Albert Edwards, the sceptical strategist at Societe Generale, has a lengthy note discussing America’s inequality problem.
In 10-pages, he cites the works of numerous economists including Joseph Stiglitz and points to the concerns of the wealthy and influential like Warren Buffett, Bill Gross, and Stanley Druckenmiller.
Few will question that the U.S. faces an inequality problem.
But what are the implications?
“[A] growing number of economists suspect that once inequality passes a certain point it may jeopardize economic stability and economic growth,” wrote Edwards. “You don’t have to be a communist to conclude that high levels of inequality not only adversely affects long-term growth, but also increases the economy’s vulnerability to recession.”
But if this is so, then why aren’t we already experiencing that instability?
Edwards reiterates a conspiracy theory that he’s been talking about for a few years. Specifically, he believes the Fed is inflating a housing bubble to create an illusion of wealth among the less wealthy. From his note (emphasis added):
When I saw the latest US Case-Shiller data showing house prices surging at a double-digit national pace, I recalled one of the key reasons we had previously identified for why the US Fed may have been so keen to get a house price bubble inflating.
We noted back in early 2010 that the Fed was in some economic sense required to offset the impact of rising inequality on the economy by generating a house price boom.
We wrote: Our US economists make the very interesting point that peaks of income skewness 1929 and 2007 tell us there is something fundamentally unsustainable about excessively uneven income distribution. With a relatively low marginal propensity to consume among the rich, when they receive the vast bulk of income growth, as they have, then the country will face an under-consumption problem. (Marc Faber also cites John Hobsons work on this same topic from the 1930s).
Hence, while governments preside over economic policies that make the very rich even richer, national consumption needs to be boosted in some way to avoid under- consumption ending in outright deflation. In addition, the middle classes also need to be thrown a sop to disguise the fact they are not benefiting at all from economic growth. This is where central banks have played their pernicious part.
This, obviously is not sustainable. Here’s Edwards (emphasis added):
…Many investors I meet continue to marvel at US labours inability to rebuild its wage share of GDP and how dominant capital and profits have become. I believe society will ultimately demand and implement a change. We have already seen a potent grass-roots backlash against cross-border tax arbitrage and tax-havens, which has forced the politicians to react here in the UK. Yet inequality in the US continues to grow.
Investors should make no mistake. The anger of the 99% will ultimately not be bought off by yet another central bank inspired housing bubble, engineered to pacify them and divert their attention as their real incomes fall and inequality continues to grow.
The current bubble will burst, despite the Fed postponing the event by climbing to ever higher diving boards. All the time rising inequality is draining the swimming pool dry and the crunch when it comes will be ugly…
“What society needs to grow in an economically optimal fashion is not equality of outcomes, but equality of opportunity,” wrote Edwards.
“But with the grotesque distortions of income now prevailing, ones lifetime opportunities are so increasingly dominated by what ones parents income is that the American dream has increasingly become just that a dream, and an increasingly distant one at that.”