Tthe K-shaped recovery of the US economy is underway. Those with stable full-time jobs, benefits and a financial cushion do well when the stock markets climb to new peaks. Those who are unemployed or partially employed in work with low added value and service work – the new “precariat“- are indebted, have little financial wealth and face declining economic prospects.
These trends indicate a growing connection between Wall Street and Main Street. The new stock market heights mean nothing to most people. The lower 50% of the wealth distribution only holds 0.7% of total stock market assetswhile the top 10% command 87.2% and the top 1% have 51.8%. The 50 richest people has as much wealth as the 165 million people at the bottom.
Rising inequality has followed the rise of “big tech”. As many as three retail jobs have disappeared for every job that Amazon creates and similar dynamics apply in other sectors dominated by technology giants. But 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 of real (inflation-adjusted) median income together with rising living costs and expenditure expectations.
For decades, the “solution” to this problem was to “democratize” financing so that poor and struggling households could borrow more to buy homes they could not afford and then use those homes as ATMs. This expansion of consumer credit – mortgages and other debt – resulted in a bubble that ended with the financial crisis of 2008, when millions lost their jobs, homes and savings.
Now the same millennia that were shattered over a decade ago are being deceived again. Workers who rely on gambling, part-time or freelance “employment” are offered a new rope to indulge in “financial democratization”. Millions have opened accounts on Robinhood and other investment apps, where they can take advantage of their meager savings and income multiple times to speculate in worthless stocks.
The latest GameStop story, with a united front of heroic retailers fighting evil short-selling hedge funds, masks the ugly reality that a cohort of hopeless, unemployed, unskilled, debt-ridden individuals is being exploited again. Many have been convinced that financial success does not lie in good jobs, hard work and patient savings and investment, but in rapid systems and investments in inherent worthless assets such as cryptocurrencies (or “shitcoins” as I prefer to call them).
Make no mistake: The populist meme in which an army of millennial David takes down a Wall Street Goliath only serves another system of fleece without an amateur investor. As in 2008, the inevitable result will be another asset bubble. The difference is that this time ruthlessly populist members of Congress have taken action inveighing against financial intermediaries in order not to allow the vulnerable to exploit even more.
Worsening things, markets are starting to worry about the massive experiment monetary income from budget deficits carried out by the US Federal Reserve and the Treasury Department through quantitative easing (a form of modern monetary theory or “helicopter money”). A growing chorus of critics defends that this approach could overheat the economy and force the Fed to raise interest rates faster than expected. Nominal and real bond yields are already risingand this has shaken risky assets such as equities. Because of these concerns about a Fed-led conical tantrum, a recovery that would be good for the markets now gives way to a market correction.
Meanwhile, the Congress Democrats are moving forward with a $ 1.9 tonne rescue package that will include additional direct support to households. But with millions already in arrears on rent and energy payments or in moratoriums on their mortgages, credit cards and other loans, a significant portion of those payments will go to debt repayment and savings, with only about a third of the stimulus likely to be translated into actual expenses.
This means that the package’s effects on growth, inflation and bond yields will be smaller than expected. And since the extra savings will end up in the purchase of government bonds, what was meant to be a salvation for fixed households will in fact be a salvation for banks and other lenders.
To be sure, inflation may eventually still rise if the effects of monetary fiscal deficits are combined with negative supply shocks to produce 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 globalization and economic Balkanization as countries pursue renewed protectionism and investment and manufacturing support. But this is a medium-term story, not for 2021.
As for this year, growth can still not exceed expectations. New strains of coronavirus continue to emerge, raising concerns that existing vaccines may no longer be sufficient to stop the pandemic. Repeated stop-go cycles undermine confidence, and the political pressure to resume the economy before the virus is curtailed will continue to build. Many small and medium-sized enterprises are still at risk of going bankrupt, and too many people are facing the prospect of long-term unemployment. The list of pathologies affecting the economy is long and includes increased inequality, indebtedness of indebted companies and workers, and political and geopolitical risks.
The asset markets remain frothy – if not directly bubbling – because they are fed by super-accommodative monetary policy. But today price / profit ratios are as high as they were in the bubbles before the bust of 1929 and 2000. Between ever-increasing leverage and the potential for bubbles in specialty companies, technical stocks and cryptocurrencies, today’s market mania offers much concern.
Under these circumstances, the Fed is likely to worry that markets will immediately crash if they remove the punch bowl. And with the increase in public and private debt preventing any monetary normalization, the likelihood of stagflation in the medium term – and a hard landing for asset markets and economies – continues to increase.
Nouriel Roubini is a professor of economics at New York University’s Stern School of Business. He has worked for the IMF, USA Federal Reserve and the World Bank.