2nd longest bull market run in history, the lift of asset prices has surely lifted the economic prosperity of all. Right?

Not really.

New reports from the Hamilton Project and The Federal Reserve show the real problems facing Americans today.

First, the Hamilton Project as noted by Pedro Nicolaci Da Costa last week:

“An expansion that began, believe it or not, more than seven years ago has extended a longer-run trend of wage stagnation for the average US worker, despite a sharp drop in the official unemployment rate to 4.4% from an October 2009 peak of 10%.


No wonder the recovery seems so lopsided, particularly given economic inequality levels not seen since before the Great Depression. After adjusting for inflation, wages are just 10% higher in 2017 than they were in 1973, amounting to real annual wage growth of just below 0.2% a year, the report says. That’s basically nothing, as the chart below indicates.”

The problem with this, of course, is that if wages aren’t rising at a pace fast enough to offset the costs of maintaining the “standard of living,” individuals are forced to turn to credit to fill the gap. As I showed recently, this wasn’t a problem initially but now is THE problem for an economy that is roughly 70% driven by personal consumption.

“Therefore, as the gap between the “desired” living standard and disposable income expanded it led to a decrease in the personal savings rates and increase in leverage. It is a simple function of math. But the following chart shows why this has likely come to the inevitable conclusion, and why tax cuts and reforms are unlikely to spur higher rates of economic growth.”

The Federal Reserve Reveals The Ugly Truth

Every three years the Federal Reserve releases a survey of consumer finances that is a stockpile of data on everything from household net worth to incomes. The 2016 survey confirms statements I have made previously regarding the Fed’s monetary interventions leaving the majority of Americans behind:

However, setting aside that point for the moment, how valid is the argument the rise of asset prices is related to economic strength. Since companies ultimately derive their revenue from consumers buying their goods, products, and services, it is logical that throughout history stock price appreciation, over the long-term, has roughly equated to economic growth. However, unlike economic growth, asset prices are psychologically driven which leads to “boom and busts” over time. Looking at the current economic backdrop as compared to asset prices we find a very large disconnect.


Since Jan 1st of 2009, through the end of June, the stock market has risen by an astounding 130.51%. However, if we measure from the March 9, 2009 lows, the percentage gain explodes to more than 200%. With such a large gain in the financial markets we should see a commensurate indication of economic growth – right?”

“The reality is that after 3-massive Federal Reserve driven “Quantitative Easing” programs, a maturity extension program, bailouts of TARP, TGLP, TGLF, etc., HAMP, HARP, direct bailouts of Bear Stearns, AIG, GM, bank supports, etc., all of which total more than $33 Trillion, the economy grew by just $2.64 Trillion, or a whopping 16.7% since the beginning of 2009. The ROI equates to $12.50 of interventions for every $1 of economic growth.

The full Federal Reserve report can be found here,  but I have selected a few of the more important charts for the purpose of this post.

While the mainstream media continues to tout that the economy is on the mend, real (inflation-adjusted) median net worth suggests that this is not the case overall. Despite surging asset prices, household net worth has only recovered back to 1995 levels.

But even that view is highly optimistic as the recovery in net worth has been heavily skewed to the top 10% of income earners.

While many economists have tried to explain the plunging labor force participation rate (LFPR) was a function of“baby boomers” entering into retirement, such is hardly the case given the collapse in net worth of those in that age group. It’s not that they don’t want to retire, they simply can’t afford to.

The “economic recovery” story is also extremely fragmented when looking at median incomes. According to the Fed survey, median household before-tax incomes have fallen from near $55,000 annually to roughly $53,000 currently.

Again, the real story becomes much more apparent when incomes are broken down into deciles.

Interestingly, the ONLY TWO age-groups where incomes have improved since 2007 is for those two groups of 65 and older. Again, this suggests that the plunge in the LFPR is not a function of “retirement” as individuals are working well into their retirement years, not because of a desire to work, but due to necessity.

Despite the mainstream media’s rhetoric the surging stock market, driven by the Federal Reserve’s monetary interventions, has provided a boost to the overall economy. The reality is quite different.

Since the bulk of the population either does not, or only marginally, participates in the financial markets, the “boost” has remained concentrated in the upper 10%. The Federal Reserve study breaks the data down in several ways, but the story remains the same.

