The US print edition of the Wall Street Journal carried an article today (see Household Wealth Climbs to Fresh Highs) that is very unsurprising. The report outlines findings from a new report from the Federal Researve, published Friday. At the aggregate level American households have now more than recovered their wealth, compared to what they lost during the recession. Apparently we all lost about $13tn in wealth before the crash, but have since increased it by $30tn. Aren’t we special. Aren’t we richer.
However the details show the real story. Non financial assets have only barely exceeded what was lost during the recesion. Non financial assets include the value of your home. Financial assets are where all the real growth has been – that is, equities, mutual funds, and pension entitlements. This is actually unsurprising of course, since this is perfectly related to the idea that Quantitative Easing (QE), the Fed’s main weapon to keep liquidity in the market and to envourage growth through greater investment, has actually feathered the nests of bond holders, the investor class, and big businesses that took advantage of cheap money in order to execeute share buy-backs, thus improving EPS and driving share prices higher.
What we should realize, and what no one should complain about, is that QE has done a lot to increase inequality. The rich have definitely gotten richer; the very rich (I suspect) by a very big margin. However the so called middle class has not gotten all that richer, and in fact other data related to median incomes suggest stagnation or even worse, reduction in wealth. QE certainly helped create some growth in the economy, but not the kind of growth the Fed (or anyone for that matter) wanted. We did not see, and continue to not see, the desired growth in capital investment that would drive higher paying wage growth. The employment growth, so positively held up by some, is for lower paying jobs (for the most part). At the same time, the participation rate (those looking for a job) are at very low levels, and so overall wages remains flat.
There is talk of a break down in the Phillips Curve that describes the relationship between inflation and unemployment. In the past as unemployment has gone down, inflation has gone up. We are currently experiencing a protracted period of low inflation, and growing employment. We might even be close to the pre-crisis understanding of ‘full employment’ in the US. But there are reasons to think that the definition of full employment has changed. There are still many vacancies for high paying jobs, and too few well qualified people to fill them. Wage pressure on the low paying jobs might be bulding, but it is taking too long to show through the numbers. If more high paying jobs were filled, this might more quickly lead to more spending, and coupled with the growth in lower paying jobs, we might see a whole lot more wage pressure. Even though commodity prices are low, we might start to see some inflation growth.
Either way, gird yourself and await the next story: inequality across America has gotten worse. Following that will be siren calls for greater redistribution of wealth. Since the wealth created is not even real, such calls should be dismissed out of hand. We should reduce Quantitative Tightening (QT) and increase interest rates to allow the market to start functioning again. To ensure that the US does not get clobbered by the rest of the world, we should coordinate this policy with China, Japan, and Europe. All regions should increase rates and increase QT at the same time. In China this would help with higher commodity prices that would trigger inflation pressure around the world. This will start to remove some of the most ugly market distortions ever seen. Then we can figure out if and where inequality has or might changed.