Economists and pundits steer well clear of the eventual social and political consequences of America’s entrenched neofeudal wealth-income inequality.
Now that debt is rising faster than “growth,” and “growth” is dependent on speculative credit-asset bubbles, the collapse of the Keynesian dream looms large.
We either make the future or break the future, so choose wisely.
There is a make-or-break financial fork in the road ahead for the United States: there are only three options:
1. Slash trillions of dollars in annual federal spending to align with current tax revenues.
2. Raise trillions in additional tax revenue from the only entities able to pay more, corporations and the top 5%
3. Monetize the soaring federal debt by the central bank “printing money” and using this new money to buy Treasury bonds, as issuing new Treasury bonds for sale is the way the federal government funds its stupendous deficit spending.
One approach might be to do some of each, but there are political obstacles to any rational response to unsustainable federal debt expansion.
Any cuts in spending large enough to be consequential will slash-and-burn either the cash overflowing in the federal trough that politically powerful cartels are gorging on, or entitlements that buy the complicity / passivity of the general populace. Neither is politically viable.
Those who can afford to pay more taxes–corporations and the top 5%–are (surprise) the most politically powerful groups in the nation, and they will never accede to tax increases high enough to be consequential.
Politically, the only viable option is the politically painless one of monetizing the soaring federal debt via the Federal Reserve creating $2 trillion a year with a few keystrokes and using this $2 trillion to buy virtually all the newly issued Treasury bonds.
If private owners of existing Treasury debt find the yield they’re receiving doesn’t even keep up with inflation, they will sell their Treasuries, forcing the Fed to print additional trillions every year to monetize portions of the existing $30 trillion in debt.
Recall that a significant percentage of state and local government spending is funded by the issuance of municipal bonds. This other governmental debt competes with Treasury issued bonds for scarce private capital. Other nations’ bonds are also competitors for private capital.
Since capital flows to the highest and lowest-risk yields, yields have to rise to attract private capital.
This creates another problem: as yields rise, so does the interest paid on the entire portfolio of bonds.
Higher interest payments then pressure other government spending. The politically painless solution is to monetize not just the newly issued debt but the rising interest payments due on the soaring debt.
Monetizing government debt is what I call the perpetual money motion machine. Just create another trillion to buy newly issued bonds, an additional trillion to pay higher interest and more trillions to buy up old debt that private owners are selling.
Is there anything that could break the perpetual money motion machine? Those pointing to Japan’s deflationary stagflation of the past 30+ years claim there are no impediments to ever-greater monetization. The Federal Reserve can expand its balance sheet by $10 trillion or $50 trillion without any structural problems arising.
Interesting, that $50 trillion number. That’s the amount that the top 5% skimmed from labor in the past 45 years.
The Bill for America’s $50 Trillion Gluttony of Inequality Is Overdue (September 21, 2020)
Trends in Income From 1975 to 2018 (RAND Corporation)
Setting aside the political veto of the wealthiest corporate interests and households, clawing back this $50 trillion via higher taxes on those who gained the $50 trillion would be karmic justice and present fewer risks that the insane scheme of just “printing more money” to satisfy every cartel, entrenched interest and entitlement.
Let’s ask a simple question of history: if monetizing debt works so wondrously, why hasn’t it been the go-to solution for every free-spending government? In the good old days, creating money out of thin air was accomplished by replacing the silver or gold in coins with lead or other base metals.
Alas, people catch on to this devaluation of money, and inflation skyrockets accordingly. Proponents of adding $50 trillion to the Fed’s balance sheet (i.e. monetizing the soaring debt and interest payments) claim this hocus-pocus won’t spark inflation. But since all that newly issued currency enters the economy one way or another, how can it not generate inflation?
The status quo answer is: if it only inflates assets owned by the wealthy, that inflation is really rather grand.
But suppose inflation leaks into Cheetos instead of Big Tech stocks? Since “We can’t eat iPhones,” that eventually matters.
In other words, there is a governor built into the perpetual money motion machine: real-world inflation.
There is also a social governor built into the “painless” expansion of asset bubbles that favor the already-wealthy: eventually this systemic inequality distorts and destabilizes the social and economic order.
