The problem with the American Economy
If dollars turn into cents, does owning the US dollar still make sense?
The USD has been the status quo my entire life. My dollar has never been denied, is widely accepted, and the responsibility of safeguarding my money is shouldered by my bank (plus I am covered by FDIC insurance). My $1000 today is the same $1000 tomorrow. In short, the United States makes holding USDs easy. This is an oversimplification of a complicated situation. Citizens around the world agree that the US dollar makes the most sense even though it turns their dollars into cents.
“The Apple Effect”
Keep it simple stupid. Complexity is the enemy of progress. What do the US dollar and Apple products have in common? They are both renowned status symbols that work intuitively. Dig beneath the surface. What do you do with an Apple product when you need help? You take it to the store and a “genius” literally whisks away your problems through a concealed door. You outsource your complexity to Apple. Apple makes your life stupid simple. The glossy product enticed your initial purchase but you stay loyal because Apple converts your complexity into simplicity. “The Apple Effect” is the trance of Apple’s glossy product plus user experience simplicity. The amount of impact the “The Apple Effect” has on a person translates to the Apple premium you are willing to pay to be a part of their system.
It is magical, “The Apple Effect” enables us to be dumb and lazy while making us look great. We cannot resist the temptation and end up permanently entrapped in its spell.
US dollars offer the exact same value proposition
I’ll prove it: What is money? How is money made? When is money made? Why is money made? Who makes the money? Most people cannot answer the most basic 5W’s of money. None of those questions cover the complex aspects of money. Like an iPhone, we use it on a daily basis yet it never dawns on us that we don’t have the slightest clue what it looks like from the inside. Once again, the complexity got outsourced and we get left with the simplicity. Every day, rain or shine, dollars simply work. But what if it is broken? Not our problem because we have the “geniuses” at the Federal Reserve (and Apple store) fix it.
“The US Dollar Effect” overtly makes the following offer: “it’s stupid simple to use, even if you are lazy or dumb, plus we’ll handle the complicated parts. Do you accept this offer?” You’d have to go out of your way to figure out whether it’s a good deal or not, but you don’t because you don’t have any alternatives. So there’s nothing to think about. We all say “yes”, by process of elimination. And in the interest of time, we skip the fine print to get a head start chasing the American Dream.
We spend most of our waking lives working for US dollars. Our livelihood depends on it yet our understanding of it ends with the swipe of our credit cards. We all (blindly) extend trust to our government, and in return “In God We Trust”. It is literally printed on the money. So our dollars make sense because God has made sense to mankind long before we ever graced the earth.
Our government trusts God, we trust our government, and our money works every day. What’s the problem?
Assuming the incentives of all three parties are aligned, there are no problems. Our blind devotion to faith in dollars would pay proportionately. But that isn’t our reality.
The Cantillon Effect
The Cantillon Effect refers to the change in relative prices resulting from a change in money supply. The change in relative prices occurs because the change in money supply has a specific injection point and therefore a specific flow path through the economy.
How have our dollars turned into cents? Take a look at how fortunes have diverged in the chart below. Financial asset wealth increased +125% for the wealthiest Americans and actually decreased -35% for the poorest. Why? We severed the connection between money and productivity. The American stock market is divorced from the American economy. It can all be explained through the Cantillon Effect: those who stand closest to the dollar printing press benefit most. After 2008, massive rounds of Quantitative Easing (QE) were doled out to the 1% following Trickle Down economic principles. The reality is for every dollar that went to the rich, only cents “trickled down” to the majority. Given enough rounds of QE to the rich and we end up with an obvious outcome of extraordinary wealth inequality.
This is why hardworking blue-collar Americans are falling behind. Their work ethic remains unchanged but they are standing so far from the printing press that by the time QE dollars reach them they only receive the cents. Adding insult to injury, so much money was printed it actually diluted the few dollars the bottom had saved.
Since 2008, the US printed $3.9 trillion of QE. For perspective, in 2008 the US national debt stood at $10 trillion. That number today is $25 trillion. That $15 trillion gap is not net new productivity through GDP. The lion’s share of the $15 trillion was money made out of thin air. The grey line clearly shows the 1% benefiting through proximity to the printing press while all the following lines show how the 1% decided to distribute said funds.
This is not capitalism. This is a rigged game where winners are anointed before the game begins. The winners of this game cannot lose, with one exception: systemic failure.
