COVID has impacted businesses of all sizes. The Fed has taken drastic measures to ensure markets don’t go into turmoil. This includes $trillions printed. I discussed the impact of “printing money” in my previous letter. One of the side effects of all this liquidity that’s rarely discussed is income inequality.
These liquidity measures taken by The Fed will cause greater income inequality in the next 10 years than we’ve ever experienced before. This stock market rally has trade-offs.
Gini coefficient, a ratio that measures income inequality, is at 0.434 for the United States. Closer to 0, income inequality doesn’t exist. Close to 1, there’s massive inequality. Please note that a perfect 0 can never exist. And a perfect 1 should absolutely never exist.
The United States has been trending higher over the last 30 years. And it’s the highest amongst the G-7.
Now, why is this important? It’s because market participation is available to all, but almost always limited for lower income households. With consumers and small businesses hurting due to COVID, most people earning a wage are focused on saving enough money to make ends meet versus being active market participants. There’s a general fear. They are unable to take advantage of capital gains opportunities.
To give you perspective, here’s a chart by The Federal Reserve of St. Louis showing S&P 500 stock index against the Gini ratio.
The US experienced the emergence of the middle class post WWII. Back then, $trillions in liquidity to keep the economy on life support didn’t exist. Mega cap companies didn’t exist. Today, the five largest S&P 500 stocks have a market cap equal to the bottom 282 S&P 500 stocks. Here’s a visual from July 2018.
Perhaps a dream, but it would be great to have an OKR style framework applied to manage government officials. Gini Coefficient rarely gets discussed by policy makers yet impacts everyone. It should be an OKR. Monetary policy and fiscal policy are managed by two different groups; the Gini ratio can help bridge the gap to ensure the average American is in good shape.