The New Economic Reality – The End of Representative Democracy?

Part of my morning reading is a market analysis blog, Seeking Alpha. It targets investors and market professionals. Stories there have been accelerating of late about how the entire planet is devolving into a deepening schism between the haves and the have-nots. What used to be a symptom of the second and third world – privileged and embedded classes with political clout and the vast majority of everyone else with no real power – has now become a global reality. The developed world, particularly economically wealthy democracies, is increasingly being crushed by income inequality.

The worst in this democratic subclass is, of course, the United States. Though the rich in other nations have that nasty one percent upper crust, only the United States concentrates so much wealth and power in the tiniest minority in the country. There was a time where developing nations were expanding their middle classes and their educational access, and indeed in some developing nations, that phenomenon is still growing. But the middle classes in the developed world have never in recent history owned less of their nation’s wealth.

What really accelerates the demise of the middle class are severe economic downturns, bubbles bursting, often from too much borrowing by the richest in the land to buy assets with cheap debt… followed by moment of reckoning that the resulting asset base is quite over-valued. The collapse of Bear-Stearns and Lehman Bros. ushered in the underlying evidence in 2008 that brought the markets down hard and long. The Great Recession. The tech bubble fall in 2000 had been mild by comparison. And while a severe downturn definitely impacts the wealthiest, they at least have the greatest capacity to absorb the shock, and perhaps even take advantage of devalued assets. The middle class gets sliced, and the poorest members of society decimated, however.

Writing for the November 23^rd Seeking Alpha, in a blog entitled As This Bubble Deflates, All Assets Will Be Affected: The One Polity, Two Economies World, Roger Solus opines:

·       Western countries are demarcating into two distinct economies, consisting of higher- and lower-tiered earners.

·       With the shrinking of the once-strong middle class, the political intelligentsia loses credibility and legitimacy in the eyes of increasing numbers of voters.

·       As unconventional parties and candidates gather popularity, our elites grow increasingly defensive, enraged, and unable to constructively deal with events occurring beyond their bubble.

·       As the bubble surrounding mainstream politics deflates, economies will be affected, along with assets ranging from currencies to stock markets to precious metals. Nothing is exempt. Be warned.

As promised, dear readers, your humble author concludes his look at the "two economies" phenomenon by discussing the inevitable political consequences that are already unfolding. The growing class divide within developed economies has been happening since at least the 1960s, but it was the Great Financial Crisis (GFC) of 2008 that shook the political status quo to its core. Whether that will be good or bad remains to be seen, and open to interpretation. What's not in doubt is that our political class is mortally wounded, and there will be consequences for asset values, whether stocks, precious metals, or even currencies.

Until now, the political elites of developed nations have been either ignorant of, or in outright denial about growing class divisions. In [recent articles,] I discussed how outdated economic indicators, like GDP, inflation, and unemployment have disguised the slow stratification of society into two classes due to disappearing job opportunities, punitive living costs, and decreasing social mobility.

Since 2008, the chasm between grass-roots voters and mainstream political elites has grown wider. The result has been the rise of unconventional political parties and candidates in the West and worldwide. This will inevitably affect our investments and asset values.

Donald Trump’s rise to power from an unexpected demographic – the underemployed and unemployed in vulnerable old-world, high-paying, blue collar jobs in either obsolete market sectors or suffering from rapidly accelerating of automation (mistakenly assumed to be the last-decade issue of global outsourcing) – elected a new kind of president, “someone really different” with “lots of business experience” who can “lead us back to those earlier days when we mattered.” Unfortunately, Donald Trump mouthed the words they wanted to hear but instead created an economic world that rather dramatically enhances America’s richest and particularly harms the poorest segment while doing very little to improve the long-term lot of the middle class.

Deregulation only helps rich business interests. Cutting back educational support saves the rich from taxes but takes away that once great pathway to upward mobility that now seems relegated to the history books.

Trump’s failed tax reform – which was supposed to flood the market with tons of new jobs, jobs, jobs – instead had big corporations paying out massive dividends to shareholders and using most of what was left over to engage in societally-useless stock buybacks. What we got was deficits and a cry from the dominant incumbent political party to cut social benefits to those who rely on them the most to pay for that tax cut. Unemployment was down. But those truly excluded from the new economy remained outside.

His trade war is already resulting in serious reductions in our agricultural sector and dramatic rises in consumer prices in too many arenas to mention, but particularly among durables and construction where steel and aluminum are staples. Add Brexit to that mix and the collapse of local currencies, particularly in the heavily leveraged developing world (they borrowed in dollars and only have falling currencies to back it all back), and you have a recipe for disaster. Where there are issues he cannot solve, like climate change, he simply denies their existence.

The fall of the middle class in Western-style democracies has witnessed the rise of right-wing politicians, “strongmen” with deep autocratic characteristics and a uniform disdain for the restrictions of constitutional law. We can see democracies shudder and sometimes fall in Eastern Bloc Europe, the Philippines, Russia and most recently, Brazil.

This “only I can solve your problems so do as I say” phenomenon – built on populist slogans and policies, where opponents are punished – has also surfaced powerfully in the United States, a nation that most the world looked to as the ultimate successful democratic paradigm. Then income inequality, polarization and Donald Trump made the world take another look at us. Indeed, too much of the world has simply lost faith in democracy’s ability to solve the economic issues. We used to think democracy was strong, but today we should realize just how fragile it is.

              I’m Peter Dekom, and if we care about democracy, we better start getting back together as a nation to fight for it!