The median value of financial assets for families has fallen sharply since the turn of the century.

Except for those in the top 10 percent of the population.

While the Federal Reserve hoped that inflating asset prices would boost consumer confidence, consumption, and economic growth, the problem is that with falling incomes and rising costs of living, the ability to save and invest eluded the majority of families.

Again, the benefit of the Federal Reserve’s interventions was clearly concentrated in the top 10%.

When looking at the financial landscape of families, the future does not look bright. The percentage of families with retirement accounts is at the same level as it was in 2000, despite surging asset prices. Again, this is a function of the disparity between incomes and the cost of living.

But once again, for the top 10%, the last five years has been a windfall. However, it is interesting to note that values dropped in 2013 despite the surge in asset prices. The 80th percentile performed better.

Lastly, as discussed recently, there is a deep flaw in the Bureau Of Labor Statistics adjustments to the employment report and little evidence to support the “birth/death” model which has accounted for roughly all of the job growth since 2009. The assumption is that each month individuals are either starting or closing a business that is not reflected in the more normalized employment data. The problem, however, is that the number of families that owned business equity has been on the decline since 1992.

Well, except for those in the top 10%.

The lack of economic improvement is clearly evident across all data points. However, it has been the very policies of the current and past administrations that have fostered that wealth divide more than anything else. While the ongoing interventions by the Federal Reserve propelled asset prices higher, and fueled the demand for risks, the majority of American families were left behind.

Tax Cuts Won’t Work This Time

This is also why Trump’s recent tax cut policy will fail to fuel the economic prosperity he is hoping for. With the bottom 80% of the population still earning below $50,000 on average, a tax cut will do little to increase their consumption in the economy. Those in the top 20% may well see a tax-savings from the reform but they are already consuming at a level that will likely not change to any great degree.

As David Stockman pointed out this past week:

“The Donald’s new tax reform airball promises to make the filing with the IRS more palatable to rank and file America. Yet 101 million taxpayers (69%) have no exposure to the complexity of the IRS code at all. They owe virtually nothing.


And I mean nothing. Among the 148 million income tax filers, the bottom 53 million owed zero taxes in the most recent year (2014), and the bottom half (74 million) paid an aggregate total of just $45 billion.


By contrast, the top 4% or 6.2 million filers paid $802 billion in Federal income taxes. That amounted to nearly 58% of total Federal income tax payments.”

While the financial media incessantly drones on about the rise of the stock market, what is missed is that after two devastating bear markets many families no longer have the capacity to participate (particularly after following Wall Street advice).

Furthermore, the structural transformation that has occurred in recent years has likely permanently changed the financial underpinnings of the economy as a whole. This would suggest 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 just how much room the Fed has to extract its monetary support before the cracks in the economic foundation begin to widen.

“The chickens have likely come home to roost.” 



Five Star BennyBoy Mon, 10/02/2017 - 12:14 Permalink

The average production worker doesn't get any interest on any savings they manage to put together at the bank and has to work over 111 hours to buy the same amount of stocks they could buy with less than 40 hours before 1994, an all time record high. There is no way for them to benefit for the  so called wealth effect...http://thesoundingline.com/us-equities-are-the-most-expensive-ever-in-t… 

In reply to by BennyBoy

you enjoy myself Paul Kersey Mon, 10/02/2017 - 12:57 Permalink

I'm as straight-up libertarian as they come but I'm starting to become really comfortable with the idea of regulating banks (and therefore pay) like a utility.  If your gains are always privatized and your losses always socialized then you're not actually a free market enterprise.I don't have a problem with $500K+ bonuses when there's actually a risk that one day your employer goes tits up. It means you're likely producing something of value in a competitive market.  But when your bonus is only made possible by increasing rents on the rest of the country by 50-100% then you didn't "earn" jack. 

