“It’s a ‘no harm, no foul’ kinda thing,” I told someone last week, while explaining the rationale for orchestrating a controlled demolition of what many believe are twin bubbles in America’s equity and housing markets.
Monetary largesse in the aftermath of the pandemic facilitated one the most spectacular wealth creation events in modern history for those fortunate enough to own stocks and a home.
Dramatic gains in the value of US real estate and equities were largely responsible for a $40 trillion cumulative increase in household wealth (figure below).
Those gains didn’t accrue equally. Far from it. By definition, you needed to own a home and stocks to participate. The more homes you owned, and the larger your stock portfolio, the better you did.
Of course, stocks are overwhelmingly concentrated in the hands of the richest Americans and a sizable percentage of US “households” aren’t really “households” because they have no house. Indeed, the surge in property prices put the dream of home ownership even further out of reach for many low- and even middle-income Americans.
At the same time, surging inflation disproportionately affected the same lower- and middle-income Americans who were underrepresented in the housing boom and stock bonanza. The implication: The post-pandemic environment was defined by one of the largest transfers of wealth in history, as generationally high inflation eroded incomes for everyday people while ballooning the fortunes of the richest members of society.
The figure (below) shows that as of December 2021, the entire American middle class owned just 10.5% of all corporate equities and mutual fund shares. The top 1% of Americans owned 54%.
Do note that absent a rebalancing, this dynamic will only get more pronounced. Unequal initial distributions are conducive to exponential (not linear) outcomes.
All of this is supremely ironic. The Fed justified the retention of a policy bent conducive to asset price inflation by reference to the necessity of ensuring the people who benefit least from higher asset prices were able to find work.
Now, in yet another paradox, the Fed’s efforts to rescue workers from the inflation they (the Fed) helped create, are set to disproportionately impact the least well-off members of society who, as the old adage goes, just can’t seem to catch a break.
Neel Kashkari acknowledged as much on Monday. “It’s the lowest-income Americans who are most punished by these climbing prices, and yet your policy tools to tamp down inflation most directly affect those lowest-income Americans as well, either by raising the cost to get a mortgage … or if we have to do so much that the economy [falls] into recession,” he told CNBC. “It’s their jobs that are most likely put at risk,” he added.
Let’s walk through this one more time, because it’s as important as it is tragic. The Fed, in the name of rescuing lower- and middle-income Americans from the highest unemployment since the Great Depression, adopted a policy stance they knew would inflate the value of assets concentrated in the hands of the wealthy on the assumption that, consistent with the post-financial crisis experience, real-economy inflation wouldn’t accelerate. But it did.
So, the explosive wealth gains enjoyed by the rich were set against a rapid erosion of purchasing power and real wage growth among the poor and middle-class.
Real wages and salaries of private industry workers are being eroded at the fastest pace in 40 years (figure above).
In order to correct the situation, the Fed is now poised to rapidly tighten policy, an endeavor which, in a perfect world, would result in sharply lower stock prices, slightly lower home prices, much lower consumer prices and, ultimately, a more equitable economic conjuncture in which the wealthy effectively give back some of their post-pandemic gains in order to “fund” a reduction in inflation for low- and middle-income Americans.
However, as Kashkari admitted on live television Monday, that probably isn’t how things are going to work out. In reality, the same low- and middle-income Americans who funded (through higher consumer prices) the epochal explosion of wealth enjoyed by the rich, will now be forced to fund their own rescue from the scourge of high inflation.
It’s not, as I euphemistically (and, I’d add, innocently) suggested last week, a “‘no harm, no foul’ kinda thing.” The rich will still be rich even if stocks and real estate prices plunge. The poor (and the relatively poor) won’t just remain poor, but will in fact get poorer because the only thing more insulting than getting a pay “raise” that’s actually a pay cut when adjusted for inflation, is getting fired during a recession engineered in the name of fighting that same inflation.
There’s a silver lining, though. As one astute reader pointed out recently, the ratio of job openings to Americans officially counted as unemployed is now nearly 2:1. That, the reader darkly quipped, means “we get the first one million jobs losses for free.”