I have written many times before about the problem of income inequality in this country. As humans, I think we have the tendency to complain about those that are richer than us but ignore those poorer. I came across the following chart and the implications, at least as I saw them, are rather large.
As the chart shows, the top 10% are doing just fine. And I expect they will continue to do just fine. I assume anybody reading this falls in the “51st to 90th percentiles group. Notice the increase in wealth over the past approximate 15 years is negligible for this group. The rise of Trump/Sanders is often attributed to this lack of improvement.
Though hard to see, both in the graph and possibly in real life, is the “bottom 50%”. The chart is a stark illustration of the income inequality problem in this country. I am not a historian, but it is hard to imagine the present situation continuing for long. Such situations are ripe for some type of revolution by the lower-class.
Today’s inequality is worse than at least one time in history. Consider what Ched Myers wrote five years ago:
Between 1997 and 2007, inequality in the U.S. grew by almost 10 percent, making it more unequal than Russia, infamous for its powerful oligarchs. The U.S. is not faring well historically, either. Even the Roman Empire, a society built on conquest and slave labor, had a more equitable income distribution. To determine the size of the Roman economy and the distribution of income, historians Walter Schiedel and Steven Friesen pored over papyri ledgers, previous scholarly estimates, imperial edicts, and Biblical passages. Their target was the state of the economy when the empire was at its population zenith, around 150 C.E. Schiedel and Friesen estimate that the top 1 percent of Roman society controlled 16 percent of the wealth, less than half of what America’s top 1 percent control.
Our society is more than twice as disparate as was the one to which Luke originally addressed his gospel [specifically the story of The Rich Man and Lazarus – Luke 16:19-31].
This begs the question-how will this “bottom 50%” be treated given the large amount of debt existing in the United States (and remember much of the world is in worse shape)?
The reduction in debt seems to be essential to any answer. There are three accepted ways of resolving excess debt.
- Economic Growth is the remedy most often proposed by policymakers. It is commonly accepted that we need economic growth of at least 3 ½ percent (measured by the gross domestic product or GDP) to begin paying down the national debt. Unfortunately, growth has been running less than 2% and demographics (see my blog here) are not in our favor.
- Inflation, is known as a stealth manner of reducing debt though few governments acknowledge this solution. Inflation means a reduction in the value of a currency, thus you are paying back debt with less valuable dollars (which is easier). Though the Federal Reserve is desperately trying to induce some amount of inflation, their efforts to date have been less than successful.
- Debt Forgiveness is the third commonly accepted way of retiring debt. Some analysts are suggesting that the government, in an effort to at least maintain current standards of living (as meager as it is for the bottom 50%) will increase control of the economy by selectively negating some debts. The Bible has a term for this-Jubilee (Leviticus 25:8-17). Of course in biblical terms, debt forgiveness was across the board, all debts were forgiven. The government was not picking winners and losers.
The foregoing is rather bleak. We have no idea what the future will bring. Even if the aforementioned predictions are correct, danger is not deemed intimate. As noted economist John Maynard Keynes stated “The market can stay irrational longer than you can stay solvent.” Regardless we do not think it is time to be taking undue risk. When appropriate, we suggest that acceptable gains be “locked in”. We also think it is a time to remain flexible, i.e. liquid or not “locked in”. The balance of these two competing goals is different for every investor with no exact right answer. Of course, we stand ready to re-examine your portfolio to see if changes need to be made.