The Great Financial Crisis wiped out 26 per cent of wealth in the US between 2007 and 2009, with the youngest and poorest families hit the hardest. Are we on track for a similar downturn now? It’s quite possible. As colleagues have pointed out, it’s very likely that the Fed’s current rate-hiking cycle may end in a US, if not global, recession.
The idea is that rate hikes and inflation together will make things more expensive for average people, curbing demand. That already seems to be happening in non-essential goods, something I explored recently in a column on “buying strikes”.
But unlike previous downturns, this would be happening at a time when commodities prices look likely to stay stubbornly high for some time — and in the US, housing costs probably will too. For individuals, some of the price hikes have been offset by a strong labour market. But is it quite as strong as we think?
One high-level investor I spoke with recently noted that in the wake of disappointing results and cuts at Big Tech employers like Amazon, Facebook and Uber, he would be watching second-quarter earnings calls in July and August closely, and expected that we might see more significant slowdowns in hiring, as consumers and corporates alike tighten their belts. This could, in turn, lead to the kind of market downturn that we saw in the GFC.
What would it mean if asset prices plunged, even as core inflation was sticky and labour markets weakened? Needless to say, nothing good — particularly for those making less than $40,000 a year. Seventy-three per cent of those people say they fear they cannot maintain their standard of living, up from 56 per cent last year according to a Gallup poll. The percentage of those who say they can’t pay bills has doubled.
Some people argue that a market crash won’t hurt those people, because they aren’t invested in the market. But that may have changed given the last 15 years of quantitative easing and low rates. Not only are retail investors still piling into the market, even as insiders got out months ago, many average Joes have moved from day-trading meme stocks to “investing” in Bitcoin. Consider this Civic Science survey that showed that 37 per cent of people making between $25-50k answered “yes” when asked whether they had quit their job in the last year due to the financial freedom earned from investing in cryptocurrency.
Given the recent rout in crypto and other risky assets (just look how many things not explicitly backed by central banks are now falling), this implies that there may be at least a couple of million people out there who could be going back into the labour force just in time for a softening in the summer. Let’s hope they don’t have to drive far to get to interviews, given gas prices. What’s even more concerning is that the risk-off environment is likely to hit minorities harder than whites, just as it did in 2008, given that they piled into riskier assets late — some as a way of trying to make up the gains that had been enjoyed by others with access to safer and more formal investment options.
Then, there’s the housing picture. Plenty of wealthy Boomers I know are sweating the rate hikes, which can quickly add thousands of dollars a month to the price of a home. Millennials in the 29-34 age group will be less likely than ever to be able to get on the housing ladder now, given the perfect storm of tighter credit, and higher prices. No wonder things like 3D printed homes that can be built quickly at a fraction of the price of a traditional dwelling are booming.
Still, Boomers have most of the money, and they aren’t going to part with it, given longer lifespans and rising inflation. In fact, as they spend their unprecedented cash hoard, they may contribute to inflationary pressures. All of this makes me think that we may be on track for another round of Occupy-type battles, in which debt-ridden young people duke it out with wealthier older people politically for a shrinking piece of the pie. Certainly, there seems to be a missing political generation between Joe Biden and Alexandria Ocasio-Cortez. Ed, would you agree, and what does this mean for politics over the next few months and years?
Economist Joseph E Stiglitz agrees with me that neoliberals need some of their own shock therapy.
Anyone interested in why the economy is so out of control and why the Fed can’t do much about it at this point should read this short and wonderfully readable account of the last 20 years of easy money, The Fed Unbound, by Lev Menand, a former Treasury policy adviser, now at the Columbia Law School (where many sharp post-neoliberal thinkers are now in residence). I will be highlighting some of his excellent ideas in my column on Monday.
And in the FT, I thought our New York correspondent Joshua Chaffin was spot on that it’s both the best and the worst of times in the city.
Edward Luce responds
Rana, there is almost half a century between AOC and Biden and not that much obvious talent in between — or at least little that has yet revealed itself. The only big economic advantage to being young nowadays is that if you’re lucky enough to have financial assets, you will have the time to wait for their recovery. In that sense I disagree with one of your points — that the global financial crisis “wiped out” 26 per cent of wealth. Asset prices recovered, which means the wealth had only been temporarily reduced. However, I agree with you that we are probably stuck for a while with today’s market doldrums. The stock market’s fall so far this year could get considerably worse if the Fed lifts rates even more than it has telegraphed, as Jay Powell has hinted he will consider.
What does this mean for US politics? Even when the economy is booming, the distribution has become increasingly unfair and the political mood is not good. It will get uglier as real incomes fall, notwithstanding the fact that nominal wage growth is as high as it has been in the 21st century. For the middle classes, it is a case of so near, yet so far. Having waited for years to see strong income gains, they find that inflation is robbing their ability to enjoy them. This is bad news for Democratic prospects in the midterm elections. Younger voters are unlikely to feel much enthusiasm for the Democrats and voter turnout will probably fall to traditionally low midterm levels. Republicans will be feeling particularly vindictive towards the Democrats, thus likelier to turn out. Republicans have bet on the fact that more voters will feel outraged by inflation than by the Supreme Court’s Roe vs Wade reversal. I suspect they are right.
Bear in mind, though, that I’m not in an optimistic frame of mind today. Rana kindly agreed to fill in for my Note today since I came down yesterday with Covid and high fever. The latter is receding but I’m not exactly skipping like a spring lamb.
And now a word from our Swampians . . .
In response to ‘Can work offset wealth?’
“Boomers have $35tn in assets built up in retirement accounts that have benefited from asset price inflation. Covid and retirement have pushed them to start spending. Twenty-plus years of asset price inflation is now entering the real economy. As a country, with debt to GDP at 130 per cent (New Zealand’s is 30 per cent, so it’s a lot easier to tell the truth), we can’t afford rates to go up because we cannot cover our interest costs, defence spending and entitlements with our tax receipts — which are already at record highs. If Fed crushes demand by raising rates and tanks asset prices, tax receipts fall and exacerbate this problem.” — Neil Winward, New York, New York
Swamp Notes is edited by Emily Goldberg