There is an unsettling issue at play within the political economy.
The general populace, having endured years of self-imposed economic and social hardships, finds itself in a state of discomfort. They are overwhelmed by a sense of both pain and panic and seek ways to alleviate their plight but find themselves unsure of where to start.
At face value, the central issue seems to be that general incomes fall short of covering living expenses and debt obligations. This is substantiated by data, as evidenced by a recent report indicating that a staggering seven million Americans are over 90 days behind on car loan payments.
Indeed, wages are insufficient to meet financial demands. But why is this the case? What has caused the aggregate value of labor to plummet so significantly compared to the overall cost of goods and services? What truly lies at the heart of the economic struggles faced by the working class?
A closer examination reveals something rather curious, though few seem willing to delve deeply enough for answers. Among those who do, only a select few will take the time and effort to uncover the truth.
For the average person, the critical issue distills down to a glaring disparity: last year, JPMorgan Chase’s CEO Jamie Dimon earned around $31 million, while the average worker took home a mere fraction of that amount. This disparity fuels the common perception that Dimon is somehow unethical, eliminating the need for further inquiry.
However, jumping to conclusions without thorough investigation leads to decisions devoid of substance. Is Dimon truly dishonest, or is he merely reaping the benefits of a financial system that favors him disproportionately?
Price Controls
It’s essential to understand that the widening wealth gap—today’s yawning divide between the rich and the poor—has emerged from the actions of central planners. These are not the overt planners of yesteryear who dictated prices through cumbersome five-year plans, but rather a subtler breed of planners who erosion labor value in ways that aren’t readily apparent.
History has demonstrated that centralized price controls for goods, commodities, and services are fundamentally flawed. This was starkly illustrated by the experiences of centrally planned economies in the former Eastern Bloc during the latter half of the 20th century.
Unfortunately, the effects of price fixing extend beyond mere products. Since the dawn of the 21st century, the United States, Europe, and Japan have been diligently proving that the stagnation seen in the old Eastern Bloc can also infiltrate credit markets.
It’s vital to recognize that credit, like any commodity, carries a price, influenced by the interest rates lenders charge to borrowers. Just as a central authority can try to control the prices of goods, central banks like the Federal Reserve, the European Central Bank, and the Bank of Japan have also attempted to regulate credit prices, and this too has proven disastrous.
Anyone with even a superficial understanding of the situation can observe that a bizarre and alarming transformation has taken place. Financial assets—including stocks, bonds, and real estate—have expanded far beyond the capacity of incomes. Moreover, those who thrive in these financial arenas, like Jamie Dimon, have become exceedingly wealthy as a result of this skewed paradigm.
This imbalanced state would never have intensified without the Federal Reserve’s manipulation of credit market prices. And the unfortunate reality is that everyone is bearing the burden of this situation.
“The Future Ain’t What It Used to Be”
Earlier this week, the national debt officially surpassed $22 trillion. While a few headlines might have caught your eye, there has been a conspicuous lack of serious discussion from either the President or Congress about addressing this looming disaster. Former Fed Chair Alan Greenspan—often regarded as the architect of modern credit manipulation—recently offered his perspective:
“We find ourselves in an extremely imbalanced situation. Politically, budget deficits don’t seem to matter. What truly matters are the consequences.”
He added, “It’s only when these deficits, which inevitably lead to inflation, start to manifest that the political system reacts. Presently, we’re only beginning to see signs of stagflation.”
From our viewpoint, Greenspan’s assessment feels misleading. Remember, inflation is fundamentally an increase in the money supply. Since the abrupt end of the U.S. dollar’s gold convertibility in 1971, as dictated by the Bretton Woods system, the money supply has skyrocketed. Debt levels, predictably, have followed suit, a trajectory made possible by the collaboration between the Fed and Treasury.
So, what can we glean from this situation?
As 20th-century economist John Maynard Keynes famously stated, “In the long run, we are all dead.” This statement has often been interpreted as a rationale for governments to borrow against the future to stimulate present growth. Such reasoning has permitted Congress to envision a world filled with perks—roses without thorns, rainbows without rain, and salvation without repentance.
However, trying to finance a nation’s prosperity through excessive borrowing at historically low interest rates courtesy of the Fed is fraught with repercussions. In the short term, it creates a facade of wealth, but in the long run, that illusion diminishes and crumbles.
Unlike what Keynes suggested, accumulating vast amounts of governmental debt hasn’t achieved the promised increase in long-term living standards; rather it has led to stagnant GDP growth coupled with a sharp rise in government debt and glaring wealth inequality.
Indeed, as Yogi Berra pointed out, “The future ain’t what it used to be.”
In the long run, we aren’t all dead. Many of us are still grappling with the consequences of the shortsighted economic policies adopted by economists long gone.
Sincerely,
MN Gordon
for Economic Prism
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