WHY THE ECONOMY IS A HOUSE OF CARDS...IN AN EARTHQUAKE ZONE

I. HOW LONG CAN IT LAST? 

How long can it last? The world is in crisis. Much of it, caused by America’s President. And yet the US economy is “booming.” Is it?

I think it’s a house of cards.

The US economy today is often called “K-shaped,” meaning that there’s a class of people who are doing well, and a class that aren’t. So far, so predatory capitalism. It’s a pretty…simplistic…metaphor. It has no dynamics, no interactions, no inner structure at all. That’s why I think it’s lacking.

This frame hides a number of crucial—and catastrophic—realities. 

A much better metaphor is a house of cards. How we see social realities matters, if we want to understand—and be able to predict—them. 

Let me explain.

II. THE CRUCIAL WEAKNESS OF THE US ECONOMY, OR, MONEY MONEY MONEY

The US economy has an Achilles Heel. A critical weakness. 

It’s 70% consumption. That means that it’s exquisitely sensitive to changes in consumption, which is how much people spend (versus invest, and we’ll come to the investment part shortly.)

This is unique, different, and a true point of critical weakness. It’s unique in the world. No other economy on the globe consumes at such a high rate. It’s different from the rest of the wealthy world, too, which is much more sensitive to changes in government investment, because of the expansive social contracts in Europe and Canada. 

And it’s a true critical weakness in the sense that a small, unforeseen change can wreak absolute havoc. It can cause failure cascades. 

Like those in 2008, where banks failed, or in 2003, where the dot com bubble crashed, or during the pandemic, where the economy went haywire.

So: the US economy depends critically on consumption, which is also why the news about it is always about how much other people spend, and that’s deeply weird if you’ve ever lived overseas. And if that number falls, even a little bit, then the economy can go south, fast, hard, and deep, unlike almost anywhere else in the world, too.

III. THE THREE MAGIC NUMBERS IN THE ECONOMY

What is an economy? Let’s think of it as a set of markets. Stock markets. Bond markets. Currency markets. The labor market. And so on. There are more, but those will do for now.

What happens when this Magic Number, consumption, begins to falter, even just a little bit, in America? One almost elementary consequence is that the stock market falls. The bond market weakens, too. So does the currency. And of course, eventually, labor markets do too, meaning that unemployment begins to rise, which is easy to understand if people are buying and spending less.

Now we’re going to begin discussing the house of cards metaphor a little.

America, like I said, is unlike any other economy. Not just because everything depends on Magic Number One, consumption. But also because that Magic Number determines Magic Number Two, the stock market. Magic Number Three, by the way, is GDP, which depends on the first two.

The stock market in America is everything. People obsess over it unlike anywhere else in the world. Europeans and Canadians by and large have no idea what their stock markets are doing, and that’s because they don’t have to care: they don’t have these miserable things called 401Ks. Investment and retirement’s taken care of for them.

But in America, Magic Number One, consumption, determines Magic Number Two, the stock market, or people’s 401Ks, savings, etcetera, which is everything.

The stock market in America is everything in a literal sense. Europeans and Canadians have expansive social contracts, like I said, from retirement to healthcare to childcare. In America, you work, and your money’s put into the stock market more or less automatically. 

The stock market is the only safety net there is. It has taken the place of every single functional system in working countries. That’s why Americans obsess over it, and they’re right to, they have to. No money, you die.

Now think again of the link between Magic Number One, consumption, and Magic Number Two, the stock market. See how America’s always on edge about the economy?

That’s because the economy is always on the edge. It’s on a perpetual knife edge. A tiny move in the wrong direction can have life-wrecking consequences.

Even for “rich” Americans.

V. THE CLASS STRUCTURE OF AMERICAN WEALTH 

Now let’s picture the house of cards.

The K shape metaphor says: richer Americans are doing well. And it implies that they’ll continue to do well. We imagine the branches or legs of the K having their own momentum, separating, bifurcating.

