Week of 06/20/2016

The Myth Of The “Wealth Effect”
– by David Matthews 2

Imagine, if you will, a nasty car accident.  One with many vehicles involved, wide-spread damage, loss of life, and traffic jammed for several hours.  But the driver of the vehicle responsible for the accident somehow manages to not be injured at all.  Not one scratch.  However, the trauma of the accident caused him or her to suffer from temporary amnesia.  They have no idea what happened.

So here’s the challenge: imagine trying to explain what happened to that driver.  But you can’t do it in a way that lets the driver know that he or she caused the accident.  Maybe the driver is a loved one or a relative.  Maybe you have something to gain from the driver being free.  Either way, you have to let them know what happened without telling them that they were the cause of it.

Think you can do it?

I think that’s what some in financial media is going through right now. 

They’re trying to explain to their audience what is going on in America, not to mention pretty much most of the westernized world, when it comes to our overall malaise concerning the economy.

On one hand, everything is going great since the Great Recession ended.  Profits have been through the roof.  Business has never been better.

But on the other hand, there has been this general malaise among the masses.  They aren’t buying houses like they should.  They’re not buying cars like they should.  They’re not consuming like they should.  The fact that consignment stores are prospering while the normal clothing stores are shutting down is proof enough.  People aren’t happy.  How else can you explain why they’re voting for a self-promoting clown act like Donald Trump as the GOP’s nominee for President?  How else can you explain the continued support for an admitted “democratic socialist” like Senator Bernie Sanders even after his rival, Hillary Clinton, is now the presumptive Democratic Party nominee?  Don’t they know the Great Recession is “over with”?  Don’t they know that the economy is “fixed” and they are free to spend again?

You see, what should be happening is a little thing called the “Wealth Effect”.  That’s the idea that if people feel that they’re making more money, they’ll spend more money.  If they feel wealthier, they’ll spend and consume more.

And the media, along with President Barack Obama and his ilk, certainly are singing from the same choir book on this.  And while some in America are going along with the chanting, a whole bunch of other people are mumbling and grumbling the opposite.  They don’t feel “wealthy”.  They feel like they’re getting left behind.  To most Americans, the Great Recession never ended.  It’s still going on.

So now, those in the financial media are trying to explain this to their audience - the ones that are singing loudly from the choir book about how great the economy is - because their audience just can’t understand why the “wealth effect” isn’t reaching everyone like it should.

One writer tried desperately to explain this as being the fault of government.  According to that writer, many Americans are feeling burdened by taxes and regulations, so they just aren’t spending like they “should”.  This theory follows the tried-and-true K-Street scapegoating of “the government” as some shady villain that is intentionally “ruining things” for the people.  They also conveniently forget that K-Street is often guilty of coming up with many of the regulations that they complain about, and they do so on behalf of the greedy money-grubbing profit-at-all-costs corporations.

Another so-called “expert” actually came close to the truth and said that there are actually “two economies”; one for the super-rich, and one for everyone else.  And while the super-rich economy is doing great, the economy for everyone else is barely getting by.  This is actually a good explanation, and far better than saying “the government broke it”.  But it doesn’t really address the problem.

Let’s get brutally honest here... the truth of the matter is that the so-called “Wealth Effect” is a lie.  It’s a confidence game just like any other con out there.  Trying to get people to believe that they have more money just so they can spend more money is no different than if you’re telling them they won some foreign lottery or some sweepstakes they never entered in.  It’s just a con game with a larger group of beneficiaries.

The truth of the matter is that what we are seeing is a long string of broken promises made by politicians and pundits on behalf of big corporations and their K-Street lobbying groups.  The broken promise repeated over and over that if we bail out Wall Street, that Wall Street would bail out Main Street, and then Main Street would then bail out Our Street.  They call it “trickle-down economics” and it’s been the promise that has been given to us since the days of Ronald Reagan.  Well, something has been “trickling” down us, but it’s not money, jobs, or opportunities.

And while I would otherwise be a supporter of this idea, I’ve been in this game long enough to recognize it as being just another game to Big Corporate.  They get the tax breaks, the bailouts, the get-out-of-jail-with-a-fine card, they get the preferential treatment, but when the profits come in, they claim that the economy is just “too unstable” to hold up their end of the deal.  So they rake in the money while the masses suffer and make do with less and less and less.

If governments large and small want the masses to actually spend more money, then they need to start putting pressure on the only group that has been feeling the “wealth effect”.  They need to stop trying to lie to the masses and actually let them feel more wealth.  Only then will they actually spend it.