T.The US economy is in a K-shaped recovery. Those with stable full-time jobs, benefits, and a financial cushion are doing fine as stock markets hit new highs. Those who are unemployed or partially employed in manual and service occupations with little added value – the new “precariat” – are in debt, have little financial wealth and have declining economic prospects.
These trends point to an increasing divide between Wall Street and Main Street. The new stock market highs mean nothing to most people. The bottom 50% of the wealth distribution holds only 0.7% of total stock market wealth, while the top 10% holds 87.2% and the top 1% holds 51.8%. The 50 richest people are as wealthy as the 165 million people below.
Growing inequality has followed the rise of big tech. Up to three retail jobs are lost for every job Amazon creates, and similar dynamics hold true for other tech giant-dominated sectors. However, today’s social and economic pressures are not new. For decades, strapped workers have not been able to keep up with the Joneses due to stagnation in real (adjusted for inflation) wages, rising costs of living and spending expectations.
For decades, the “solution” to this problem was to “democratize” finances so that poor and troubled households could borrow more to buy houses they couldn’t afford and then use those houses as ATMs . This expansion in consumer credit – mortgages and other debt – created a bubble that ended in the 2008 financial crisis when millions lost their jobs, homes and savings.
Now the same Millennials who were held in check over a decade ago are being betrayed again. Workers who are dependent on gig, part-time or freelance “employment” are offered a new rope to hang themselves with in the name of “financial democratization”. Millions have opened accounts with Robinhood and other investment apps where they can use their small savings and income multiple times to speculate on worthless stocks.
The latest GameStop narrative, which shows a unified front of heroic small-day traders battling evil short-selling hedge funds, masks the ugly reality of a cohort of hopeless, unemployed, unskilled, debt-ridden individuals being re-exploited. Many believed that financial success did not lie in good jobs, hard work, and patient savings and investments, but rather in quick wealth programs and betting on inherently worthless assets like cryptocurrencies (or “shitcoins” as I prefer to call them).
Make no mistake: the populist meme in which an army of millennial Davids defeats a Wall Street Goliath is just another scheme to discourage unsuspecting amateur investors. As in 2008, the inevitable outcome will be another asset bubble. The difference is that this time around, populist members of Congress ruthlessly tried to fight back against financial intermediaries for not allowing the vulnerable to get involved any more.
To make matters worse, markets are concerned about the massive budget deficit monetization experiment being carried out by the Federal Reserve and Treasury Department through quantitative easing (a form of modern monetary theory or “helicopter money”). A growing chorus of critics warns that this approach could overheat the economy and force the Fed to raise interest rates earlier than expected. Both nominal and real bond yields are already rising, and this has rocked risky assets like stocks. Given these concerns about a Fed-induced tantrum, a rebound that should be good for markets is now giving way to a market correction.
Meanwhile, Congress Democrats are pushing a $ 1.9 billion bailout that will include additional direct budget support. With millions already in arrears on rent and utility payments, or moratoriums on mortgages, credit cards, and other loans, a significant portion of those payouts are used to repay and save debts, with only about a third of the incentives likely in actual spending to be translated.
This means the package’s impact on growth, inflation and bond yields will be less than expected. And because the extra savings ultimately go back into buying government bonds, what was meant to be a bailout for troubled households is actually becoming a bailout for banks and other lenders.
Of course, inflation can still ultimately occur if the impact of monetized budget deficits with negative supply shocks leads to stagflation. The risk of such shocks has increased as a result of the new Sino-American Cold War, which threatens to trigger a process of deglobalization and economic balkanization if countries reintroduce protectionism and support investment and manufacturing operations. However, this is a story in the medium term, not for 2021.
This year growth is likely to lag behind expectations. New strains of the coronavirus continue to emerge, raising concerns that existing vaccines may no longer be enough to end the pandemic. Repeated stop-go cycles are eroding confidence and political pressures to reopen the economy before the virus is contained will continue to increase. Many small and medium-sized businesses are still at risk of bankruptcy and far too many people face the prospect of long-term unemployment. The list of pathologies burdening the economy is long, including growing inequality, deleveraging by debt-ridden companies and workers, and political and geopolitical risks.
The asset markets remain frothy – if not downright bubbly – because they are fed by an extremely accommodative monetary policy. Today’s value for money, however, is as high as it was in the pre-busts bubbles of 1929 and 2000. Between the ever-increasing leverage and the potential for bubbles in specialty acquisition firms, tech stocks, and cryptocurrencies, today’s market craze is much of a concern.
Under these conditions, the Fed is likely concerned that if it takes away the punch bowl, the markets will collapse immediately. And with the rise in public and private debt, which prevents a possible normalization of monetary policy, the likelihood of medium-term stagflation – and a hard landing for asset markets and economies – continues to rise.
Nouriel Roubini is Professor of Economics at the Stern School of Business at New York University. He has worked for the IMF, the US Federal Reserve and the World Bank.
© Project Syndicate