‘Capitalist Suicide’: What’s Wrong With This Chart?

There is a strong argument to be made that central banks underestimated the efficiency of the transmission channel between accommodative policies and financial markets while simultaneously overestimating the efficiency of the transmission channel between those same financial markets and the real economy.

That’s from a piece we did for DealBreaker a couple of months back and the point there is that the policy response to the crisis has effectively served to exacerbate the wealth divide in America.

Although this isn’t a perfect way to visualize the excerpted passage above, it does a decent job of getting the point across:

FinancialVersusRealEconomy

Obviously, central banks were acutely aware that flooding the market with $15 trillion in liquidity would inflate the value of financial assets. The assumption – or so it seems – was that the fabled “wealth effect” would reflate the real economy in relatively short order, and thus the benefits of ultra-accommodative policies would quickly “trickle down”.

Of course that’s not what happened.

Instead, corporations took advantage of the hunt for yield fostered by ZIRP, NIRP, and QE by implementing debt-funded buybacks, the effect of which was to turbocharge the equity market rally.

Well, guess what? This:

StockHouseholds

And also this:

401k

Because financial assets including and especially equities are overwhelmingly concentrated in the hands of the rich, the longer policies that inflate those assets take to trickle down, the wider the wealth divide gets.

Relatedly – and this is important – the longer the trickle-down lag, the longer the policies stay in place because after all, those policies were ostensibly designed to reflate the real economy and once you’re pot-committed (which central banks were a long time ago), you can’t very well throw in the towel and say the effort has been a failure. Rather, you’ve got to keep accommodative policies in place until growth and inflation finally tick up. Again, the longer those policies are in place, the wider becomes the divide between those who are disproportionately benefiting from financial asset price inflation and those who aren’t.

Note what’s implicit in the above. Namely: this is not a linear dynamic. And that nonlinearity runs all the way up the proverbial totem pole. Here’s how Salient’s Ben Hunt recently explained this:

The goodies of a trebled stock market aren’t evenly distributed. Who owns stocks? If we’re talking about households, leaving aside pension funds and endowments and other institutional investors, it’s the rich, mostly. And that household share of the Central Bankers’ Bubble doesn’t increase linearly with wealth, but exponentially, meaning that the really rich own a lot more stocks than the merely rich, so the really rich have gotten a lot richer than the merely rich.

It should go without saying that the GOP tax plan is going to make this worse. For one thing, corporations are going to use repatriated cash to buy back more shares and otherwise reward capital.

But the more overt “fuck you” to the middle class and to low income Americans comes courtesy of simple math, which shows that by 2027, households bringing in more than $1 million (the top 0.6% of filers) will be getting 81.8% of the benefits from Trump’s tax plan.

Now with all of the above in mind, consider the following chart from Pavlina Tcherneva:

RichGetRicher

Any questions?

As far as how this ends, allow William Spriggs, chief economist at the AFL-CIO, to explain it to you in no uncertain terms:

This is the last time they can get away with it, because the backlash is going to be huge. In the end, the trend toward inequality amounts to capitalist suicide. Businesses can’t create themselves, they respond to general growth in income. Inequality chokes off business development.

Grab the torches and the pitchforks.
 

 

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7 thoughts on “‘Capitalist Suicide’: What’s Wrong With This Chart?

  1. Well I woke up this morning
    On the wrong side of the bed
    And how I got to thinkin’
    About all those things you said
    About ordinary people
    And how they make you sick
    And if callin’ names kicks back on you
    Then I hope this does the trick
    ‘Cause I’m sick of your complainin’
    About how many bills
    And I’m sick of all your bitchin’
    ‘Bout your poodles and your pills
    And I just can’t see no humor
    About your way of life
    And I think I can do more for you
    With this here fork and knife
    Eat the rich
    There’s only one thing that they are good for
    Eat the rich
    Take one bite now – come back for more
    Eat the rich
    I gotta get this off my chest
    Eat the rich
    Take one bite now – spit out the rest
    So I called up my head shrinker
    And I told him what I’d done
    He said you best go on a diet
    Yeah, I hope you have some fun
    And a don’t go burst the bubble
    On rich folks who get rude
    ‘Cause you won’t get in no trouble
    When you eats that kinda food
    Now they’re smokin’ up their junk bonds
    And then they go get stiff
    And they’re dancin’ in the yacht club
    With muff and uncle biff
    But there’s one good thing that happens
    When you toss your pearls to swine
    Their attitudes may taste like shit
    But go real good with wine
    Eat the rich
    There’s only one thing that they are good for
    Eat the rich
    Take one bite now – come back for more
    Eat the rich
    I gotta get this off my chest
    Eat the rich
    Take one bite now – spit out the rest
    Believe in all the good things
    That money just can’t buy
    Then you won’t get no bellyache
    From eatin’ humble pie
    I believe in rags to riches
    Your inheritance won’t last
    So take your gray poupon my friend
    And shove it up your ass
    Eat the rich
    There’s only one thing that they are good for
    Eat the rich
    Take one bite now – come back for more
    Eat the rich
    I gotta get this off my chest
    Eat the rich
    Take one bite now – spit out the rest
    Eat the rich
    There’s only one thing that they are good for
    Eat the rich
    Take one bite now – come back for more
    Eat the rich
    Don’t stop me now, I’m goin’ crazy
    Eat the rich
    That’s my idea of a good time baby

  2. The farmer has traded in his pitchfork for an AR-15. When the government announced that it had developed a neutron bomb that left buildings intact while killing people, I saw the writing on the wall. These suckers will stop at nothing to hold onto the loot.

  3. Good read, but a better title than, “What’s wrong with this chart” would have been, “Just in: actual data on SEC’s 1982 experiment to allow stock buybacks.”
    In fact, the effects of the SEC’s issuance of 10b-18 in 1982 have been devastating to corporate productivity and, subsequently, living standards. This single SEC action basically freed America’s C suite and boardroom denizens to play with cap ratios in rewarding themselves in comp plans…and they have. Instead of running huge risks driving R&D, capital expenditures, etc., in slogging it out in the competitive trenches of the free market, most have opted to simply use the artificially low rates to buy back their stock…because they can, as Slick Willie said..

  4. Pingback: Contra Corner » January 2: Daily Contrarian Reads

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