In reply to by Paul Kersey

gaoptimize Mon, 10/02/2017 - 11:54 Permalink

I suspect the uniparty knows the game is up and there isn't enough bread, and very little cake.  This is the stuff of revolutions.  Now they get a choice:  1) The peaceful MAGA kind, or 2) The other kind.

scaleindependent Mon, 10/02/2017 - 11:55 Permalink

The tax cuts are not really meant to spur economic growth, dummy. They are meant as a wealth transfer mechanism to the 0.01% . (See "carried interest", lower tax rates for a billionaire than for someone with a 100K salary, etc., etc)

Fantasy Free E… Mon, 10/02/2017 - 12:00 Permalink

It is amazing to me that folks still believe that there was ever a remote chance for the economy as a whole to benefit from Fed intervention.These silly articles always have the tone that the Fed was misguided but has been acting in good faith.http://quillian.net/blog/historys-greatest-cash-cow/This has never been anything but a political initiative. It is ongoing. It is not going to stop until the entire system collapses.

Stuck on Zero Verniercaliper Mon, 10/02/2017 - 14:26 Permalink

I beg to differ on the taxes. The wealthy pay no taxes. Taxes are theft of one's production. Only the middle class makes anything so all taxes end up on the middle class. The rich simply pass any tax bill on to others. If the tax bill for a CEO goes up he commands more pay and all the shareholders and consumers of the goods produced by the company have to pay more. A middle class worker in a factory cannot pass the tax bill to anyone else.

In reply to by Verniercaliper

Seasmoke Mon, 10/02/2017 - 12:10 Permalink

Until everyone is willing to go on a 2 week strike. The wealth extraction will continue. I talk to people who are miserable every day, tell them what needs to be done and they say can't afford to do it. Ok well you can't afford this way either. Stop being afraid !!!!!

rp2016 Mon, 10/02/2017 - 12:11 Permalink

it was planned... none of this is a no-one-saw-it-coming stuff. The only differece among various observers was the manner in which this would unfold. That it will fail was never in doubt ... among those who knew what is coming.

DontWorry Mon, 10/02/2017 - 12:12 Permalink

Since the chief problem is wage growth for the last 7 years, it is rediculous to continue to import legal immigrant labor. Work visas increase the labor supply, which suppresses wages. One thing that could be done is to immediately suspend work visas.

buzzsaw99 Mon, 10/02/2017 - 12:12 Permalink

even now the fed guarantees that it stays that way.  when the poor default on their loans, and they will, becoming even poorer, the fed will buy the affected securities from the top 1% so they don't lose anything.

moneybots Mon, 10/02/2017 - 12:27 Permalink

"With such a large gain in the financial markets we should see a commensurate indication of economic growth – right?” Not when we are experiencing the greatest financial fraud in the history of the world.

LawsofPhysics Mon, 10/02/2017 - 12:44 Permalink

"admits failure" but continues to enable the greatest fraud/theft in the history of the planet...Perhaps they will actually do the right thing once we stretch their fucking necks a bit?In the meantime..."Full Faith and Credit"

JBPeebles Mon, 10/02/2017 - 12:51 Permalink

Tyler hits the analysis here just right. The Fed may be looking at ZH. So when will their mandate shift to helping the American worker?Two ways to learn. One is trial and error. For the population at large, QE has been an error; its political ramifications are yet to be discovered. Now that the inequity is out in the open, has it not been made clear that Fed interventions have been meant to enrich the top? How many more charts does Tyler need to whip out to prove this reality?So the nine year  experiment has failed for the economy and the vast bulk of the nation's people. It's succeeded in making the top wealthier--a process that continues every time the already bloated Dow sails to another high.I'm out of the market and I hope you are too. This is because we don't know how this reallocation of wealth is going to play out. There are a lot of very angry people. Violent crime is up around 3% for two years running. How long before the 90% in the bottom start looking around for their next meal ticket?Communism made real inroads during the Depression and may offer an alternative. Millenials are said to be 40% pro-socialist over capitalist. And who's to blame them? Their college debt is an odious drain on their income, housing has been driven up by QE-feuled speculation, and they have nothing to gain from this system of debt enslavement and corporate socialism.Life will get increasingly miserable. The Gangs of New York wealthy will never know when the angry horde will strike. And don't think you're safe with some bunker or a couple weapons. People out in the sticks know where you live. You'll have to stay in fortified compounds and those will be the juiciest targets in hard times. People with starving kids will do things.Of course the feudalist intent is to have impoverished hordes slave in the fields in a state of near starvation, sufficiently so to perhaps inhibit their grabbing of pitchforks and lynching of the rich. But don't think the wealthy are secure for their money will not buy them a minute more.Maybe they can build a giant satellite outside our steaming, polluted atmosphere. There they can orbit in bliss, unaware of the woes in the planet far below. Cancer machines will give them infinite life.Meanwhile down on the planet the people get hungrier. The satellite may be distant but the hordes below will find a way up there where they'll plunder the ill-gotten gains. Hmm...sounds like a movie plot.

