1 December 2011
Banana Republics of America and Europe
Check this before read : Banana Rebuplic Lyric
The biggest single structural defect facing the US economy night now is the widening gap between rich and poor, reshaping the U.S.economy, leaving it more vulnerable to recurring financial crises and less likely to generate enduring expansions.
I recently debated this point on CNBC with Eric Rosenkranz – http://video.cnbc.com/gallery/?video=3000056592
Issues like record levels of debt, spiraling federal deficits, and chronic lack of velocity in money circulation are all symptoms of the same disease.
“Income inequality in this country is just getting worse and worse and worse,” James Chanos, told Bloomberg Radio recently this week. “And that is not a recipe for stable economic growth when the rich are getting richer and everybody else is being left behind.”
We’ve been beating this drum a while and we’d thank GMO’s Jeremy Grantham for waking us up to this.
Since 1980, about 5 % of US annual national income has shifted from the middle class to the nation’s richest households. That means the wealthiest 5,934 households last year enjoyed an additional $650 billion – about $109 million a piece – beyond what they would have had if the economic pie had been divided as it was in 1980, according to Census Bureau data.
Between 1993 and 2008, the top 1 percent of families captured 52 percent of total income gains, according to a 2010 analysis of Internal Revenue Service tax data by economist Emmanuel Saez of the University of California, Berkeley.
Disputes over what constitutes economic fairness are moving to center stage amid a near-stagnant U.S. economy saddled with 9.1 percent unemployment yet boasting record corporate profits. President Obama last month targeted “the wealthiest tax payers and biggest corporations’ for higher taxes, saying they should pay “their fair share” - Bloomberg Of course Republicans led by John Boehner, elected on a pledge to an opposite all tax hikes, whether they’re good or bad, sensible or stupid see any suggestions of increases as being unacceptable – they are probably hoping that the wealthiest 5,934 households influence exert an influence disproportionate to the actual quantum of, votes that they themselves wield, when it comes to the polls.
A lot of the anger over this banana republic income dispersion fuels the likes of ‘ OccupyWallStreet ‘.
“We are the 99 percent that will no longer tolerate the greed and corruption of the 1 percent,” US the occupywallstreet.org web site.
Tax reforms
Howard Buffett, the Berkshire Hathaway Inc. director sympathizes with this anger.
Buffett Junior recently told Bloomberg News:“There has never been such a large gap between earnings in this country….There has never been a time in my lifetime when the government is going to cut an incredible amount of programs that support poor people and feed them.”
Almost half Americans now see their country divided between “haves” and “have-nots,” according to a Pew Research Center poll last month.
Growing Gap
“The large and growing gap between the haves and have-nots will tend to undermine growth, both directly and indirectly – including by reducing the marginal propensity to consume and by amplifying the political polarization that has already contributed to poor economic policymaking.” According to PIMCO, CEO: Mohamed El – Erian.
To us this is the central issue right now. It’s not a specifically American problem, although much of the data and available commentary focuses on the Banana States of America. It’s also very easy to see the evolution of the gap in America. Following WW II, the country unified around a programme of building post-war prosperity in the 1950s. This was so successful that the 1960’s saw radical social change and moves to greater equality encapsulated by the promise of a “grand society”. When times became cougher in the 70’s, the focus on distribution of the spoils once again moved to the fore setting the stage for the what we’ve long highlighted as Art Laffer’s role.
Since 1968, incomes in the U.S. have become steadily less equally distributed, according to the standard statistical measure of inequality know as the Gini coefficient. The U.S. Gini score rose from .39 in 1968 to .47 in 2010, meaning that incomes were becoming increasingly unequal.
Bloomberg points out that in the 30-nation Organization for Economic Cooperation and Development, only Turkey and Mexico have more unequal societies than the United States. In the U.S., the rich-poor gap widened by 20 percent since the mid-1980s, more than in most developed countries. “Nowhere has this trend been so stark as in the United States,” the OECD concluded in a 2008 study.
