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Why are Real Wages Stagnating and Stock Markets Booming?

by Rammohan Susarla 9 months ago in wall street
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I explain the gross inequities and the paradoxes of how the Top 1% is gaining and the rest are faltering, or worse, even failing to exist, let alone subsist.

The news is full of how the Sensex, S&P, Dow Jones Index, and the Nikkei Index zooming to ever greater heights and breaking "records" every day. At the same time, the "real" economy is stagnating and the reports of farmer distress, worker angst, and the sufferings of the man/woman on the street are all too "visible", even if mainstream media chooses to gloss over the latter and celebrate the former.

So, what explains this "disconnect" and "divergence" between the Stock Markets and the broader economy? Moreover, the returns from savings like Term Deposits (the favorite savings instrument of choice for the middle classes and more so, for the retirees) decline every year even as the Sensex "smashes" through "ceilings", much like Thalaiva in the blockbusters).

This dichotomy can be explained by The Law of Diminishing Returns, which states that returns from investment begun to taper off after a while and diminish in value leading to marginal gains. So, when returns start to turn into trickles, why would any Entrepreneur or Industrialist invest in building factories, plants, and other tangible assets, which not only require humongous Capital outlays, but also take time to fructify, before they start offering meager returns.

In recent years, maverick economists have theorized that Four Units of Investment are required for Each Unit of Return, as measured in the GDP or the Gross Domestic Product calculations. On the other hand, stock markets are "played " anticipating the arbitrage based profits wherein each unit invested in them yields returns relative to the prevailing interest rates.

So, when Central Banks keep interest rates at historical lows and in some countries, at Zero, capital flows wherever relative returns are higher. In other words, speculative investments yield higher returns than investments in Fixed and Tangible Assets. This is the key reason why more and more investors flock to the Stock Markets and fewer and fewer of them invest in Physical and Employment generating activities.

The only solution to this would be to incentivize capital intensive investments and raise interest rates to discourage excessive speculation. Of course, the present schism between the speculative and capital intensive cogs of the economy can be traced as far as 1971, when President Nixon took the United States off the Gold Standard and set in motion the Neoliberal Dogma that haunts us to this day.

With so much of our lives being dominated by neoliberal principles, it is hard to see if anything would change in our lifetimes unless Bernie Sanders becomes President. This is also the reason why the Democrats are finding it hard to garner votes for their ambitious Spending Bills, as Biden has promised to undo the damage caused by the Reagan-Thatcher neoliberal consensus of Supply Side Economics, with Tax Cuts for the Rich and Limited Government for the Poor.

Unless there is concerted and coordinated action by legislators and the executive, not to leave out, the vigilant judiciary on regulating neoliberal excesses, the poor of the world would be left with no choice but to subsist, and maybe, not even exist. This is the stark choice that confronts us as we head into a future where the Top 1% are the only ones optimistic about what comes next, whereas the rest would be left with little to nothing.

Moreover, Neoliberal Capitalism has also made it impossible for any sort of Class Mobility with the result that those fortunate, or clever enough to have “made it” remain there, whereas the rest have to contend with crumbs and the so-called Trickling of Wealth from above, proven to have failed to actualize equitable growth, which too is a reason why there is a dichotomy between the Stock Markets and the Real Wages.

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About the author

Rammohan Susarla

Writer seeking metaphysical fulfillment by publishing meditations and ruminations about the world.

I am a Techie turned Business Analyst who found his true calling as a writer this journey spanning 12 years has been incredibly rewarding.

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