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Charles Hugh Smith: Sorry Our Demographic Karma Ran Over Your Economic Dogma

Your bogus economic dogma of “growth via the wealth effect” created the demographic karma that will bring down the status quo.

What happens when you bleed your workforce while enriching those who already own assets with one bubble after another, all in the name of “fostering growth”? To answer this, let’s modify a felicitous phrase: Sorry Our Demographic Karma Ran Over Your Economic Dogma.

The Demographic Karma is young people can no longer afford houses, healthcare or children and so the birthrate plummets and the workforce shrinks to the point that the bloated, heavily indebted status quo collapses under its own weight.

Demographic-economic chartist CH summed it up very succinctly in a recent Tweet:

@Econimica: Asset/RE bubbles (of assets primarily held by elderly/institutions) must be maintained to avoid a banking/economic crash…but the price will be the ongoing collapse of families/births…saving the present at the expense of the future (again).

This dynamic of Demographic Karma crushing Economic Dogma is global, as evidenced by this Tweet about China’s demographic collapse and bubble-economy:

@fuxianyi: Chinese policymakers now face a dilemma: if the real-estate bubble does not burst, young couples will be unable to afford to raise two children. But if the bubble does burst, China’s economy will slow, and a global financial crisis will erupt.

The Economic Dogma holds that inflating one speculative credit-asset bubble after another is wonderful because each bubble produces a “wealth effect” in which those who inherited assets or bought assets in the past are greatly enriched by the bubble. Feeling wealthier, they then borrow and spend more freely.

This Economic Dogma–that bubbles are excellent pathways to “growth”–is a form of “trickle down” economics in which the wealthy borrowing and spending more “trickles down” to the middle class and working class.

As the charts below show, this theory is baseless and bankrupt: the rich get richer and richer and everyone else gets poorer and poorer with each bubble. What’s “growing” is wealth and income inequality as the demographic consequences of this soaring inequality collapses the social contract.

Let’s go through the chart deck.

1. The US workforce is fully employed. Many expect a recession and AI will slash employment and create a pool of unemployed seeking work at low wages, but this isn’t how it works. As I’ll explain in a future post, the mismatches between the work employers need done and the skills and willingness of the workforce to do the work for the offered wage mean the unemployment rate can be high but workers are still scarce.

2. The expectation that US population and the workforce will ceaselessly expand is not guaranteed, especially if immigration declines. What is guaranteed is the population of retirees will continue rising.

3. Wages’ share of the national income has declined for 45 years as the gains of the economy were shifted from labor to capital.

4. The top 1%’s share of wealth soars to new heights in every speculative credit-asset bubble.

5. The middle class’s share of wealth plummets in every speculative credit-asset bubble and only gains ground when bubble pop. (We all know what happens when bubble pop: the Federal Reserve fraks out and creates trillions of dollars in stimulus that then flows into the pockets of the wealthy via the next bubble.)

6. Household net worth has skyrocketed far above inflation and the growth of the economy (GDP). As the charts above show, this wealth flowed disproportionately to the top 1%.

7. Thanks to the Fed’s latest bubble–The Everything Bubble–housing affordability is at an all-time low. Put another way, the ratio of median income to housing prices is at an all-time high.

8. To stave off the inevitable karmic consequence of extreme wealth inequality–social disorder–the federal government has borrowed and blown tens of trillions of dollars on “fiscal stimulus” to buy the complicity of the 90% left behind.

So sorry Our Demographic Karma Ran Over Your Economic Dogma. Your bogus economic dogma of “growth via the wealth effect” created the demographic karma that will bring down the status quo.

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