When you write about economics, you learn very quickly that the economy doesn’t care what you say about it. The forces that drive it are beyond any one person’s comprehension, much less control.
But at the same time, the economy doesn’t work like a law of nature. Unlike gravity, for instance, the economy responds to human choices and preferences. We influence it, even if we don’t understand exactly how.
In last week’s “Fragmentation of Society” letter, I wrote about the coming technological changes that will replace many human jobs and disrupt society. Some of the disruption will be good and necessary. Much of it will be painful, too, and the pain won’t be evenly distributed.
That is a problem whether you personally feel any pain or not. People don’t like pain and will change their behavior to avoid or relieve it. Like the drowning who desperately seek something to hold onto, they will vote for politicians who say they can relieve that pain, regardless of whether they actually can. And if those who suffer see that you don’t share their pain, they will wonder why not and seek to gain whatever advantage you possess. And then it gets ugly.
That’s not a moral statement but simply a fact-based observation of human nature. Whether we like the facts doesn’t really matter: We have to face them. Presently we are not handling them very well.
We have engineered society so that we at the upper end of the financial spectrum have little interaction with or knowledge of the people who feel the most pain. I wrote about this chasm between classes last year (see “Life on the Edge”) as the US elections made the split in our nation harder to ignore.
Peggy Noonan talks about the “Protected” class that makes public policy and the “Unprotected” who must live with those policies. The gulf between those classes continues to widen. The changes I wrote about last week will probably make it worse over the next 10–15 years.
Today I want to delve a little deeper into this widening split and consider where it may take us. As you’ll see, the possibilities range from “not so bad” to “very, very bad.”
Ray Dalio is no stranger to my readers. The billionaire founder of top hedge fund Bridgewater Associates got where he is by having keen insight into both human nature and economic trends. Occasionally he shares some of his wisdom publicly. I featured his reflections on the then-forthcoming Trump presidency in Outside the Box last December.
Last month Dalio posted a new article, “The Two Economies: The Top 40% and the Bottom 60%.” He believes it is a serious mistake to think you can analyze or understand “the” economy because we now have two of them. The wealth and income levels are so skewed between top and bottom that “average” indicators no longer reflect the average person’s experience or living conditions.
Dalio launches with this chart:
The red line is the share of US wealth owned by the bottom 90% of the population, and the green line is the share held by the top 0.1%. Right now they are about the same, but notice the trend. The wealthiest 0.1% has been increasing its share of wealth since the 1980s, while the bottom 90% has been losing ground.
Looking back, we see a similar pattern in the 1920s – which dramatically reversed in the following decade. Then there was an almost 50-year period during which the masses gained wealth and the wealthy lost ground.
(Important note: This doesn’t mean the 0.1% ceased being wealthy. It just means they owned a smaller portion of the total wealth. An economy in which 0.1% of the people own 10% of the wealth is still skewed, just less so. But more on that later.)
In the big picture, we see about a half-century when the net wealth gap widened in favor of the bottom 90%, followed by another 30 or so years in which the wealthiest gained ground while most of the population lost it.
It’s not a coincidence that populism emerged as a political force in both the 1920s–1930s and the 2010s. In each case, people at the bottom could tell the economy wasn’t working in their favor. The best tool they had to do something about it was the vote, so they elected FDR then and Trump now – two very different presidents but both responsive to the most intensely angered voters of their eras.
That previous, roughly 10-year period in which the green line was above the red line included the Roaring 20s, the 1929 market crash, and the first part of the Great Depression. For the 0.1%’s share of the wealth, 1929 was roughly the high point. Wealth lost in the crash sent their share plummeting. It has not fully recovered to this day, but it’s getting close.
Thinking about this situation, I can’t help but correlate it to my friend Neil Howe’s idea of a historical “Fourth Turning” every 80 years or so. It fits well with Dalio’s data. Neil said at my 2016 Strategic Investment Conference in Dallas that we are in the middle stages of that Fourth Turning, and he expects conditions to worsen from here. He repeated that warning this year at SIC in Orlando. As he points out, for almost 500 years the last half of Fourth Turning has always encompassed the most tumultuous times in Anglo-Saxon history.
(A Fourth Turning is a time when society’s foundational institutions are challenged. The generation who are young adults at that time must face the challenge, and hopefully, overcome it. The so-called Greatest Generation did so by persevering through the Great Depression and fighting World War II. It may not be a war, but the Millennial Generation will face a similar test.)
Back to Dalio’s article. He goes on to quantify the 60/40 split with some startling numbers. Just a sampling:
• The average household in the top 40% earns four times more than the average household in the bottom 60%.
• Real incomes for the bottom 60% have been either flat or down slightly since 1980.
• In 1980, the average top 40% household had six times more wealth than the average bottom-60% household. Now it is 10 times as much.
• Only about a third of the bottom 60% saves any of their income.
Dalio also found some very useful data I had never seen before: household income adjusted to show the impact of taxes, tax credits, and government benefits. This adjustment gets closer to the resources people actually have available for living expenses, savings, and investment.
