S&P: Wealth disparity is bad for the economy


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On Tuesday, S&P issued a report cutting its five year economic growth estimates for the US on the grounds that while income continues to rise for the top one percent, it is falling, in real terms, for the bottom 90%. According to Beth Bovino, S&P's chief US economist, economic disparities are reaching extremes that "need to be watched because they're damaging to growth." S&P now estimates that the US economy will grow at a rate of 2.5% for the next five years, instead of the 2.8% previously forecast.

There is nothing extremely new or necessarily controversial in Bovino's observation: if the consumer has less money to spend, fewer goods are purchased, which means fewer goods are produced, leading to lost jobs, etc… If the observation feels in some way dangerous, it may be because S&P is echoing, in part, sentiments put forward by Thomas Piketty in his best selling ( but little read ?) book Capital in the 20 th Century .

Clearly sensible of the possible connection, S&P broke it at the first opportunity by cautioning against using the tax code to even the playing field (one of Piketty's proposals). It is a comment on the times that even a common sense observation by a financial ratings agency must be qualified in order to prevent accusations of Socialism.

One point S&P did not mention was that in addition to a weaker economy, large wealth disparities lead, if left unremedied, to even larger wealth disparities, in an accelerating cycle. If wealth levels continue to diverge, 90% of US consumers will find themselves increasingly cash strapped, and under such conditions, US companies will find it impossible to grow their earnings.

If that happens, it will not only put an end to the bull market, it will create another 2001, 2008 style correction in which stocks lose a considerable portion of their value and do not regain it for many years. There is no question that this issue will weigh heavily on investors in the coming years. How heavily depends entirely on whether US policy is guided by economic pragmatism or over-applied and mis-applied ideologies.

Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC .

This article was originally published on MarketIntelligeneCenter.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Earnings , Economy , Taxes

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