The Two Charts That Dictate the Future of the Economy

by Charles Hugh Smith, Of Two Minds:

If you study these charts closely, you can only conclude that the US economy is doomed to secular stagnation and never-ending recession.

The stock market, bond yields and statistical measures of the economy can be gamed, manipulated and massaged by authorities, but the real economy cannot. This is espcially true for the core drivers of the economy, real (adjusted for inflation) household income and real disposable household income, i.e. the real income remaining after debt service (interest and principal), rent, healthcare co-payments and insurance and other essential living expenses.

If you want to predict the future of the U.S. economy, look at real household income. If real income is stagnant or declining, households cannot afford to take on more debt or pay for additional consumption.

The Masters of the Economy have replaced the income lost to inflation and economic stagnation with debt for the past 17 years. They've managed to do so by lowering interest rates (and thus lowering interest payments), enabling households to borrow more (and thus buy more) with the same monthly debt payments.

But this financial shuck and jive eventually runs out of rope: eventually, the rising cost of living soaks up so much of the household income that the household can not legitimately afford additional debt, even at near-zero interest rates.

For this reason, real household income will dictate the future of the economy. If household incomes continue stagnating or declining, widespread advances in prosperity are impossible.

The Masters of the Economy have played another financial game to mask the erosion of real income: inflating speculative asset bubbles to boost the illusion of wealth, a form of financial sorcery called the wealth effect: households that see their stock and bond funds swelling by 50% to 100% in a few years are emboldened to believe this phantom "wealth" is permanent and thus can be freely spent in the present.

The problem with this financial shuck and jive is only the top 5% own enough assets to experience the speculative high of asset bubbles. This is one reason why the top 5% have pulled away from the bottom 95%, a trend that is blindingly obvious in this chart of Real Average Household Income by Quintile and the Top 5% from the always-insightful Doug Short (U.S. Household Incomes: A 49-Year Perspective):

The gains since 1992 reflect the national distribution of wealth very closely: those with minimal financial wealth (the bottom 80%) experienced minimal gains in real income.

Those with some financial wealth (the top 20%) enjoyed substantial gains, but the truly outsized gains were reserved for the top 5%, the class that owns the majority of the nation's wealth.

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