America's economic boom is just a mirage

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The writer is president of Rockefeller International. His latest book is called What Went Wrong With Capitalism.

As the United States heads to the polls, its economy looks particularly strong. Averaging growth of nearly 3 percent for nine consecutive quarters, the country is attracting large inflows of foreign capital, which has helped push its share of the global stock index to well above 60 percent, a record level. Yet voters remain pessimistic about their economic and financial prospects.

For what? U.S. growth is a mirage for most Americans, driven by the increasing wealth and discretionary spending of the richest consumers, and distorted by the growth in profits of the largest corporations. Times look good, but this growth is unbalanced, fragile and heavily dependent on spending and borrowing by the government, which is usually the lender of last resort.

Even as the world marvels at America's unsinkable consumers, a growing number of them are being evicted from their homes and falling behind on their credit card debt. The poorest 40 percent in terms of income now account for 20 percent of all spending, while the richest 20 percent account for 40 percent. This is the largest gap ever recorded and is likely to widen further, says consultancy Oxford Economics. Most Americans now spend so much on essentials like food that they don't have much left for extras like travel or dining out.

Discretionary spending becomes a luxury for the wealthy, as does optimism. Confidence collapsed during the pandemic and has since recovered much more strongly for the richest third of consumers than for the middle or lower thirds. The impact of increased wealth on spending is also concentrated among wealthy consumers, who own most assets. During this decade, the boom in financial markets added $51 trillion to American wealth, and while millennials did particularly well, virtually all of their gains went to wealthy millennials. Added to the wealth gap that is widening between the young and the old is this new source of division and anger within the younger generation.

America is increasingly a gilded economy, with a shiny but thin veneer. In the corporate sector, the 10 largest companies account for 36 percent of market capitalization, the highest since data began in 1980. The most valuable U.S. stocks trade 750 times more than any stock in the bottom quartile , compared to just 200 times 10. a few years ago, and this is the largest gap since the early 1930s.

As adults grow up, anxiety haunts others. The share of small businesses expressing uncertainty about the economy and their own future is unusually high, and their confidence is at a level rarely seen outside of recessions.

Most analysts view dominant technology companies as an asset to the U.S. economy, spurring growth, justifying sky-high stock prices and attracting a torrent of money. In the 2010s, foreigners invested about $30 billion a year in U.S. stocks, but that amount is expected to reach $350 billion this year.

But normally booms are financed by increasing private sector debt. The government only increased its borrowing later, to help cushion the blow after the boom collapsed. This time, it is the government which is leading the way; the deficit has more than doubled over the past decade to 6 percent of GDP and is on track to widen further in the years to come. The public debt is exploding, increasing by $17 trillion over the past decade, matching in 10 years the increase in the previous 240 years, almost since the independence of the United States.

By accounting definition, the public deficit is a reflection of private savings, which includes corporate profits. Historically, U.S. corporate profits have increased with the deficit, a connection established as early as 1908 in the Kalecki-Levy equation. This trend has continued since then, and has been strongly confirmed in recent times, with growing deficits fueling rising corporate profits.

Democrats and Republicans don't agree on much but are united in indifference to the deficit, which is expected to rise significantly regardless of who wins Tuesday's election. With so much money flowing in, why not keep borrowing?

After the end of the zero interest rate regime two years ago, bond advocates awoke from a long sleep and began punishing countries for fiscal profligacy, starting with frontier markets like Sri Lanka. Lanka and Ghana, then looking to emerging markets like Brazil and Turkey and more recently to developed markets, first the UK and now France. Thanks to high demand for the world's favorite currency, the United States appears less vulnerable, but no country in history has been forever immune.

As deficits rise, artificially inflating U.S. growth, there are already signs that these forces are driving up interest rates. Empires have often failed when they could no longer cover their own debts, and given the direction the United States is heading, its next president may learn that lesson the hard way.

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