When people have money to spend, marketplaces are more resilient – more buyers means a larger market and potential revenue for companies, and more sellers makes it easier for buyers to find products within their price range. Stable economies have a wide base of households in good financial health.
This has traditionally been the driver of American dynamism. A strong middle class provides both sides of the marketplace with wiggle room to take risks and innovate.
Today, American companies are increasingly incentivized to target the upper end of the market – serving large companies and wealthy individuals, while middle and lower class households rely on more and more debt.
This creates volatility as households become increasingly sensitive to price and employment shocks. Simply put, most Americans have a harder time accessing the lifestyle portrayed in a typical sitcom. And can’t afford to take risks.
Billionaires love to reference iconic industrialists like Henry Ford. Yet would he be celebrated as a capitalist today?
100 years ago, Ford decided to pay his workers five times the typical wage. As legendary bond investor Bill Gross put it:
Ford knew… when he paid five bucks an hour to his workers in Detroit, [those] workers buy cars and that if they were earning a dollar an hour as opposed to five, they wouldn’t be able to afford a Ford.
Ultimately, wage earners have to earn a decent wage or else capitalism can’t continue in a productive way.
Today, the average American CEO makes XXXX times the average employee. Henry Ford earned XXXX times his average employee.
It’s a fundamental factor that will influence not only the U.S. economy, but global economies going forward. It will be destabilizing… Labor and capital have to share in the rewards of a productive economy, and for the past 25 years labor has gotten the short end of the stick.
The solutions Gross proposes – higher minimum wages and taxes on the rich – would be very difficult to pass in the current climate. He predicted growing inequality would become a destabilizing force for world economies, and now 10 years later, we are witnessing widespread populism and a global trade war, all attempting to address cost of living crises in some way.
For families to enjoy resilience and a path to wealth, the answer must include higher wages and downside protection from risk. Access to financing is not enough. If we simply encourage indebtedness, we treat the symptom and encourage the disease. We have seen this in healthcare, education, and housing.
Key takeaways for FIRE fighters:
- Debt provides access, but also risk.
- Plan conservatively for income growth.
What solutions do you think we should try? Does the trend accelerate or reverse from here?
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