May 5, 2012
‘The
essence of debt serfdom is debt rises to compensate for stagnant wages.
I often speak of debt serfdom; here
it is, captured in a single chart. The basic dynamics are all here,
if you read between the lines:
1. Financialization of the U.S. and global economies diverts
income to capital and those benefitting from globalization/ “financial
innovation;” income for the top 5% rises spectacularly in real terms even as
wages stagnate or decline for the bottom 80%.
2.
Previously middle class households (or those who perceive themselves as middle
class) compensate for stagnating incomes and rising costs by borrowing money:
credit cards, auto loans, student loans, etc. In effect, debt is substituted
for income.
3.
The dot-com/Internet boom boosted incomes across the board, enabling the bottom
95% to deleverage some of the debt.
4.
When the investment/speculation bubble popped, incomes again declined, and
households borrowed heavily against their primary asset, the home, via home
equity lines of credit (HELOCs), second mortgages,
etc.
5. The
incomes of the top 5% rose enough that these households could actually reduce
their debt (deleverage) even before the housing bubble popped.
Here
is a chart of real (inflation-adjusted) incomes, courtesy of analyst Doug
Short: note that the incomes of the bottom 80% have been flatlined
for decades, while the top 20% saw modest growth that vanished once the housing
bubble popped. Only the top 5% experienced significant expansion of income.
Notice that incomes of the top 20% and top 5% really took off in 1982, once financialization became the dominant force in the economy.
Interestingly,
we can see the double-bubble (dot-com and housing) clearly in the top income
brackets, as these speculative bubbles boosted capital gains and
speculation-based income. Since the bottom 80% had little capital to play with,
the twin bubbles barely registered in their incomes.
Bottom line: financialization
and substituting debt for income have run their course. They’re not coming
back, no matter how hard the Federal Reserve pushes on the string.Both of these interwined trends have traced S-curves and are now in
terminal decline:
Those
hoping the economy is “recovering” on the backs of financial speculation/
legerdemain and ramped up borrowing by the lower 95% will be profoundly
disappointed when reality trumps fantasy.’