This post really isn’t complete, but it continues on a theme that I have been working on for some time. The thesis is that deficit spending is no longer providing a meaningful boost to the economy.
Some potential reasons for this include an over supply of goods (how many cars do we need, how many trinkets, toasters, plates, glasses? These are prevalent but their manufacture and sale have poor returns). As well, innovations have been providing less return in recent decades. Huge improvements such as engines, computing power, electricity have now dramatically improved productivity, but few innovations are providing such a meaningful boost today.
As governments throw money at the economy to try to boost productivity (growth/inflation), the effort is less meaningful. This is creating a bubble in assets, that is unlikely to be met (in the near term at least) with a boost in productivity. That bubble will likely be very, very difficult to unwind with policy measures.
Here is a look at another way to measure the distribution of wealth and the cost . . . it is not a completed argument, but it is worth documenting for those that are interested in the measures and meanings.
The Federal Reserve in the US looks at wealth by ‘wealth percentile group’. Here is the comparison of wealth before the 2008 ‘Great Recession’ versus now during the COVID crisis.
Below are the charts of wealth in the USA as calculated by the Federal Reserve. This is different than stock market values as it is based on Survey of Consumer Finances and Financial Accounts of the United States.
The wealth of consumers has increased from $66.48 trillion to $104.3 trillion during the 12 years since the Great Recession. That is an increase of about $38 trillion. During that period, the top 1% has garnered $12.8 trillion of that, and the next 9% have garnered about $14 trillion. The 40% above the median have gained $11 trillion.
The bottom half just $300 billion, or about $2,000 increase in wealth each.
By comparison, the US government debt has increased from about $9.2 Trillion (62% of GDP) in Q4-2007 to $26.5 Trillion (108% of GDP) in Q1-2020. At the same time, the Federal Reserve has used their ‘Quantitative Easing’ programs to help the economy and has added about $6 trillion to the economy since 2008. In total, that is about $22 trillion.
In doing so, the wealth of the citizens has grown by $38 trillion, for an increase of just $16 trillion, net of the debt.
With an economy of just under $15 trillion in 2008, and around 21.4 trillion in 2019, it cost $22 trillion to get an improvement of a bit less than $7 trillion. Given the lack of plans to pay back that debt, that return is terrible and the burden will be carried by the poor and middle class for decades to come, and that is assuming the economy can sustain this valuation given the COVID crisis, the debt crisis and the diminishing returns from innovation and investment.