This in one reason why history shows government debt in excess of 100% of GDP (the real economy) eventually leads to disorder, default and bankruptcy. Or revolution. Take your pick. (Chart courtesy of David Sommers.)
If $50 trillion were clawed back from the wealthiest corporations and households, that would only return total assets owned by the wealthy to levels that were considered excessive a decade ago. But since this is politically unviable, the “painless” option of monetizing debt will be pursued.
But since the only possible outcomes of this option are disorder, insolvency or revolution, the wealthy may well regret their short-sighted greed. Nemesis can take various forms, but eventually the pendulum swings from one extreme (monetary hocus-pocus and staggering inequality) to the other extreme (clawback of central-bank-bubble “wealth” and a balance of revenues and expenditures).
The meteor that will obliterate the financial hocus-pocus is already visible and cannot be diverted by dancing the humba-humba and waving dead chickens around the campfire, i.e. Federal Reserve policies. Claiming god-like powers doesn’t grant one god-like powers.
There’s no going back once we select a pathway. The systemic damage cannot be reversed, regardless of what happy stories are told around the campfire by credulous believers in the magical powers of waving dead chickens around. We either make the future or break the future, so choose wisely.

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Blowback has its own dynamics, as we’ll learn in the decade ahead.
One of the most durable expectations in the financial sphere is that inflation will drop sharply in a recession and the Federal Reserve will lower interest rates back to near-zero. There is a good reason to doubt this: rising wages. Yes, we all hear about the millions of human workers who will shortly be replaced by AI–wonderful for corporate profits!–but few pundits bother looking at long cycles in interest rates and inflation, and even fewer pay any attention to the absurdly extreme asymmetry of labor and capital.
As I’ve often noted here, labor’s share of the economy has fallen for 45 years. Only recently did it reverse slightly. It’s not yet clear if this was a brief false-breakout ot a change in trend, but there are good reasons to expect a secular, cyclical reversal that lasts years or even a decade.
In other words, a decade in which labor / wages gain at the expense of capital.
There are two basic narratives that are offered as explanations for how capital siphoned $50 trillion from labor over the last 45 years. One is that the macro-forces of globalization and financialization inherently favor capital and reduce labor’s leverage as production and jobs were offshored and US workers entered a race-to-the-bottom competition with developing nations’ low-cost workforces–a competition that kept US wages stagnant even as US corporate profits and financial assets soared.
The other narrative starts with the observation that the erosion of wages and the glorification of corporate power was the direct result of specific policies being adopted.
The dominance of corporate interests and the stripmining of labor were anything but inevitable: it was
engineered by policies that enriched the top 0.01% (the Financial Aristocracy), and the
top 10% who own 90% of America’s productive capital.
This wholesale transfer of wealth and income from workers to Capital was documented
by a RAND Corporation report,
Trends in Income From 1975 to 2018.
Time magazine summarized the findings:
The Top 1% of Americans Have Taken $50 Trillion From the Bottom 90% —
And That’s Made the U.S. Less Secure.
(We’re told the stagnating wages of the past 45 years) were the unfortunate but necessary price of keeping American
businesses competitive in an increasingly cutthroat global market. But in fact, the $50 trillion
transfer of wealth the RAND report documents has occurred entirely within the American economy,
not between it and its trading partners. No, this upward redistribution of income, wealth, and
power wasn’t inevitable; it was a political choice–a direct result of the trickle-down policies we chose
to implement since 1981.
The net result of this four-decade siphoning of wealth/income from workers was
documented by a Foreign Affairs article:
Monopoly Versus Democracy:
Ten percent of Americans now control 97 percent
of all capital income in the country. Nearly half of the new income generated since the global
financial crisis of 2008 has gone to the wealthiest one percent of U.S. citizens.
The richest three Americans collectively have more wealth than the poorest 160 million Americans.
In other words, the bottom 90% have very little stake in the status quo: they receive
essentially zero income from America’s stupendous $140 trillion hoard of private wealth and
have essentially zero political influence, as documented in
Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens.
We can see these realities in the data /charts.
