A Sunday article in the WSJ was simply mind-boggling. It quoted a report from the Federal Reserve that stated that US households added 13.5 trillion dollars in wealth during the pandemic year 2020, no doubt the biggest increase on record going back three decades. In other words, the Fed is confirming that Americans in aggregate became super-rich during the worst recession in modern history. How interesting…
This statement defies every convention of previous economic downturns. In 2008, for example, households lost 8 trillion in the wake of the financial crisis. Of course, the government did respond 12 years ago and caught the falling knife, and still, the negative wealth effect was enormous. Doesn’t it tell us that this time around, to counter the pandemic effects, the government and monetary authorities went out of their way?
And they did, didn’t they? Just look at the macro numbers. Washington has been running a federal deficit of 15% of GDP. The Fed slashed interest rates back to zero in March and printed in excess of 3 trillion of new liquidity in 2020 alone. America added roughly 5 trillion in national debt last year. The S&P has basically doubled from the March crash lows. Property prices have accelerated their uptrend. Crypto is on a tear. Other asset prices have gone up significantly.
In other words, America’s policies in the wake of the health crisis made its population incredibly richer by deferring the cost to the next generation, and by way of the dollar still being the preeminent reserve currency not just for its own but a good part of the rest of the world’s as well. Worse, the wealth was not only front-loaded but has also produced a lopsided distribution. Paycheque-to-paycheque earners had their share through helicopter money, but that wasn’t where the beef was.
More than 70% of the increase in wealth went to the top 20% of income earners. Households that are better off are more likely to own stocks and real estate and benefited disproportionately from the asset bubble. And about a third of the increase went to the top 1%, so the Americans who gained the most during that bonanza in 2020 were the ones who had the most wealth to begin with. Reports are still ringing in our ears how the likes of Jeff Bezos made tens of billions more.
It’s called financial repression, as I pointed to in Friday’s
post. It causes steeper social curves in societies and produces millions who will not be able to participate in such a gargantuan wealth increase. As there is a reason why populism has been on the rise in places like Europe, where a misguided monetary policy has created similar effects, it also explains the phenomenon of Donald Trump who successfully identified this bracket and got them to vote for him in 2016.
That undertone will not go away with fundamental dislocations as we have seen last year. In fact, it is not entirely a Trump phenomenon in America, it is similarly ingrained in the left-wing of the Democratic party as well. It is certainly not Jeff Bezos’ fault, who is clearly benefiting from overzealous policymakers and will go down as one of the most impactful businessmen in history. Nevertheless, in the past this was the stuff that revolutions were made of.
