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Sunday, January 27, 2013

Structurally unsustainable.

Income inequality has been growing steadily since the mid-1980s. As of 2011, the top 5% of households brought home over 22% of all income generated in the country, whereas the middle 20% of households (quite literally the middle class) got less than 15%. Coupled with the unemployment picture wherein U6 (as a measure including discouraged and part time workers) is steady at 14-15%  it is clear a majority of the U.S. population has been losing ground to the most wealthy.

This is not just a moral issue.  It lies at the heart of economic malaise.  In a society that relies on consumption for 70% of its economic activity, this certainly does not bode well for the future, since the wealthiest traditionally do not consume much of their income.

To top it off, the recent “fiscal cliff deal” just reduced disposable income further by increasing payroll taxes by 2% for all those working, putting additional strain on the working class and their discretionary spending dollars.maag-1-2013-3.gifthe share of total U.S. income earned by the middle class and the top 5% of households.

At the same time it is true that the US takes in about 2.5 trillion in tax dollars and pays out about 2.5 trillion in transfer payments.  This leaves nothing for everything else.  But how can that ever change given that 1 in 5 Americans are unemployed, and less than 15 percent of Americans have more that $10,000 of liquid assets.  More Americans are becoming dependent on transfer payments every day.  Not less.  More.

But we're doing fine, right?  The stock market is at an all time high, rates are at an all time low, and the vix is at any all time low.  The housing market is rebounding.  The recovery is picking up steam.

How do we reconcile these two realities?

Two words: Money Printing.   

One question: How long can money printing paper over the structurally unsustainable?

In fact money printing adds to the instability because most of the printed money goes to the banks who gamble it in the risk markets - keeping stocks high and rates low and they keep the rest in the form of salaries and bonuses for bank executives.  Meanwhile necessities become ever more expensive adding to the malaise of the middle class.

Be careful. It doesn't take a genius to see where this is headed.

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