Items filtered by date: August 2016

The Failed American Social Contract and the Betrayed Generation

Tuesday, 16 August 2016 11:08
Part II: The Failure of the American Social Contract Will Cause Profound Upheaval

The American Social Contract was the social and financial backbone for much of the economic progress made by America in the last 60 years. Its destruction will lead to the eventual and inevitable erosion of the middle class and meaningful prosperity for generations of future workers. The consequences of this disruption are profound.

As the middle class is slowly carved out and flattened, economic demand will continue to decrease, leading to stagnant and stalled economies. Monetary policies by central banks, which have traditionally primed the economic pumps through targeted interest rate cuts at key moments of crisis, have become largely irrelevant. These policies, which have rescued nearly every recession in the last 60 years, will become increasingly impotent. Currently, with interest rates in negative territory throughout the world, central bank monetary policies have been rendered ineffective in creating aggregate demand, the real culprit of the decades-long stagnation in Japan and most Western economies.

And economists are perplexed because the current cycle is unlike any they’ve ever witnessed. Keynesian intervention, long favored by the Democratic elite has, at one time or another throughout the last 60 years, been successfully applied to modern recessions to alleviate them. But most recently, monetary policy aimed at improving the economy following the Great Recession has largely failed to kick-start aggregate demand.

Supply-side fiscalists, the favored Republican Band-Aid to nearly every economic ailment, stresses that fiscal policy alone is enough to induce the expansion of businesses, which in turn would ultimately spur growth. This model, proposed and implemented by many Republican presidents, has markedly failed to remedy the country’s economic malaise, as overcapacity continues to plague most manufacturing countries.

Both remedies have failed to mitigate economic contraction, as the United States has steadily reduced overall tax rates for the last 30 years (fiscal, supply-side intervention), and interest rates have remained at historic lows for at least 10 years (monetary, Keynesian intervention), yet overall aggregate demand has remained stalled and barely budged.

The inevitable result of decreased economic demand and pervasive central bank interest rate manipulation are frequent asset bubbles. Interest rate manipulation has severely skewed asset allocation incentives in the United States, creating massive pricing bubbles in the stock market and real estate markets and among many other asset classes affected by this manipulation.

Banks and other traditional financial repositories have been stripped of any meaningful ability to provide investors with healthy returns on their invested assets, and these investors have turned to other investment vehicles for their funds. This outcome has driven up the value of these alternative investments to unrealistic valuations. These valuations have become meaningfully divorced from their inherent, income generating potential, and instead are based on fear and irrational expectations.

 

Category: The Economy

The Failed American Social Contract and the Betrayed Generation

Tuesday, 16 August 2016 10:51
Part I: The History of the American Social Contract and Why it Failed

The American Social Contract has failed, and with it the moral justification that generations of Americans accepted in order to educate themselves, marry, raise families, build businesses, retire and pass the torch to each successive generation of workers. The contract itself was deceptively simple and plain, but breathtaking in its sweep of moral, financial and cultural imperatives: the youth of our country were expected to reasonably educate themselves and prepare themselves for the responsibility of adulthood and their place in America’s economic engine, in return, the American workplace would provide a haven for these skills, successively greater pay and responsibility, and sufficient security and income with which to bankroll an early retirement.

This compact, though, has turned into a Faustian deal. No longer are successive waves of well-schooled young adults strutting into a secure world with nearly guaranteed jobs. They are being increasingly told there is no place for them at the table; instead, they’re on their own. Ill equipped to compete with each other let alone with their much older siblings, they feel betrayed.

In order to understand the failure of the American Social Contract, it is important to first understand how it came into being and became the driver for most of America’s post World War II economic expansion. After World War II had lifted the nation from the ravages of the Depression, it was this implicit contract that guaranteed the loyalty of successive generations of workers to corporate America. This bi-lateral understanding between the corporate aristocracy and the governed ensured a steady stream of educated and industrious workers eager to improve their lives over each preceding generation.

America, the only economic giant largely unscarred by the ravages of World War II, became the world’s financial and economic engine, driving much of the developed world’s innovation and manufacturing. America innovated, created, supplied and manufactured much of the economic output required by a post-industrial world-order, suffered from little overseas competition and assumed the mantle of technological giant and innovator.

 

Category: The Economy