In the examination of modern economic structures, Charles Hugh Smith identifies three essential pillars that currently sustain workforce spending: consumer spending, productivity, and corporate profits. However, he argues that these are not actual pillars, but merely outcomes of a deeper, central pillar – the wages earned by the workforce. This foundational element is critical because, without adequate wages, workers cannot afford to purchase the output generated by the industrial economy, resulting in a stagnated market where producers are unable to sell their goods and services effectively. The history of wage stagnation since the mid-1970s illustrates the erosion of workers’ purchasing power, leading to an increasing gap between what they earn and the economy’s production capabilities.
To address this widening gap, three main strategies have been utilized: government distribution of funds, the expansion of credit, and the inflation of asset values. First, the government has resorted to distributing “free money” through various subsidies, tax cuts, and direct payments to households, thereby attempting to enhance workers’ purchasing power. Second, low-interest loans have been made widely available, allowing consumers to borrow funds to maintain their consumption levels despite stagnant wages. Lastly, asset bubbles have been created through monetary policies that inflate the value of various investments, which provides a superficial sense of wealth among consumers, prompting increased spending and further driving economic activity.
However, Smith points out that each of these strategies is fundamentally flawed and ultimately self-liquidating. The reliance on government distribution is unsustainable in the long term as increasing interest payments on national debt will limit government spending capabilities. This financial strain could eventually lead to a recession or depression, showing the fragility of this pillar. Furthermore, the proliferation of credit risks pushing many borrowers towards default, leading to a contraction of available credit. As default rates rise, lenders experience significant losses, forcing a cycle of reduced borrowing and spending across the economy.
Moreover, the expansion of asset bubbles has been shown to concentrate wealth in the upper echelons of society, exacerbating income inequality. The acceleration of speculative investments among those disadvantaged financially fuels further volatility in the economy. As these speculative bets fail, the resulting losses trigger a downward spiral that diminishes both asset values and consumer confidence. This dynamic creates an environment where the economy becomes increasingly unstable, as the confidence of investors and consumers alike wavers, leading to more significant market corrections.
Comparatively, the structural decline in wage shares of the economy since 1975 signifies a well-established trend that has contributed to the buildup of significant public and private debt. The interrelationship between federal borrowing, unsustainable credit levels, and the cyclic nature of asset bubbles paints a bleak picture for continued economic health. Smith warns that the current situation can only sustain itself up to a point; the pillars supporting consumer credit and federal borrowing are approaching their limits and may soon falter without significant systemic changes.
In conclusion, the cracks in these foundational pillars are becoming more pronounced, signaling an impending economic crisis if adjustments are not made. As Smith suggests, past solutions have provided temporary relief but are not viable long-term strategies. The hope for continuous growth through inflated asset bubbles, coupled with rising public and private debts, creates a precarious situation. With all three pillars now buckling under pressure, it becomes vital for stakeholders—including policymakers, businesses, and consumers—to reassess and adapt, addressing the core issue of inadequate wages to restore a more sustainable economic equilibrium.