Free Money Sweepstakes
A desperate thing is happening today: COVID-19 Stimulus Checks. A fancy way of saying the United States is holding a free money giveaway. For the first time in US history, The Cantillon Effect is benefiting average blue-collar Americans. About time, right? But there is a catch (there’s always a catch). Below is the distribution of new money from the CARES Act. As you can see, only 30% of the $2T goes to individuals. Being generous we can add the 19% that applies to SMB taking the total to 49%. But you and your kids are going to foot 100% of the bill.
These free cash distributions are in response to extreme situations caused by COVID-19. We currently have 33 million unemployed Americans (23% of working-age Americans). These numbers just 1.9% shy of the worst period of unemployment during the Great Depression. Add the unemployment prior to COVID and we’ve already exceeded the worst stretch of Great Depression unemployment.
That COVID free money sweepstake is just getting started. We started at $1200 per person. Now they are discussing $2000 per person and possibly up to $6000 per household — now that’s rich. How long until Andrew Yang’s Universal Basic Income (UBI) becomes the new normal? Maybe he’s better suited to represent America at this point in time. Here’s a better angle on the free money America is printing:
Broken Incentive Structures
Many unemployed at home getting free checks face a strange dilemma. There are 3 general personas receiving free money. The first is the responsible older crowd who want their job back in order to restore a sense of normalcy. The second cohort is making a similar or reasonable equivalent amount (<$40,000/year; think taxes) from COVID stimulus checks and therefore lean toward staying unemployed and having their time back. The last group, are typically millennials and gen Z who are blissfully happy to get free money: waking up at noon, watching Netflix/YouTube, beer in the afternoon, spliff at night, video games all day, and praying the free money train never ends. The stimulus checks are causing a shift in behavior damaging our incentive to work.
What about the incentive structure for folks that are still employed? Instead of zooming in on specifics, let’s zoom out across the past 20 years. Elon Musk alluded to this on the latest Joe Rogan Experience podcast, “manufacturing used to be highly valued… these days it’s often looked down upon which is wrong.” Following it up with “too many smart people go into finance and law… We should have fewer people doing law and fewer people doing finance and more people making stuff.” Money is no longer correlated to production. Making big money has a very high correlation to the financial markets and non-productive behaviors. The most highly paid people are typically the best investors and speculators. It used to be the people building things. Meaning instead of producing something new and adding to our GDP, our highest paid are financial wizards and legal eagles who have mastered playing in a zero-sum game, exponentially increasing their net worth by putting the masses in checkmate.
This makes the 1% wealthy beyond their wildest imagination while producing a minimum, a worst-case outcome. And it demoralizes the spirit of the 99% who spend all their time working and have not enough time to figure out why their dollars are turning into cents. So where does this leave the 99%? In the month of March 2020, 40% of Americans making less than $40,000 lost their job. If you make $40,000 a year in California, after taxes your monthly take-home is $2,742. Stimulus checks at $1,200 now and possibly $2,000 soon will put this group of unemployed in a strange predicament. Many will question whether or not a job is worth it. Free money makes people lazy.
Conclusions
During the good times (70's,80's,90's), the Federal Reserve got away with applying “The Apple Effect” yielding great results. We all bought in because it was our best and only option. Then we got greedy in the face of despair. Tracking the Cantillon Effect of QE through the Great Financial Crisis of 2008, we see that today’s wealth inequality was not earned but given. COVID-19 has highlighted our financial market strength and exposed out economic vulnerability. Our brightest minds work on Wall Street and have kept stocks near all-time highs. Meanwhile, 23% of working-age Americans are unemployed many of whom conflicted as to whether returning to work is worthwhile. The numbers are even uglier if you zoom in one more time: 40% of Americans making less than $40K a year have lost their jobs.
The game is becoming clearer for many unemployed Americans with downtime to reflect. Since 2008, working hard has not paid off for the majority of Americans. Many now have a taste of the Cantillon Effect via stimulus checks which the 1% has received in spades for the past decade in the form of QE rocketing their net worth 125%. So now everyone knows, what you should be working towards in America is lobbying to get as close to the printing press as possible instead of working. I would argue that if your full-time job on LinkedIn is “Getting Closer to the Printing Press” you also understand how America works. The ethos has changed from “working hard” to “working smart” to “don’t work”. Because that is what people are being paid to do. The Cantillon Effect is teaching us that no matter how you slice it, only the rich get richer.
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