The Warren Buffet economy: How Central Bank enabled financialization divided America

David Stockman points to this amazing figures on rise in wealth of a few and inequality for others:

….During the 29 years after Alan Greenspan became Fed chairman in August 1987, the balance sheet of the Fed exploded from $200 billion to $4.5 trillion. Call that a 23X gain. That’s a pretty massive increase—so let’s see what else happened over that three-decade span. Well, according to Forbes, Warren Buffett’s net worth was $2.1 billion back in 1987 and it is now about $73 billion. Call that 35X.

During those same years, the value of non-financial US corporate equities rose from $2.6 trillion to $36.6 trillion. That’s on the hefty side, too. Call it 14X and take the hint about the idea of financialization. The value of corporate equities rose from 44% to 205% of GDP during that 29-year interval.

Corporate Equities and GDP - Click to enlarge
Needless to say, when we move to the underlying economy which purportedly gave rise to these fabulous financial gains, the X-factor is not so generous. As shown above, nominal GDP rose from $5 trillion to $18 trillion during the same 29-year period. But that was only 3.6X

Next we have wage and salary disbursements, which rose from $2.5 trillion to $7.5 trillion over the period. Make that 3.0X. Then comes the median nominal income of US households. That measurement increased from $26K to $54K over the period. Call it 2.0X. Digging deeper, we have the sum of aggregate labor hours supplied to the nonfarm economy. That fairly precise metric of real work by real people rose from 185 billion hours to 240 billion hours during those same 29 years. Call it 1.27X.

Further down the Greenspan era rabbit hole, we have the average weekly wage of full-time workers in inflation adjusted dollars. In constant 1982 dollars that was $330 per week in 1987 and is currently $340. Call that 1.03X.  Finally, we have real median family income. At about $54,000 then and now, call it a three decade long trip to nowhere if you credit the BLS inflation data.

 But when you deflate nominal household income by our more accurate Flyover CPI per the last chapter, you end up at the very bottom of the Maestro’s rabbit hole. Median real household income went backwards! It now stands at just 0.8X of its starting level. So 35X for Warren Buffett and 0.8X for working people. That is some kind of divide.

OK, it’s not entirely fair to compare Warren Buffet’s $70 billion gain to the median household’s actual 21% loss of real income. There is some “inflation” in the Oracle’s wealth tabulation, as reflected in the GDP deflator’s rise from 60 to 108 during this period.

So in today’s constant dollars, Buffet started with $3.8 billion in 1987. Call his inflation-adjusted gain 19X then, and be done with it. And you can make the same adjustment to the market value of total non-financial equity. In constant 2015 dollars of purchasing power, today’s aggregate value of $36.7 trillion compares to $4.5 trillion back in 1987. Call it 8X.

Here’s the thing. In the context of an 0.8X main street economy, Buffet isn’t any kind of 19X genius nor are investors as a whole 8X versions of the same.

He goes on to show how Fed has been creating all these bubbles for the last 30 years:

The real truth is that Alan Greenspan and his successors turned a whole generation of financial gamblers into the greatest lottery winners in recorded history. They turned redistribution upside down——-sending unspeakable amounts of windfall wealth to the tippy top of the economic ladder.

These capricious windfalls to the 1% happened because the Fed grotesquely distorted and financialized the US economy in the name of Keynesian management of the purported “business cycle”. The most visible instrument of that misguided campaign, of course, was the Federal funds or money market rate, which has been pinned at virtually the zero bound for the last 90 months.

 Never before in the history of the world prior to 1995 had any central bank decreed that overnight money shall be indefinitely free to carry trade gamblers. Nor had any monetary authority commanded that the hard earned wealth of liquid savers be chronically confiscated by negative returns after inflation and taxes. And, needless to say, never had savers and borrowers in a free market struck a bargain on interest rates night after night at a yield of virtually 0.0% for seven years running, either.

Not only did the Fed spend 29 years marching toward the zero bound, but in the process it became addicted to it. During the last 300 months, it has either cut or kept flat the money market rate 80% of the time. And until the token bump of December 2016, it had been 114 months since the foolish denizens of the Eccles Building last raised interest rates by even 25 bps!

One should even mention how this whole financial culture was building all these years. The thinking was as long as it finance, all is well. It was deemed that the sector is run by the most intelligent people and no trouble shall occur. This was the biggest shock for the once maestro.

The capture of financial industry of near everything is really the crux of all kinds of issues.

We in India are catching up as well. Our financial industry is beginning to make similar progress in capture as well. Its influence in policy and capturing is making steady progress..


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