As the charts below (courtesy of the Federal Reserve FRED database) show, wages’ share topped out in the early 1970s and trended down for 45 years. Corporate profits skyrocketed 15.7-fold since 1982 while inflation rose “only” 3-fold.
This decline in wages is mirrored by a corresponding decline in the wealth of the bottom 90%. It’s not just wages that stagnated–so did the share of the nation’s wealth held by the middle class / bottom 90%.
The middle class’s share of private-sector wealth (total net worth) has plummeted from 37% in the early 1990s to 28%, a decline of $12 trillion compared to what would have been the case had the middle class continued to hold 37% of net worth.
$50 trillion here, $12 trillion there, pretty soon you’re talking real money that’s been transferred from the wage-earning peasantry to America’s Financial Aristocracy.
We see this vast asymmetry in who collects the primary engine of wealth for the top few: capital gains. Those who already own most of the wealth have pocketed the stupendous gains of the past three decades.
Middle class households pocket $4,000 or $5,000 in annual capital gains while those who own most of the wealth pocket on average a cool $1 million–200 times the middle class gain in unearned income.
So why will wages rise, regardless of deflation and AI? Catch-up and blowback. Even if we accept the “gee, we were helpless to stop wage stagnation” story (which is false, as detailed above), financialization and globalization are reversing and so labor can finally play catch-up to capital’s asymmetric gains.
If catch-up is suppressed by corporate political power, then blowback kicks into gear. The workforce has had enough of corporate-state pillaging, and while corporations are gleefully planning the elimination of their human workforce via AI and automation, that fantasy isn’t going to play out as expected, for automation has limits which I discuss in my book
Will You Be Richer or Poorer?.
Nobody thinks that there could be political limits on corporate power, but precious few asymmetries that reward the few at the expense of the many last forever. Blowback has a remarkable ability to careen from nobody notices or cares to full-blown revolt in relatively short order. The greater the asymmetry, plunder and hubris of the Aristocracy, the greater the eventual swing of the pendulum to the opposite extreme. Blowback has its own dynamics, as we’ll learn in the decade ahead.
Wages–and the inflation they generate–are going up for good whether anyone thinks this is possible or not. And inflation pulls interest rates higher, whether anyone thinks this is possible or not. It’s not just the Federal Reserve that matters; asymmetries, exploitation and plunder matter, too.
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When we lose small businesses, we lose More than tax revenues.
Small businesses receive plenty of lip service but very little appreciation–until they’re gone. By then it’s too late to do anything but mutter, “you don’t know what you’ve got until it’s gone.”
Small businesses aren’t just sources of tax revenues, they’re sources of a wide range of jobs that can’t be replaced by Corporate America or the government. Just as importantly, small business owners and entrepreneurs are advocates for the neighborhoods, districts and cities they depend on for customers and suppliers.
The livelihoods of the owners and their employees depend on maintaining the viability of their neighborhood / district / city, which includes public safety and services such as transportation and trash collection, and a minimum density of other private-sector services and amenities which provide residents a safe, appealing atmosphere worth visiting.
59.9 million Americans work at small businesses across the nation.
An estimated 47% of Americans shop at small businesses at least twice a week, generating about 45% of the nation’s economic activity.
According to the most recent available numbers from the U.S. Census, approximately 47% of U.S. employees work for small businesses, compared to 54.5% in 1988.
Small business entrepreneurs are risking everything they have to open and operate a business. They have far more skin in the game than city functionaries tasked with enforcing regulations and collecting business-related fees or their employees, who have the freedom to quit and seek employment elsewhere.
Residents tend to feel powerless to stop the decay of their neighborhood safety, services and amenities. They tried contacting their elected officials or municipal functionaries and were given a meaningless feel-good reply which everyone involved knows is empty.
Small business owners are more willing to apply meaningful pressure because they know the decay follows a sobering slide in which incremental declines pile up and eventually trigger a phase change in which the character of the neighborhood / district / city goes over a cliff no one discerned: petty crime increases, paving the way for more serious crimes to proliferate; customers thin out and then become scarce, and the zeitgeist goes from friendly to wary to unpredictable or even dangerous.