Economic gains in the U.S. have been spread less equally in recent years as a result of factors including globalization, technological change, the decline of labor unions, changing social norms, and government trade and tax policies, according to Worldbank economist Milanovic . Much of the focus has been on the Gini co-efficient, a measure of personal net worth, but we shouldn’t forget the effect of corporates.
“In the aftermath of the 2007-2009 financial crisis, the fortunes of labor and capital have diverged. After plunging in the two years leading to December 2008, total corporate profits have roared back to a new high of $1.5 trillion, 6.5 percent above the previous peak reached in September 2006. “ – BloombergCorporate balance sheets are stocked with cash due to these imbalances while US consumers are drowning under seas of debt. The typical American household’s median income of $49,445 at the end of 2010 remained below the level reached in 1997.
Societies with a narrower gap between rich and poor enjoy longer economic expansions, according to research published this year by the International Monetary Fund. Income trends in the U.S., where the wealthy have pulled away from the rest of society, mean that future U.S. expansions could last just one-third as long as in the late 1960s, before the income divide began widening, said economist Jonathan Ostry of the IMF.
“Expansions -- or what Ostry and coauthor Andrew Berg label “growth spells” -- fizzle sooner in less equal societies because they are more vulnerable to both financial crises and political instability. When such countries are hit by external shocks, they often stumble into gridlock rather than agree to tough policies needed to keep growth alive.” – Bloomberg
Stumble into gridlock? Sound familiar? Just to be clear, this is no bleeding heart liberal socio-reforming agenda – we’re looking at economic efficiency and socio economic sustainability as our main concerns.
“Very high levels of inequality seem to be associated with slower economic growth,” agreed Michael Feroli, chief U.S. economist for JPMorgan Chase & Co, echoing, Raghuram Rajan, the IMF’s former chief economist who says countries with high levels of inequality tend to produce ineffective economic policies and that political systems in economically divided countries grow polarized and immobilized by the sort of zero-sum politics now gripping DC.
The 30.5 million American households that earned less than $25,000 in 2010 were almost seven times the number making more than $200,000, according to new Census Bureau figures. In 2000, the ratio was 5.6-to-1.Even Ben Bernanke last year told CBS’s “60 Minutes” that rising inequality was leading to “a society which doesn’t have the cohesion that we’d like to see.
”As I said earlier, this isn’t an uniquely American problem. Bloomberg reports that “European capitals, including London, Madrid and Athens, have witnessed street protests in response to reduced government spending and subsidies.” While New York Mayor Michael Bloomberg agrees that persistent unemployment could spark social unrest.
Like us, Bloomberg sees echoes of the past. During both the 1920s and the most recent decade, the extremely rich enjoyed large income gains, much of which were made available to the working poor and middle class via credit channels. Politicians encouraged the resort to credit as a way to bridge the gap for those struggling to sustain living standards amid flatlining wage income, according to Rajan’s 2010 book “Fault Lines.”
As a result, household debt nearly doubled in both periods, setting the stage for the Great Depression and the most recent financial crisis, says a December 2010 paper by economists Michael Kumhof and Romain Ranciere of the IMF. That increasing debt burden left the economy exposed to widespread defaults when a financial shock hit.
In Europe, this has played out in a Euro context, with the GIPSI countries encouraged to borrow at low interest rates while the real accumulation of wealth took place at the core.
For many consumers, easy access to credit today is a thing of the past. Government fiscal policy -- in the form of payroll tax cuts and transfer payments -- is filling the gap between income and consumption the way easy credit did during the boom years.
“The missing credit temporarily is being filled in by fiscal measures,” said Feroli. “But we have yet to understand or see how a post-leverage, post-fiscal support household sector will behave.”
The government’s response to the financial crisis may also have exacerbated the rich-poor gap by shifting liabilities from private banks to taxpayers. Households and businesses have trimmed their debts since the 2008 peak while government borrowing -- to recapitalize the nation’s banks and battle the recession -- has exploded.
As a result, total domestic nonfinancial sector debt in America topped $36.5 trillion at mid-year, compared with $32.4 trillion in mid- 2008. And that massive load leaves the economy vulnerable to future shocks.
Banana Republics, they’re all Septic Isles…….