“It’s the Economy, Stupid”

It's the Economy Stupid

This is the phrase that James Carville placed as a sign over his desk in the Little Rock, Arkansas Bill Clinton’s headquarters for his presidential run. Carville was Bill Clinton’s successful presidential campaign strategist in the 1992 election against then incumbent president George H. W. Bush. The phrase become the election’s mantra. Today, that old mantra could be applied again. The following long blog is a modified version taken from The Stansberry Digest. It is my intuition that the digest is hitting the nail right on its head.

American societies are in trouble

The recent national anthem controversy in the NFL and beyond, violent protests in major cities across the USA, soaring rates of drug abuse and suicide…when you watch the news and you see people rioting about race in Charlottesville, Virginia, Black Lives Matter protests, and college students embracing violence to protest at any conservative speaker event – social disharmony is everywhere. What this unrest is really all about is the widespread feeling of hopelessness felt by the people of America and that feeling of hopelessness is deeply entrenched in the troubles of their personal or family economics.

While most Americans believe their debt-problems during the 2008 financial crisis were “solved”, as vast amounts of bad mortgage debt was wiped out, the reality is not so.  American consumers never stopped borrowing. In essence, people simply replaced mortgage debt with new consumer debt. Americans ran up credit cards, bought fancy cars they couldn’t really afford, and borrowed insane amounts of student loans. The result is that people now hold more total debt than ever before in history. Today most of this consumer debt has been concentrated in the poorest segments of our society. The poorest 20% of Americans now hold debts in excess of 250% of their incomes, or about five times more debt than the wealthiest 20%. This massive change in the profile of US household debts came about because of “innovations” in lending – like subprime auto loans, pay day lenders, and, most important, student loans. Today total household debt is almost $13 trillion. That’s higher than the previous all-time high set in the third quarter of 2008 – immediately prior to the last crisis. They have no way out. And they have no hope that things will get better.

The Jubilee

Tens of millions of angry Americans increasingly feel they have nothing to lose. Worst of all, this is happening despite some of the lowest interest rates in history. How many more Americans will join the ranks of their fellow indebted citizens as these massive debts become more and more costly? Sooner or later, the U.S. government will have no choice but to appease these folks. They will wipe out these debts and redistribute trillions of dollars in the process. what you’re really seeing is the beginning of the jubilee.

The jubilee is a Jewish economic tradition. It is part of the Old Testament. You’ll find it described in the Book of Leviticus, Chapter 25. The idea was simple. At the end of 49 years, all debts would be wiped out and collateral property returned. It was a way of completely “resetting” the financial order, of making sure the wealthy didn’t become too dominant… of making sure their economy didn’t collapse… of making sure there was never a violent revolution.

The jubilee has started. You haven’t seen it yet. But it’s there. Mark Zuckerberg (founder of Facebook) recently toured all 50 states. His message: We should forgive all student loans and offer a guaranteed income to every American. Likewise, both the Hillary Clinton and Bernie Sanders campaign pledged to forgive student loans and make college “free.”

Why on Earth did so many people borrow so much money they have no hope of ever repaying? You might assume it stems from a lack of personal responsibility, or a decline in moral standards in recent years. And that certainly has played a role … but this doesn’t explain how this problem could have grown so large.

The reason is simple

Productivity Growth vs Income GrowthReal wages for most Americans have been stagnant or falling for decades. Real (adjusted for inflation) median household income in the U.S. has been flat since at least 1980.

As you can see, productivity in this country grew nearly 250% between 1948 and 2014, but median wages only grew 109%…

You’ll also notice that the divergence begins around 1971… the year President Nixon removed the U.S. dollar from gold. In short, when the dollar was unlinked from gold, the government was granted the ability to create unlimited amounts of new money. But this money doesn’t flow to everyone equally. The result is that asset and consumer prices have risen far faster than wages.

Simply working harder – or working smarter – isn’t benefiting employees anymore. On the other hand, Americans who own assets and businesses have seen their wealth soar over the last 40 years. And it is this massive gap that is ultimately fueling today’s problems.

In other words, despite the boom in the economy and financial assets over the past 30 years – which boosted the wealth and incomes of the wealthiest Americans like never before – average Americans are actually worse off than they were decades ago. And they’ve been forced to borrow more and more simply to keep up.

But it’s almost certain you don’t know why this has happened. Again, the reason is simple. But it’s one most folks will never understand… and one you’ll never hear an economist or government official admit. The underlying economic cause is simply that wages are no longer connected to gains in productivity.