The core characteristic of of neofeudal economy and society is that it’s two-tier: there are two tiers of “criminal justice,” one of wrist-slaps and vast white-collar crimes ignored for elites and the wealthy, and another far more brutal and Kafkaesque for the rest of us.
In terms of commerce, Big Tech is free to establish monopolies and Finance escapes all the supposed regulatory safeguards, while small business is throttled with endlessly multiplying petty regulations that have little or nothing to do with public safety or employee labor rights. Corporate America has the immense wealth and power to gut any regulations it finds onerous, but small business struggles to pay the soaring costs of compliance and the tripling of junk fees such as business license renewals.
City-provided services degrade but the costs for the privilege of doing business triple.
The majority of small businesses are sole proprietors. (see chart below) Many of these are online or at-home enterprises that are invisible to residents walking down the sidewalk. The 5.4 million small businesses with less than 20 employees are visibly consequential to the viability of bricks-and-mortar neighborhood commerce.
Demographics play a large role in the viability of small businesses. About 40% of all small businesses are owned by Boomers nearing retirement or already past the age of typical retirement. It won’t take much in the way of losses or stress to nudge these owners into selling or closing the business.
But if conditions are decaying, who’s going to buy a struggling business? The grim reality is “no one.” Owners are already working long hours and enduring high levels of stress. This self-exploitation can only go so far before the owners’ health and/or finances break down in burnout or losses.
Municipal bureaucracies tend to see small business tax donkeys as something they can count on much like a gushing spring. Should one tax donkey collapse and close a business, another tax donkey will magically appear to pick up the self-exploitation harness and start a new business in the same space.
Local-economy boosters love to cite the flood of new business applications as proof the spring is still gushing, but many of these new enterprises are sole proprietorships with no storefront presence and no employees. Many new businesses that thrived in the post-pandemic boom will soon encounter the headwinds of recession for the first time, and many will find their enterprises blown onto the unforgiving rocks of financial losses.
The phase-change shift in the character and zeitgeist of neighborhoods, districts and cities is difficult to reverse.
Once people no longer feel safe, they won’t come back. Once the empty storefronts and homeless encampments dominate the landscape, they won’t come back. Once services deteriorate and trash accumulates, they won’t come back.
Municipal bureaucracies are largely staffed by people who have never experienced what a real recession (such as 1981-2) can do to commerce, tax revenues and small businesses struggling to survive. They’re confident that history demonstrates any downturn will be brief and the tax donkeys will appear as usual to fill the empty storefronts, lofts and offices.
But this time will be different. No new tax donkeys will appear to gamble their fortunes and lives on starting a stupidly expensive-to-operate business, pay prevailing wages and benefits and all the taxes, licenses and junk fees municipalities have piled on small business.
When we lose small businesses, we lose more than tax revenues. We lose the engines of employment and the commercial foundation of neighborhoods and districts. When these foundations crumble, those residents who see the slide down the slippery slope of decay sell their homes and get out while the getting’s good. Those who remain will regret their inaction.
Tax donkeys don’t appear by magic. There has to be an infrastructure in place that allows a real opportunity to scrape out a living despite the high costs and formidable challenges. If the infrastructure and character of a place decay, so does the opportunity, and small businesses melt into air when it’s longer worth the struggle.
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Extremes keep getting more extreme, but for those at the top of the heap, it’s all fine. For everyone else slipping down the ladder, all that FINE adds up to Fragile, Insecure, Nonsensical, Expensive.
Readers occasionally point out I’ve been predicting that unsustainable extremes will eventually unravel for 10+ years, yet everything’s still fine. Yes, everything’s still fine, maybe even peachy, but perhaps we should describe “fine” in light of the policy extremes that keep getting more extreme to keep all that fineness duct-taped together.
How about this for FINE:
Fragile
Insecure
Nonsensical
Expensive
To assess just how extreme things have become beneath the placid surface of peachiness, let’s look at federal debt, the Fed balance sheet and Household Net Worth in relation to inflation and GDP, two standard measures of growth.
All else being equal, most economic-financial metrics will roughly track either inflation or Gross Domestic Product (GDP), the broad measure of the economy’s activity / expansion /contraction.
In other words, one way to identify extremes is to look for metrics that are way out of line with GDP and inflation.