I Write Code Mon, 10/02/2017 - 13:05 Permalink

As usual missing the point, because you need to peel off the top 1% or top 10% BEFORE you calculate those aggregates.  THEN you would see how really bad it is for the 90%.  That 0.2% positive growth would probably turn negative by about 0.5% or more.  For forty years.So why haven't we had a revolution?  Well, the bottom 10% is probably doing better, and that helps.  And a lot of illegal immigrants drag down the numbers, directly and indirectly.Who has really been crushed was the middle middle middle class, which used to be 50% of the population.  Now it's probably 20%, most have been squeezed lower, and just a few higher.  Yes, I know the mathematics involved but you can see what I mean, the medians are falling even though the averages stay up because of the top 1%.  And the modes are falling, and that's the ugliest part.

canisdirus I Write Code Mon, 10/02/2017 - 16:20 Permalink

I'm not sure that even 20% could be classified as the "middle class" anymore. By historic standards, we barely have one and it's probably about 3-4% of the population among the top 10%. I'd estimate that it is the 93rd-97th income percentiles, with a thin "upper middle" around the 98th-99th income percentiles. Everyone in the bottom 90% are simply working poor. They have no real assets to speak of, an income that barely supports their lifestyle (and if they appear middle class, they're using debt or gaming something to get there), and the vast majority are on some kind of social assistance program that they depend on to survive (this is why no real changes have been made to reduce these programs, in spite of any rhetoric).Debt and debt-based transfer payments from the government (in the guise of social assistance) are the only reason we haven't had a revolution yet.

In reply to by I Write Code

TrustbutVerify Mon, 10/02/2017 - 13:02 Permalink

There is much to be considered in these statistics. First, the Fed can quickly take care of so much of the wealth disparity by raising rates. Asset prices across the board would fall. But importantly too, part of the lack of wealth building at all levels except the top is simply the American social phenomenon of assuming a society can elevate itself by buying discount products made - increasingly for last 4 - 5 decades - by cheap labor countries. Its like the comedian I heard during the 1960s whose bit was about saving money and how good he felt buying cheap goods and how much he was saving. He felt to good about it he quit his job so he could save full time! Of course, American's don't quit their jobs by buying cheap imported goods, they essentially get fired from their jobs. But they're firing themselves.
Now after 4-5 decades of this is hard to even find American made goods in so many market segments. And over this period our government officials have seen the benefit of increased amounts of government dependence - all the while allowing and even promoting extra-legal (illegal by any definition) immigration that provides desperate low wage that further erodes pay.
The government isn't the answer. Americans spending habits are the answer. Even if its a slow turn toward buying American made goods, the power of American spending if redirected toward domestic manufacturing is a powerful force.
Maybe less foreign made computers and cell phones - and the recurring monthly charges of "staying connected" - can be reconsidered, too. In itself this spending is a massive river of money and spending going in large part, to astoundingly unproductive wasted time.
In summary, people can start making hard decisions on how to make things better for themselves and their country. There's no government "superman' that's going to suddenly fix things.

Scuba Steve TrustbutVerify Mon, 10/02/2017 - 13:27 Permalink

IMO, your premise is wrong.The common man should always look to save money in his spending habits .... always, always, always. It doesnt matter where the product is made the buying choice in the Common Mans ALWAYS should be price/value. It should be left up to hin to decide.At that point the Common Man should of took his savings and drawn an interest from it OR re-invest it into equity from an organic profit making organization. Also, the Common Man should of refrained from Financing and lived within his means and his money saving life. In everythhing I said here, you can see what happened to the Common Man ... be it fraud, market manipulation, Fed manipulation, false product pricing, lack of trade tariffs, transparent banking, commercial impulse advertising, peer pressure, increase in larger govt taxes, etc, etc, etc.It was NEVER about buying American Made and not saving a buck on purchases ... those things would of and do still happen organically. It is Common Mans coomon sense and logic that decides price to value in his life.jmo.  

In reply to by TrustbutVerify