Five Things You Need to Know: Asymmetric Economy Increasingly Untenable and Unstable

By Kevin Depew  AUG 15, 2011 12:10 PM

This situation cannot continue without adjustment.


1. Our Asymmetric Society

We live in an increasingly asymmetric world. One in which the wealthiest Americans are feeling very little discomfort from the ongoing economic depression while others, the majority really, are confronted almost daily with the pain of few jobs and/or job mobility, rising prices for necessities (including rent) combined with a lack of wage growth to keep pace, and no incentives -- let alone ability -- to consume on a scale to which the old economy was accustomed. It's a situation that is becoming more untenable and unstable by the day, and one that simply cannot continue indefinitely without an adjustment.

Minyanville Professor Peter Atwater first characterized the very serious threat this asymmetric economy poses in this excellent and still very much relevant piece from 2010.

"The net result of it all is that, despite the abundant oxygen, the masks aren’t getting to where they were supposed to. And to these eyes, rather than creating a virtuous economic cycle, I am increasingly afraid that all the Federal Reserve and other global policymakers have accomplished is to create a potentially dangerous asymmetric recovery, in which “the haves” now have even much more and the "have nots" are slowly suffocating to death."

Income inequality in the U.S. has long been an economic problem. Now, however, it's increasingly becoming a social problem.

With respect to the overall economy, Friday's superficially positive report of sales at retail and food establishments showed a modestly healthy 0.5 percent increase in July and a robust 8.5 percent year-over-year gain. Sounds great, right? Not exactly. As Bloomberg economist Richard Yamarone pointed out, the problem is the report doesn't adjust for inflation so there's no way to dig through the data and see if the increase is due to pricing or volume. If it's due to volume, great. But if it's driven by the pass-through of higher input costs, well, you can see where this is going.

But here's something else to chew on: According to Gallup polling data, from May 2009 to May 2011 daily consumer spending rose by 16 percent among Americans earning more than $90,000 a year. For all other Americans, however, spending was flat. There's your asymmetric recovery.

The chart below, showing the increasing divergence between the Bloomberg Consumer Comfort Index and the S&P 500 index, offers another visual of what this increasingly asymmetric economy looks like:

2. NY Post Article Reveals Asymmetric

Social mood and an increasingly asymmetric economy is ripe for class warfare that has been percolating just below the surface. This morning I was reading a piece in the NY Post about workers at WTC who were caught by undercover reporters drinking in lower Manhattan bars on lunch breaks. It's dangerous and sad, but nothing new. The construction worker drinking on the job story has been a New York City tabloid staple story for 100 years. But this little nugget buried at the end of the piece caught my eye:

"Eamonn's and Uncle Mike's both denied that Ground Zero workers drank before returning to work, saying they come in only after their shifts or order just food and water. As for those who drink at lunchtime, "it's mostly just financial workers, like guys who work for Goldman Sachs," claimed a bartender at Eamonn's who identified herself only as Rachel."

See what happened? "Rachel" defends the construction workers, who were clearly and definitively caught by the reporters of the story on film drinking at lunch and then going back to the job site, but throws the Goldman Sachs (GS) workers under the bus! But man, is there anyone in New York City more hated than Goldman Sachs workers?

Sure, this might seem like a slightly silly and inconsequential view of social asymmetry but it's emblematic of a more serious underlying antagonism between those perceived as Haves versus Have-Nots. 3. Wall Street Resumes Deleveraging?

Speaking of investment bankers, this morning I caught this piece scrolling by: Margin Calls Push Leverage Down Most in Year as Stocks Fall:

"Borrowed money in accounts at 61 New York Stock Exchange firms has fallen 4.6 percent, the biggest drop since June 2010, according to a July 22 statement from New York-based NYSE Euronext (NYX)."

Put in perspective, the decline is slight compared to the 36 percent expansion in the prior eight months, the largest since 2007.

4. Main Street is Still Deleveraging

And speaking of deleveraging, the Fed's quarterly report on household debt and credit markets showed continued decline in balances on most consumer loan types. Mortgage and home equity lines of credit both fell by $20 billion. Non-real estate levels of debt fell by $10 billion, down nearly 10 percent from their fourth quarter of 2008 peak.

"This is more evidence that the pace of consumer deleveraging that began in late 2008 has slowed," said Andrew Haughwout, vice president in the Research and Statistics Group at the New York Fed. Or that consumers are increasingly turning to credit to manage daily expenses, depending on from which group's perspective you are viewing the data.

5. Corporations Are People...

Late last week GOP presidential hopeful Mitt Romney had a "conversation" on the Iowa campaign trail with a demonstrator calling for an increase in corporate taxes, a position to which Romney adamantly is opposed. Video of the event shows Romney saying "Corporations are people, my friend," an assertion perfectly ripe for late night mockery. Except, as Roberton Williams points out on the Tax Policy Center TaxVox blog, it's true. The real question is, just what kind of people are corporations?

"The corporation is the conduit but the burden of the tax falls on individuals. The question is “On whom?”

There are four main possibilities: the owners of the corporation, owners of capital in general, workers, and consumers. A) The corporation’s owners could get a smaller return on their investment if the tax reduces profits. B) All owners of capital could suffer if the tax induces a reallocation of investment toward less profitable but untaxed endeavors, thus reducing the after-tax return to all affected capital. C) Workers could receive less pay if the tax causes investment to move away from the firms that employ them, leaving them less productive than they would otherwise be. D) Consumers could pay more for the firm’s products if reduced output pushes prices up. Most likely the answer is E) All of the above."

See, it's true. Soylent Green Really is People!

Twitter: @kevindepew

No positions in stocks mentioned.

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