The Economics Of The Demonstrations Across America

The death of George Floyd was both unjust and tragic. However, his death was the catalyst that lit a powder keg of dissension, which has simmered beneath the headlines for over a decade.

While we focus on events that fill our media streams, it is worth remembering Oscar Grant, Trayvon Martin, Manuel Diez, Kimini Gray, and Michael Brown. These events, and many others throughout history, show civil unrest has deeper roots. made a note of this in 2017:

“The U.S. economy is in much better shape now than it was in the aftermath of the Great Recession. It cost millions of Americans, their homes, and jobs. It led him to push through a roughly $800 billion stimulus package as one of his first business orders. Since then, unemployment has plummeted from 10% in late 2009 to below 5% today, and the Dow Jones Industrial Average has more than doubled.

But by some measures, the country faces serious economic challenges: A steady hollowing of the middle class and income inequality reached its highest point since 1928.”

Look at the faces of those rioting. They are of every race, religion, and creed. What they all have in common is they are of the demographic most impacted by the current economic recession. Job losses, income destruction, financial pressures, and debt create tension in the system until it explodes.

It has been the same in every economy throughout history. While the rich eat cake, the rest beg on street corners for scraps. Eventually, those most disenfranchised and oppressed storm the castle walls with “pitchforks and torches.”

A hit on this issue.

“As the coronavirus pandemic continues to pummel the economy, many Americans are decreasing their retirement contributions, but some are raiding their retirement accounts to pay for essentials. A new survey found 3-in-10 Americans dipped into the funds meant for their golden years — and the majority of those who have done so spent their nest egg on groceries.”

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

America was not prepared financially for the downturn caused by the pandemic. They are angry, financially stressed, and the visible face of their ire has become Wall Street and the Fed.

Since the “Financial Crisis,” the role of the Federal Reserve shifted from its dual mandate of “full employment” and “price stability” to a seeming inclusion of a “third mandate” supporting consumer confidence via the inflation of asset prices. As Ben Bernanke stated in 2010:

“This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose, and long-term interest rates fell when investors began to anticipate the most recent action.

Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”

Unfortunately, it didn’t work out that way.

As with all things, there are always the unintended consequences which follow. For the vast majority of Americans:

• Housing did not become more affordable.
• Wall Street bought massive numbers of homes at distressed prices and went into the landlord business, which led to a rise in home prices.
• Many Americans, still recovering from the “Financial Crisis” were unable to obtain financing.
• For many others, affordability due to suppressed wage growth was the issue.
• Lower corporate bond rates didn’t lead to more investment, but rather increased share repurchases which benefited “C-Suite” executives at the expense of the working class.

Instead, as discussed previously, the Fed’s policies led to a growing divergence between the stock market and the economy. To wit:

“The one lesson that we have clearly learned since the 2008 “Great Financial Crisis,” is that monetary and fiscal policy interventions do not lead to increased levels of economic wealth or prosperity. What these programs have done, is act as a wealth transfer system from the bottom 90% to the top 10%.

Since 2008 there have been rising calls for socialistic policies such as universal basic incomes, increased social welfare, and even a two-time candidate for President who was a self-admitted socialist.

Such things would not occur if “prosperity” was flourishing within the economy.

This is simply because the stock market is not the economy.

The Fed’s interventions and suppressed interest rates have continued to have the opposite effect of which was intended. I have shown the following chart below previously to illustrate this point.