Marvin Gaye’s What’s Going On

When I developed a more advanced understanding of monetary & fiscal policy, I got into vinyl records at around the same time. One day as my coproducer & I had many of the famed conversations which led to the creation of this very program, I had sat down to this album with a glass of whiskey and I listened to it in completion with an earnest heart. I realized that economics, for all my love of numbers & the quantitative data which is the basis of macroeconomics, was all about the people and how they were feeling in the economy. 

Marvin Gaye’s What’s Going On was released in May of 1971 and detailed the conditions of the Black American at that time - including inflation, taxation, drug abuse and police brutality. As an economist, I don’t see this as unrelated to the suspension of the gold standard which occurred later that year. More than that, I saw the obvious comparisons with our current era which I’ve dubbed the Great Uncertainty following the Great Recession & its recovery. 

We endured rising & persistent inflation. We endure a tax system which doesn’t favor most of us. We endure significant drug use and rising deaths of despair. We endure significant unrest. Why? It is because the American Economy, as it is presented to each of us is no longer effective in delivering for us. While I could begin my rant into rentier capitalism, that is not why I am recording today - another time. 

The K-shaped recovery

Since we’ve had the Inflation of the 2020s, we’ve seen prices soar much higher than wages. Median Wages are negative for most of the working class while prices are higher. There has emerged a class of Americans who are largely safe from the recent inflation & I will list them here. 

1. Persons who owned homes on 1 December 2019

   1. While rent has inflated 40 - 50% in the last 6 years, these persons have been largely protected by a fixed or declining monthly cost for their residence - notwithstanding the possibility of a refinance when rates were very low. 

2. Persons who own equities

   1. Equities, Commodities, Crypto and real estate have gone on an impressive run in the last few years. These people have made enough money to eat the cost of living increases. 

3. Persons who were established in their field of work

   1. People who have experience have been allowed to grow in their field respectively and their wages have outpaced inflation in the 2010s & 2000s, so while they’ve lost purchasing power they are ahead of most. 

This class of Americans are known as the Top 10%. These people make up about 50% of consumption. About 70% of the US Gross Domestic Product is consumption so that is to say the consumption of this class of people is about 35% of US Gross Domestic Product. 

The bottom 90% of Americans, have been experiencing recession since about July of 2022 with negative wage growth, higher costs for necessities and now Artificial Intelligence & Automation taking affect in the job market. The outlook for the bottom 90% is rather grim, however the Federal Reserve has been given the tough job of getting us to a smooth landing.

The Smooth Landing

Federal Reserve Chairman Jerome Powell tasked himself with getting us to a smooth landing - a situation where he was able to combat inflation without causing a significant uptick the unemployment rate. Inflation & unemployment have been discussed as if they operate inversely - one goes up & the other goes down. Under normal conditions, what the Federal Reserve has accomplished would be seen as impossible but it has delivered something of a smooth landing with a few changes. 

First, inflation will likely never see 2% again and this probably because fiscal deficits are now structurally running at 6% of GDP. Furthermore, the Federal Reserve’s policy directly effects the interest on the debt, which is now much greater than 100% of Gross Domestic Product. Second, unemployment will rise if rapid innovation occurs surrounding AI & Automation and reduces the demand for human labor. 

The investment in AI & Automation is speeding up dramatically as corporations look to reduce their dependence on human labor & human error more broadly. This investment race has led to something of a bubble in the US Stock market which has increased the net worth of the top 10% Americans dramatically in the last 5 years. This is called the wealth effect - increases in asset prices increase consumer confidence and then consumer spending. However, should this bubble be allowed to pop, we would see the reverse wealth effect - decline in asset prices reduces consumer confidence and reduces consumer spending. A reduction in consumer spending in the top 10% would surely guarantee a recession. The subsequent recession would increase unemployment among the bottom 90% and further exacerbate the K-shaped recovery we’ve been seeing. However, Inflation is surely running still just below the current of our economy. A rate cut would offer a chance to exacerbate inflation further. 

What is uncommonly said is that the Federal Reserve has three mandates. The first two mandates are often said together: maximum employment & stable prices. The third is the most forgotten & the most important: ensure the solvency of the American Government. With rising interest payments and warning buyers of the US Debt overseas, it is the objective of the Federal Reserve to finance the US Government. 

Bottom Line

If the Federal Reserve doesn’t act in the interest of financial markets, it could create an economic crisis. This isn’t to say that it isn’t a problem that the jobs that put food on the table for millions of Americans should exist at the whim of shareholder return quarter on quarter. This is a problem - and fixing it would require the destruction of the stock market as we know it and a shockingly high unemployment rate in the short term. If the Federal Reserve doesn’t give the markets what they want then (I) the reverse wealth effect will reduce consumption & (II) unemployment will rise as companies respond to reduced consumption and to shareholder calls to reduce costs. 

