Weekly Comment - February 25, 2020

Feb 26, 2020 | Nick Foglietta


Each time segment came with greater financial distortion in the general net worth of society. The final segment from 2007-2016 is truly an abomination.

“It has been a particularly good time to be at the top of the income spectrum”

The editorial title is a direct quote from Federal Reserve Chairman Jay Powell last week during a speech.

When I hear such a quote, there is an underlying feeling that “it has been a good time for everybody, but a particularly good time at the top.”

Unfortunately, that is not what the numbers bear out in the US. The PEW research piece below is excellent in that it compares wealth accumulation across different wealth quintiles.

 Please note:

  1. Only the wealthiest quintile of America saw its net wealth gain since 2007.
  2. The chart does not include the bottom quintile of American society because they have nothing.

Honestly, I could write about that chart for pages.

Let me show you a similar data set from the same PEW research report.

The graphic above shows the percentage of all income earned in the US by upper, middle and lower income earners over time.

The lower income data makes complete sense. Where things get stupid is with the middle and upper income earners. The percentage decline for middle income earners from 62% of total income down to 43% is stunning to me. That decline represents a complete hollowing-out of the middle class.

The next segment is going to relate to the PEW research shown, but we will use the lead chart from last week’s comment showing UK housing prices relative to wages.

I have added two black smudge lines to the chart because I am going to build a case that the financial world has come full-circle back to 1850…we just don’t know it yet.

From 1845 – 1913:

At the beginning of this era, wealth was concentrated in the hands of few. They were the “owners,” and virtually everybody else payed rent and worked to survive.

That started to change in the early/mid 1800s, and “ownership” began to spread down the social-economic ranks of society.

Higher demand was created by new classes of people with growing incomes. Growing incomes led to more demand and even higher incomes. More and more people could afford a home to buy rather than rent.

This is true capitalism at work. This is what healthy capitalism looks like. Entrepreneurs could take risks and succeed. They could also fail. The ones that succeeded created companies that thrived and hired more people at better wages.

Those that failed could regather their mojo and try again.

Key point: At the beginning of this period, there would have been the 5% at the top and the 95% rentiers. By the end of this period, those numbers had significantly balanced out. The rich got way richer…but the rest of society did much better as well.

From 1914 – 1987:

World Wars, central banking and general “economic alchemy” began to take hold of the world.

After the Great Depression in the 1930s, the idea of bailing out failure and trying to smooth out the business cycles became common place.

Based on Keynes great idea, deficit spending slowly got bastardized into an excuse to “control the financial world” beyond the reach of the theory.

The gold standard existed, but had to be “recalibrated” in the 1930s to usher in the New Deal (you can’t print money out of thin air when an ounce of gold needs to be held to allow printing).

Jumping ahead to 1971, President Nixon had to close the “gold window” completely before Charles DE Gaul helped himself to every ounce of gold in Fort Knox (the US dollar was “exchangeable” for gold prior to 1971).

Once the world was completely on fiat money, it was game on for the elites to destroy the purchasing power of paper currency.

It can be said that the process started in a more balanced way until 1987, but the stock market crash that year ushered in the golden age of central banking with Alan Greenspan at the helm. 

Key Point: Even though fiat currency was being debased during this time there were ebbs and flows as to those who won and who lost. Some eras saw the rich win, some saw wage earners win. Some saw everyone win…and some saw everyone lose.

But that was about to change in the golden age of central banking.

From 1988 – to present:

Let me repost the PEW chart from the top of the editorial...

Study who in society “won and lost” financially between each of these recessions.

Each time segment came with greater financial distortion in the general net worth of society. The final segment from 2007-2016 is truly an abomination.

Nick, how does this bring things full-circle?

The answer is found in the “illusion of ownership” and the insane amount of debt that exists.

The illusion of ownership refers to the all too common situation where copious amounts of debt taken out by people, companies and countries makes them vulnerable to interest rate shock.

If a 20% decline in asset prices would render an individual or institution insolvent, then I argue they really don’t own the assets they have title to.

Highly leveraged “owners” that make massive mortgage/interest payments are more closely related to renters than asset owners.

The full circle comes in that, if interest rates were to spike for some reason, the world would see a new rentier class created out of previously over-leveraged “owners” that would no longer be in a position to stay on title of their assets.

In summary, this is not a forecast, but I could not help re-presenting these thoughts given the stark trends shown in the PEW data.