Understanding the GameStop Saga — Part Four: A Tale of Two Economies
In part three we saw how one of the largest bubbles in history culminated in a deep global recession with consequences are still felt to this day. Policy makers and central banks bailing out sectors of the economy that were culpable of the 2007 crisis and are tried to reinflate what is currently referred to as the everything bubble.
These actions, however, had and are still having even more consequential repercussions that reach into the fabric of society. The pandemic just made the divide worse.
Part IV. A Tale of Two Economies
The financial crisis of 2007 and ensuing global recession didn’t just cause economic havoc, it exposed a big disconnect that was papered over by decades of easy money, debt, and wealth transfer.
The extraordinary remedies implemented by central banks and governments since then — to stabilize the economic system — largely penalized middle- and lower-income families and benefitted the wealthiest. The trickle-down ideology, while repeatedly debunked, is still used as a mechanism to pump money at the top of the economic pyramid in the hopes it flows favorably downwards. Instead, this just contributed to the destruction of the middle class and exacerbate wealth inequality between rich and poor.
As an example, there are mechanisms through which central bank policies influence the overall economy. By artificially driving interest rates to historically low levels and expanding its balance sheet (effectively printing money), a central bank causes the economy to overheat by encouraging lax lending standards and over-indebtedness, risking the rise of inflation, and stoking speculative asset bubbles as happened in the runup to 2007 and what, while still in debate, is currently happening.
These policies contributed to deteriorating prospects for average households who straggled with stagnant or even falling incomes, increasing cost of living and debts.
However, as economists know, wealth follows the Pareto principle, which renders average statistics (e.g. income and debt) meaningless. To get a better picture we should compare the impact on different income levels.
Yes, there has been a recovery, but it is best described as K-shaped recovery. The middle and lower classes haven’t recovered, facing falling or stagnant wages, increasing cost of living and worse employment environment. Many of the already vulnerable has been punished hardest by the lockdowns and lost their jobs while others smoothly transitioned to WFH or saw their investments explode in value. Inflation and asset bubbles are a two-edged sword: punishing those who earn income through wages and spend it on necessities while making the wealthy capital-owners (e.g. high-net-worth investors, business owners, large landlords…) richer.
The wealthiest have been realizing the bulk of the increase in income. But income concentration only shows part of the story as the richest households accumulate their wealth not through income but mainly through capital and asset returns (rent, corporate profits, stock profits and dividends…)
For example, the stock market fully recovered from the 2008 recession, and more recently from the covid-induced shock, and is making record-after-record. Notwithstanding the obsession of the Fed, policymakers and the media with the S&P500 index as a proxy to the health and wealth of the nation, the majority are not benefiting because most are not invested (because they can’t.)
The wealthiest are not just making more, they are also owning more and more of the pie.
The pandemic and ensuing lockdowns just seemed to make the rich richer faster by the day.
In next and final part we will tie everything we discussed so far together back to the main Gamestop story.