Journalists and mainstream economists love to place simple labels on things they don’t understand to indicate regularity and partly to cover for their ignorance. You have no doubt heard of the K-shaped economy which is dominating discussions across all areas of the media including Christmas sales, job prospects, and policy in Washington DC. The K-shaped economy has completely displaced talk of the L-shaped and V-shaped versions.
For a visual description, imagine a graph where the vertical axis forms the vertical height line of the K. From the vertical axis two lines emerge to form the K—one upward sloping and one downward sloping.
The economic interpretation starts at a point in time when the economy was moving in a kind of equilibrium with all sectors and industries moving together in unison, including aggregate income and labor markets. Then, at that point in time, instead of the overall economy moving in unison upward with economic growth, or downward into recession, there is a noticeable divergence.
The upward trend line of the K represents the fortunes of high-income salary earners, the wealthy, and the high-tech and luxury goods industries. The downward trend line of the K represents the fortunes of the working class and the poor. Essentially, the rich are getting richer, the poor are getting poorer, and the middle class is shrinking.
This divergence is too stark to deny. President Trump’s conservative coalition was based on the concern over breadwinner jobs and high prices. Then, New York City elected a Marxist who campaigned on the concept of “affordability.” When the two men recently met in Washington, DC, everyone was surprised that they had so much in common.
What explains this unusual macroeconomic pattern? My search for explanations found two themes. First, most explanations were just descriptions of the pattern: the wealthy were getting wealthier because of stock prices or high-tech; the middle class was declining because of fewer jobs, higher prices, and technological displacement. This first “explanation” insinuates the second explanation, a vague Marxist charge that it is all just part of the capitalist process to exploit labor on the part of the capitalist.
The usual remedies include tax breaks and interest rate cuts. Such remedies will backfire and disclose the intellectual and financial bankruptcy of political Keynesianism in Washington, DC. The real solution is deep spending cuts, program eliminations, and interest rate increases which will eventually undo the K knot in the economy and restore vigorous economic prosperity for all.
This is revealed once you know the cause of the problem. Washington, DC has flooded the economy with government spending of all sorts and inflated the money supply via artificially low interest rates for the last quarter of a century or more. It’s been a tidal wave of Washington-themed filth since covid.
Inflation—and it’s important to understand that term in the Austrian sense as increases in the money supply—is the true cause of this problem. In a market-based economy that uses commodity money like gold or silver there are not such divergences. Wages, incomes, and wealth levels seem to follow a general synchronized pattern. There is plenty of opportunity, economic mobility up and down, and standards of living appreciate over time.
The Austrian explanation of cause and effect is not “rocket science.” The explanation is one part of the Austrian Business Cycle Theory (ABCT), known separately as the Cantillon effect. Here, when money is inflated, it benefits the people who get the money first before prices start to increase.
If the money supply in an economy is increased by the Federal Reserve via the banking system and artificially low interest rates, then it should not be surprising that bankers, financiers, and borrowers are given an advantage. Lenders benefit because they have more to loan in much the same way that a bakery would benefit from subsidized flour. Borrowers benefit from the lower interest rates, with the government and big corporations being the biggest beneficiaries as the biggest borrowers of all. As prices rise due to the inflation, wage rates are undermined by a declining purchasing power of currency, but it actually benefits the biggest borrowing class who pay back their loans and bonds with deflated dollars.
Hence, the rich get richer and the poor get poorer, but this does not exhaust the impact. The artificially low interest rates also have a financial impact. Stocks, bonds, and real estate prices are all triggered upward by lower interest rates, so that when interest rates come down—even without the Fed’s help—it raises the price of physical assets and the wealthy by definition are the largest holders of physical assets.
You may have noticed that stock markets and real estate prices are very high. That’s great for homeowners and people with retirement portfolios but remember how that looks to young adults looking to form a family and to have children.
That is the rationale to cut resources from government, return them to the private sector, and establish a small, balanced budget for Washington, DC. It also makes clear the need to end the Fed’s interventions, return to sound money, let interest rates be determined in the market, and to make saving for the future great again.
Richard Cantillon and his disciples, the Physiocrats, advocated for economic reforms prior to the French Revolution. See this link to get a free copy of his book. Unfortunately, they were ultimately unsuccessful, and France lost its status as a great nation.