Consider federal debt as an example. We can be forgiven for assuming federal borrowing would more or less track the expansion of GDP.
But as the chart below shows, if federal debt had tracked GDP since 1990, it would be around $16 trillion, half of its current bloat of $32 trillion. Hmm, $16 trillion here, $16 trillion there and pretty soon you’re talking real money.
The GDP of Japan is around $4.3 trillion, the GDP of Germany is about $4 trillion, so that $16 trillion in “excess federal borrowing and spending” is the equivalent to four GDPs of the third and fourth largest economies in the world (just behind the US and China).
Does an “excess $16 trillion” of federal debt qualify as extreme? I think the fair conclusion is “yes.”
Next up, the Federal Reserve Balance Sheet, which reflects the sum created out of thin air to buy US Treasury bonds and mortgage-backed securities as the means to inject gobs of US dollars into the financial system as liquidity for speculation.
Hmm, if the Fed balance sheet had tracked GDP, it would have risen from around $700 billion in the early 2000s to a meager $1.8 trillion, a far cry from its current level of $8.6 trillion. In round numbers, this is about $7 trillion in “excess Federal Reserve stimulus,” not quite the combined GDPs of Japan and Germany but hey, $1 trillion at these levels is a mere rounding error, right?
Now let’s look at the really, really fine part of the extremes, Household Net Worth: all the plump, juicy wealth created for the top 10% who own the vast majority of financial assets to enjoy.
If Household Net Worth had tracked GDP, it would total about $90 trillion, $50 trillion less than its current level of $140 trillion. You see what’s really fine here: the federal government injects $16 trillion in excess stimulus, the Federal Reserve injects $7 trillion in excess stimulus for a total of $23 trillion, and the top 10% reap $50 trillion in excess wealth: yowza, that’s a really fine investment!
Of course private and corporate debt has soared along with federal debt, but never mind the details. $50 trillion in excess wealth is roughly twice the size of America’s GDP of $26 trillion. That’s a lot of extremely fine wealth to play with.
But all this really fine wealth hasn’t exactly been evenly distributed. It turns out the bottom 50% of households lost ground since 1990, as their share of the total household wealth fell from about 4.5% to 3% (see chart below).
The middle class (the 50% to 90% segment of households) also lost ground, as their share of wealth fell from above 36% to less than 29%. A 7% decline may not sound like much, but recall that each 1% is $1.4 trillion, so that 7% decline adds up to roughly $10 trillion in today’s total wealth of $140 trillion.
Meanwhile, back at the Really Fine Ranch, the top 1% saw its share of the wealth soar by 40%, from 23% to 32%.
It seems some have received more fineness than others.
Extremes keep getting more extreme, but for those at the top of the heap, it’s all fine. For everyone else slipping down the ladder, all that FINE adds up to Fragile, Insecure, Nonsensical, Expensive.
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Be careful what you wish for, because currencies are not abstractions we ponder, they are commodities that serve real-world functions that place demands on the currency as a mechanism of trade, trust, value and risk.
The market and the government will continue to promote and support a neofeudal status quo until they are forced by society to restore the common good and opportunity.
Of the three primary dynamics of human endeavor–the market, government and society–we focus almost exclusively on the first two. Society is rarely considered as a force of its own. It is implicitly viewed as reactive to the market economy and government, the churning wake left as the market and government chart the course.
In other words, society is secondary to the economy and governance, the venue of fashions, trends, entertainment, culture wars, etc., fodder for media and social media, a reflection of what’s happening in the market and government.
As I explain in my book Global Crisis, National Renewal, this is a misunderstanding of society’s role as a force that changes the economy and governance in profound ways.
We give social transformation short shrift because it’s not easy to study or understand. Social change is amorphous and doesn’t lend itself to quantification like the market or the legal structures of government policy. We end up relying on snapshots such as opinion polls that are inherently limited in scope and accuracy. Respondents tend to give answers they they believe are expected or reflect their views of the moment. Other data is collected from groups that are self-selecting.
Despite these limitations, it’s clear that American society is unraveling and undergoing profound changes that will eventually upend markets and governance. We will come to realize society is transforming markets and governance, not the other way around.
