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Registered Investment Adviser Caleb Lawrence

The major averages enter the final hour mixed on little economic data today though the earnings reporting season is off to a wobbly start.

One of the more notable long term economic trends that broke down in the modern era was the close relationship between productivity and earned income as the two went more or less hand in hand from World War 2 until about 1978 when productivity continued to rise following its long term trend as earned income stagnated. Using Federal Reserve data we find that since 1979 productivity increased some 95% yet earned income only went up 4% both figures on a real or inflation adjusted basis. Also of note manufacturing productivity stalled in late 2011 about the same time corporate earnings growth did. The Federal Reserve has blamed ageing baby boomers and the recent financial crisis for these trends yet declining productivity predates both substantially dating to the late 70’s. Also of note 1981 was the peak year for interest rates and using Federal Reserve data again we see that the late 70’s also marked the beginning of sharply rising private sector debt and the start of modern financialization. An era that has seen the creation of 3 consecutive credit booms the first two ended with spectacular busts the Dot-Com crisis in 2000 and the recent financial crisis in 2008, the current credit boom is an accident waiting to happen. A strong argument can be made that we maintained our standard of living over the last 35 years or so using debt. Debt that has now reached unsustainable proportions and crowded out productive investment in the process. The sharp declines in the labor force participation rate now at a 50-year low has seen 90 million Americans leave the workforce. Add it all together and it’s no wonder that emergency level interest rates are required to keep the economy and the indebted on life support as the lack of earned income, stagnant productivity and debt service costs have led to record wealth and income inequality, overcapacity and anemic economic growth.


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