Economic Inequality in America

We were making progress toward equality. What changed?

At Grey Swan we welcome an honest discussion regarding inequality. If we wish to talk meaningfully about inequality, we can’t ignore changes to our monetary system, and how those changes inherently favor some of our population at the expense of others.

While recent events have shifted the country’s focus toward the very real challenges facing African Americans, we believe the largest source of economic disparity is being ignored. Sound money, return to American manufacturing, reducing regulation, can do more for solving inequality than political statements, but these changes would threaten the most powerful parts of society.

Progress Stopped in 1971

In 1947, the average black American income in the U.S. (Census Bureau uses the term “Black” Americans in its data reporting) was about half the average white income. By 1973, almost 40% of that gap had closed. The average African American income had grown to over 68% of average white income.

In 2018, however, African American income had only reached 72% of white income. So much of the earlier and very promising progress turned into a slow crawl. An 18% gain over 26 years was followed by a 4% gain over 45 years.

Economic Gains Redistributed Inequitably

At the same time this progress stopped, there has developed a disconnect between wages and productivity, between earnings and economic output per capita in the country overall. Simply put, economic gains went from being widely distributed among income groups before 1971 to going mostly to the top ever since.

As the site https://wtfhappenedin1971.com shows, by almost any measure, something changed dramatically in 1971. That change hit Americans in the middle and lower end of the economic spectrum dramatically. And, unfortunately, a large percentage of African Americans live and work in the segment of the population hardest hit by this change.

In the following table, it is clear that in 1971 while GDP continued to grow at a constant pace, median male income stagnated. What happened to this growth in wealth, where was it distributed? Who were the beneficiaries?

Significance of the Cantillon Effect

What happened? While many changes occurred in our economy, arguably the most significant was the Cantillon Effect. The Cantillon Effect suggests when new money is printed, there are two changes to our economy.

First, the people who benefit most are those that first gain access to the new dollars that are created. That means government spending the new cash, financial institutions earning fees on that cash, and the rich buying assets with that cash before they appreciate via their better access to credit. By the time the new dollars reach the general public, these dollars buy fewer real goods and financial assets.

Second, manufacturing declines as a percentage of the economy because of increased domestic financialization. As America went from a country that made (and exported) goods to a country that made (and exported) dollars, jobs went offshore. Foreign entities had to export to us to access the U.S. reserve currency. The switch is obvious in the chart below.

The switch from exporting goods to exporting money.

Summarizing the Roots of the Inequality

Inequality increased due to the decline in the value of dollars earned or saved and due to the loss of the manufacturing economy. This hit everyone in the middle and the bottom, especially relative to the gains at the top.

Manufacturing moved offshore to increase foreign demand for the US dollar, enabling the US government to print more dollars for greater unconstrained spending. Until we institute negative feedback on this money printing and spending, this trend will continue.

Source: Ray Dalio

Massive Corporate Hypocrisy

Many companies and prominent individuals have issued statements indicating their support for the BLM movement. Of course, it’s the politically safe move.

But let’s remember that these are the “connected”, who are closer to power and money printing than everyone else. The current system [of dollar production and export, combined with overseas production and goods imports], favors them over their smaller competition and over their employees.

So, while these big, media savvy firms tell us how much they want to help our African American brothers and sisters, let’s find out how willing they are to fundamentally change the structure that has been increasing income inequality since 1971.

Our Decision: Continue this Cycle of Madness or Engage in Meaningful Conversation?

• Return to sound money, which will allow poor and working class people’s savings (usually in dollars) to retain purchasing power.
• Get America back to making things, and compensate the workers who make those things fairly.
• Reduce regulation, so large businesses do not have an advantage over small ones.
• Or, do we want emotionally charged sound bites 24/7 that let the “connected” off the hook and drive wedges between us?