Charts of the stock market and economy in the 1960s do not reflect the social changes in values that made the 1960s so tumultuous and consequential. Three social movements–civil rights, the environment and women’s rights–all changed the economy and governance in the 1970s, unleashing forces that continue to shape our economy and government to this day.
The market and government didn’t lead these changes, social forces changed the market and government. The market and government were perfectly happy to maintain the status quo of rampant industrial pollution and systemic restrictions of civil rights. Society forced economic and political change: the government was forced to enact environmental regulations limiting pollution and industrial waste, and enact legislation removing barriers that enforced an oppressive, unjust, two-tier society and economy.
In the 1970s, these environmental, women’s rights and civil rights advances forced on the market and government transformed the economy for the better. Women entered the workforce en masse and women and minorities gained access to institutions that that had previously excluded them. Environmental and efficiency regulations transformed the American economy and landscape from an industrial dumping ground to a much cleaner, more sustainable, more efficient and productive industrial base.
I discussed this recently in The Forgotten History of the 1970sand The 1970s: From Rotting Carcasses Floating in the River to Kayak Races.
Much work remains to be done, of course, but much has been accomplished by the citizenry concluding the status quo is no longer acceptable.
In my analysis, the nation’s social fabric is unraveling due to the breakdown of civic virtue, social cohesion and the social contract. The dominance of finance (hyper-financialization) and corporate self-interest (hyper-globalization) has fatally undermined civic virtue, social cohesion and the social contract. Rather than the market serving society, society now serves the market and finance in a painfully obvious two-tiered neofeudal structure in which the few garner the vast majority of the wealth and political power.
Locking in vast private wealth is now the Prime Directive of the elite, an elite which in previous generations understood that every elite ultimately serves at the behest of those they rule (i.e. consent of the governed), and so the elite must apply some of their wealth and power to pursue the common good rather than their own self-interest.
Soaring wealth-income inequality leads to vast concentration of political power. “The people” rule in name only. Any attempt to end the two-tiered neofeudal structure of our economy at the ballot box is futile.
As for the social contract of equal opportunity for all, in the real world, the rungs in the ladder of social mobility have been broken. Those who bought homes and assets a generation or two ago have acquired wealth in a credit-asset bubble economy, while those who borrowed a fortune for a college degree find the value is uncertain or marginal in all but the top-tier of credentials–and connections still matter.
The net result is people are dropping out, opting out or burning out. This is the result of what I call social defeat: the odds are now stacked against all but the super-achievers and the well-connected. Given the instability and inequality of the financialized, globalized “market economy” (heh), a family and home are out of reach financially for many, so they give up. Others see their hard-won gains wiped out by medical expenses (the leading cause of household bankruptcies) or a collapse in the speculative bubble-du-jour. We see the same trends in stagnant economies elsewhere (Japan, for instance): the decline of marriage, family and having children and the abandonment of social / community ties.
As this Wall Street Journal poll reveals, the traditional forces of social cohesion are collapsing before our eyes.As Peter Turchin has explained, social cycles of integration and disintegration occur every 50 years or so. In integrative phases, people find reasons to cooperate. In disintegrative phases, people find reasons to disagree and fragment into divisive, polarized camps. Clearly, we’re well into a disintegrative phase, and what could bring us together is not even visible.
America Pulls Back From Values That Once Defined It, WSJ-NORC Poll Finds (WSJ.com)
The rising emphasis on money reflects the insecurity and instability that characterize the economy. If history teaches us anything, it’s that piling up private stashes of wealth can’t buy social cohesion, restore the social contract or rebuild social ties. Speculative gain is the ultimate false god. The belief that if we all barricade our own private wealth, everything will be fine is the acme of social dissolution.
We have a great opportunity for national renewal, but there is precious little in the market or governance that offers common ground. The common ground must be found in social changes in what we value and what is no longer acceptable. The market and the government will continue to promote and support a neofeudal status quo until they are forced by society to restore the common good and opportunity.
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Everyone wants a trend they can trade for effortless gains. That may no longer be realistic.
We can also predict that the next round of instability will be more severe than the previous bout of instability.