Marvin Gaye’s What’s Going On

When I developed a more advanced understanding of monetary & fiscal policy, I got into vinyl records at around the same time. One day as my coproducer & I had many of the famed conversations which led to the creation of this very program, I had sat down to this album with a glass of whiskey and I listened to it in completion with an earnest heart. I realized that economics, for all my love of numbers & the quantitative data which is the basis of macroeconomics, was all about the people and how they were feeling in the economy. 

Marvin Gaye’s What’s Going On was released in May of 1971 and detailed the conditions of the Black American at that time - including inflation, taxation, drug abuse and police brutality. As an economist, I don’t see this as unrelated to the suspension of the gold standard which occurred later that year. More than that, I saw the obvious comparisons with our current era which I’ve dubbed the Great Uncertainty following the Great Recession & its recovery. 

We endured rising & persistent inflation. We endure a tax system which doesn’t favor most of us. We endure significant drug use and rising deaths of despair. We endure significant unrest. Why? It is because the American Economy, as it is presented to each of us is no longer effective in delivering for us. While I could begin my rant into rentier capitalism, that is not why I am recording today - another time. 

The K-shaped recovery

Since we’ve had the Inflation of the 2020s, we’ve seen prices soar much higher than wages. Median Wages are negative for most of the working class while prices are higher. There has emerged a class of Americans who are largely safe from the recent inflation & I will list them here. 

1. Persons who owned homes on 1 December 2019

   1. While rent has inflated 40 - 50% in the last 6 years, these persons have been largely protected by a fixed or declining monthly cost for their residence - notwithstanding the possibility of a refinance when rates were very low. 

2. Persons who own equities

   1. Equities, Commodities, Crypto and real estate have gone on an impressive run in the last few years. These people have made enough money to eat the cost of living increases. 

3. Persons who were established in their field of work

   1. People who have experience have been allowed to grow in their field respectively and their wages have outpaced inflation in the 2010s & 2000s, so while they’ve lost purchasing power they are ahead of most. 

This class of Americans are known as the Top 10%. These people make up about 50% of consumption. About 70% of the US Gross Domestic Product is consumption so that is to say the consumption of this class of people is about 35% of US Gross Domestic Product. 

The bottom 90% of Americans, have been experiencing recession since about July of 2022 with negative wage growth, higher costs for necessities and now Artificial Intelligence & Automation taking affect in the job market. The outlook for the bottom 90% is rather grim, however the Federal Reserve has been given the tough job of getting us to a smooth landing.

The Smooth Landing

Federal Reserve Chairman Jerome Powell tasked himself with getting us to a smooth landing - a situation where he was able to combat inflation without causing a significant uptick the unemployment rate. Inflation & unemployment have been discussed as if they operate inversely - one goes up & the other goes down. Under normal conditions, what the Federal Reserve has accomplished would be seen as impossible but it has delivered something of a smooth landing with a few changes. 

First, inflation will likely never see 2% again and this probably because fiscal deficits are now structurally running at 6% of GDP. Furthermore, the Federal Reserve’s policy directly effects the interest on the debt, which is now much greater than 100% of Gross Domestic Product. Second, unemployment will rise if rapid innovation occurs surrounding AI & Automation and reduces the demand for human labor. 

The investment in AI & Automation is speeding up dramatically as corporations look to reduce their dependence on human labor & human error more broadly. This investment race has led to something of a bubble in the US Stock market which has increased the net worth of the top 10% Americans dramatically in the last 5 years. This is called the wealth effect - increases in asset prices increase consumer confidence and then consumer spending. However, should this bubble be allowed to pop, we would see the reverse wealth effect - decline in asset prices reduces consumer confidence and reduces consumer spending. A reduction in consumer spending in the top 10% would surely guarantee a recession. The subsequent recession would increase unemployment among the bottom 90% and further exacerbate the K-shaped recovery we’ve been seeing. However, Inflation is surely running still just below the current of our economy. A rate cut would offer a chance to exacerbate inflation further. 

What is uncommonly said is that the Federal Reserve has three mandates. The first two mandates are often said together: maximum employment & stable prices. The third is the most forgotten & the most important: ensure the solvency of the American Government. With rising interest payments and warning buyers of the US Debt overseas, it is the objective of the Federal Reserve to finance the US Government. 

Bottom Line

If the Federal Reserve doesn’t act in the interest of financial markets, it could create an economic crisis. This isn’t to say that it isn’t a problem that the jobs that put food on the table for millions of Americans should exist at the whim of shareholder return quarter on quarter. This is a problem - and fixing it would require the destruction of the stock market as we know it and a shockingly high unemployment rate in the short term. If the Federal Reserve doesn’t give the markets what they want then (I) the reverse wealth effect will reduce consumption & (II) unemployment will rise as companies respond to reduced consumption and to shareholder calls to reduce costs.