Why the Economy Is Splitting in Two

Commentators have labeled the divide between soaring asset prices and stagnant wages the “K-shaped economy,” but slapping a name on the pattern is not the same as explaining it. The real driver is the Cantillon effect: new money enters the economy through the banking system first, inflating the assets held disproportionately by the wealthy while wages and savings absorb the purchasing power loss last, meaning the K is not a feature of capitalism but a direct product of central banking itself.

The following article was originally published by the Mises Institute. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.

Open the financial pages and a strange creature stares back at you. The S&P 500 has climbed over 90 percent in three years. The top 10 percent of earners now account for nearly half of all consumer spending. Moody’s, Morgan Stanley, and the New York Fed agree on the shape of the thing: the economy has split in two. Asset-holders ride the upper arm of the “K” upward while wage earners slide down the lower one, watching groceries, rent, and insurance devour paychecks that no longer stretch.

The commentators have responded the way they respond to everything: with a label. Call it “K-shaped” often enough in the news and the naming starts to feel like an explanation. It is not. As Mark Thornton has observed, journalists and mainstream economists love to place simple labels on things they do not understand to cover for their ignorance. The label tells us what is happening. It tells us nothing about why.