The Current State of Capitalism: A Recap and Analysis
This article summarizes the key points regarding capitalism's current challenges, building upon a previous discussion of the system's inherent issues. The core problems are unemployment and unequal distribution of wealth. However, these issues are mitigated when the economy experiences strong growth.
Capitalism's Successes and Recent Challenges
Capitalism thrived for many years due to continuous innovation and new products, including advancements in urbanization, mass production, the internet, financial instruments, and smartphones. However, since 2008, growth drivers have diminished, leading to a reliance on quantitative easing (QE) to sustain the economy. From 2022, even QE became less viable due to concerns about significant inflation. The absence of robust growth means many jobs no longer provide meaningful value. Individuals must either find a job strategically aligned with the current social system or leverage their income through investment to benefit from monetary policies. Failure to do either could lead to financial strain.
Summary of the Current Economic Landscape
The present economic climate can be characterized by the following:
- Low Growth: A lack of significant new innovations or products to drive economic expansion.
- Rising Unemployment and Inequality: The absence of growth exacerbates unemployment and leads to unequal wealth distribution.
- Government Intervention: Central banks and governments are actively intervening by injecting money into the system to artificially stimulate job creation and maintain growth.
The Problem of Wealth Inequality
Wealth inequality, stemming from significant imbalances in distribution, is a prominent issue in society. Several factors contribute to this:
- Low Growth and Fear: Low growth and lack of innovation create fear among people. In contrast, during periods of high growth, people tend to spend more, feeling secure in their jobs and focusing on immediate consumption. However, when growth slows, spending decreases, leading to reduced money circulation, lower company profits, and ultimately, job losses and decreased income, creating a downward spiral.
- Government Intervention: Lowering Interest Rates: To counter low growth, central banks lower interest rates. Lower interest rates increase the value of future cash flows from assets, driving up asset valuations. This can create a "fear of missing out" (FOMO) mentality, where people take on loans to purchase assets like real estate and stocks, further inflating asset values.
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QE and Asset Inflation: When growth remains low, and asset prices rise due to low interest rates, liquidity increases. The Federal Reserve may resort to quantitative easing (QE). QE injects money into financial institutions, which then invest in assets, further driving up prices. QE typically occurs when:
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GDP growth is low.
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Interest rates are already significantly low.
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There is no expectation of new innovation or economic stimulus.
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In essence, QE is pouring oil on the fire. Fearful of low growth, people spend less but also speculate more on assets due to low interest rates. QE intensifies this by injecting liquidity and pushing asset valuations higher.
The Disparity Between Income and Asset Growth
The core issue lies in the disparity between income and asset growth. Over the past 30 years, average annual salaries have increased modestly, while major indices like the Nasdaq have seen exponential growth, and housing prices in major cities have also surged dramatically. The low interest rate environment for almost 15 years and QE for over 10 years has created massive liquidity, causing asset inflation to accelerate, especially since 2008 and further intensified after 2022 due to unlimited QE following the COVID-19 pandemic. What the world needs now is new growth driver which can steer away people's attention from speculating assets.
Impact on Different Groups of People
To illustrate the impact of these economic conditions, people can be categorized into different groups.
- Older, wealthy generation with inherited assets.
- Older generation who actively invested since the 1990s/2000s.
- Older generation who did not invest, saved passively, or failed in investing.
- Younger generation from wealthy families with existing assets.
- Younger generation who started working before 2015 and invested early.
- Younger generation who started working before 2015 but did not actively invest or failed in investing.
- Younger generation who haven't started earning or lack savings for investment.
Those in categories 1 and 4 are generally well-positioned. However, the significant disparity lies when comparing categories 2 and 3. Even with similar career trajectories and savings habits, those who actively invested have accumulated significantly more wealth due to asset appreciation. A considerable portion of this wealth gap has emerged within the last 5-10 years, particularly after QE.
Consequences of Rapid Wealth Inequality
While wealth inequality is inherent in capitalism, its rapid acceleration is problematic. It can demotivate people and encourage speculation.
The people in 5 and below category are under an even more difficult situation. For people in category 5, if they invested the right way, they are okay. However, for people in 6 and 7 category, the wealth gap may seem like too far of a stretch to catch up.
For younger generations (categories 6 and 7), the situation can be particularly discouraging due to:
- Social Media and FOMO: Constant exposure to wealth displays on social media intensifies the "fear of missing out."
- Limited Job Opportunities: A low-growth economy leads to fewer job opportunities and discouragement.
- High Cost of Living: Rising housing prices and inflation strain the finances of young workers, hindering their ability to save and invest.
Opportunities Still Exist
Despite these challenges, opportunities still exist. Finding a good job that provides both income and personal growth can lead to future opportunities. Perseverance and strategic investment can still lead to positive outcomes. Even with the increased difficulty, it is possible to achieve success.
Conclusion
While wealth inequality is unavoidable in capitalism, its rapid expansion is a serious concern. It is crucial to understand these problems to address them effectively. The next step involves exploring potential solutions and future directions.