Having presided over the dot com boom and bust in the 90’s, Bill Clinton ran on the following campaign slogan:
Change vs. more of the same.
The economy, stupid
Don’t forget health care.
As we near the 2020 election today, all of politics seems like a lot more of the same. However, the economy is quite different. After the 90’s exuberance, tech companies came back stronger than ever. As an increasing proportion of the the S&P 500 index, major tech companies have driven historic stock market valuations (which are now supported by trillions of government and central bank stimulus).
At the same time, modern politics is increasingly defined by economics. After both red and blue political administrations, education, childcare, and healthcare have become disproportionate economic burdens upon U.S. citizens. Financial assets have soared however, and TVs, toys, software, and clothing have declined in cost to allow the Federal Reserve to meet its 2% annual inflation target.
As a corollary to this trend, economic inequality is on the rise with significant political consequence. Or in the words of National Bureau of Economic Research: “In response to rising inequality, rich-country voters optimally elect a populist promising to end globalization. Equality is a luxury good. Countries with more inequality, higher financial development, and trade deficits are more vulnerable to populism...”
A stock market diverging from real economic conditions is a considerable driver of inequality. Unprecedented monetary stimulus has insulated the entire universe of financial assets from negative economic data, stock markets included. In other words, central banks like the Federal Reserve have issued trillions of new money to buy an expanding array of financial assets (such as government bonds, mortgage backed securities, and now corporate bonds and ETFs) from commercial banks.
As a result, the total supply of money available in the U.S. (a.k.a. M2 money supply) has recently surged at a historic pace to protect financial assets of all kinds from short-term depreciation. Intervention like this raises the risk that central banks are unfairly supporting the relative economic share of the upper class. Only 55% of Americans hold financial assets such as stocks according to Gallup. What is the hidden cost of money printing to artificially support financial assets?
In the midst of one of the most severe economic shock of the 21st century, stimulus is likely necessary. The question then becomes: how do central banks and governments ensure that any new money is equitably distributed across the economy?
The answer will shape the future of democracy itself.