plutonomy crisis- When 80% of the consumers lose purchasing power, overall economic growth over this period in an economy dependent on consumer spending should have been weak. But that wasn’t the case, the report pointed out. Instead, there has been “strong growth,” based on “a sharp increase in household consumption despite the stagnation in the purchasing power of the middle class. How is this possible?” Turns out, income inequalities have been “corrected” by two effects of loose monetary policies: One, expansionary monetary policy kept long-term interest rates lower than the growth rate from 1998 until the Financial Crisis in 2008. Cheap credit encouraged households to load up on debt to fill the widening holes in their incomes. Households became debt slaves, substituting “credit for income to consume and invest in housing.” And two, starting with the Financial Crisis, the Fed unleashed QE and ZIRP on the economy, or rather on Wall Street, causing asset prices to skyrocket. These asset bubbles allowed people to feel richer and open their wallets and spend money. It stimulated household demand at the top where these assets were concentrated. The infamous wealth effect. And the household savings rate has been deteriorating again since the end of 2012. So expansionary monetary policies have sustained growth by boosting household demand despite the devilishly declining purchasing power that most households suffered during that time. Alas, now that the Fed is tapering QE out of existence and is thinking out loud about raising interest rates, both pillars of economic growth – ballooning household indebtedness and asset bubbles – are likely to buckle. And where would that leave the US economy? In trouble.... Now “the negative impact of income inequalities on US growth may appear clearly as a consequence of the stagnating purchasing power of the middle class,” the report argues. And so, “we fear” that “the weakness of the economy due to income inequalities may suddenly be revealed.”
Posted on: Wed, 25 Jun 2014 16:01:51 +0000