But is that true?

“Richer” Americans these days have grown wealthy largely due to a single industry: tech. It’s provided a route to the upper middle class, what’s left of it, through astronomical salaries and stock market gains. So much so that Americans now make 3-4 times what their counterparts do in the rest of the rich world. Does that sound sustainable to you? I digress a little bit.

My wife and I were in Seattle recently. I was astounded by the level of wealth a little bit. Nice shops, restaurants, cafes, with astronomical prices, tiny houses that cost a fortune. So I did a little research, and learned something I didn’t know before. Seattle has the largest number of tech workers in the country. Hence, all this newfound wealth.

“Tech,” we’ve discussed recently, is misnomer. It’s really advertising, and mail order. They’re responsible for a very, very large portion of this K shape. And the story goes like this. This class of richer Americans will just keep spending, spending, spending. 

So there’s an idea that “the wealthy can just keep spending…forever.” But will they? Can they? Maybe if their money came from the heavens above, certainly. But the wrinkle in this very earthly tale is that their money is coming from below, because they are in the business of mass advertising. Global, in fact, and the world economy is emphatically not doing well. However you look at it, their wealth comes from the rungs of the ladder below them.

Once you understand that this is a story of advertising, then things become much clearer. To advertise, you need people in mass, society-scale, markets to buy stuff. Who can. If they don’t, then of course, there’s little reason to advertise.

So while it’s true that these richer Americans may want to keep spending, the point is that they’re employed in and by an industry which depends on advertising to everyone else. Not just them. This is how the US economy really works right now, and has for a decade plus.

See what I mean by house of cards a little bit?

VI. THE HOUSE OF CARDS

Now let’s put it all together.

This new class of techno-wealthy, and here I don’t mean Musk and Bezos, but your average tech worker pulling a quarter of a million plus, is working in an industry—advertising—that’s premised on selling ever more stuff to the people below them in the economic ladder. 

That is where their wealth is really coming from.

And they’re one step away from catastrophe, too, make no mistake. One lost job, one missed paycheck. This level of wealth doesn’t insulate you much at all from the brutal realities of American financial life—that comes with having tens or hundreds of millions. At this level of wealth, family, groceries, and housing are still very much an ongoing basic issue of household financial management.

To put it another way, this level of the house of cards is fragile. It’s not on solid ground. It depends critically on the one beneath it.

Now think of the other stratum beneath them on the economic ladder. How are they doing? The ones being advertised to?

Not very well at all. They’re under immense strain. They are struggling to make ends meet, and we see it in every statistic there is, from bad debt, to rising credit card delinquencies, to car payments, to savings rates, to levels of distress, and so on. 

Magic Number One, Two, Three. See how much risk they’re at? Of…

VII. WHAT HAPPENS TO A HOUSE OF CARDS?

What happens in a house of cards? 

The bottom falls out.

The bottom layer suddenly gives way, and the rest of the thing collapses as if it were nothing at all. A breeze blowing the wrong way undoes it.

This is where the economy really is. 

And I think that the “K shape” metaphor hides this. Prevents us from really seeing it or understanding it well.

If we think about it clearly, a house of cards is a clearer pattern for us. It has internal structure, dynamics, logic, the elements are related, and there is a pattern to it at the macro scale. It isn’t just “some cards are doing well, and others aren’t.”

None of the levels of such a house are safe, on solid ground, secure.

Let me continue my little explanation.

Remember Magic Numbers One and Two? Consumption and the stock market?

What happens if the bottom begins to give way, and the people at the bottom stratum stop spending at what are now rates they can barely, if at all, afford? The rung above them feels the pain instantly, and in multiple ways. Their jobs, created by advertising, are at sudden risk (and I won’t even get into AI for now.) And so is their wealth, which is tied up in the stock market, and locked into stock options of the very “tech” meaning ad companies they work for. They face a triple whammy.

So there are feedback effects here, which make the edifice a house of cards: unstable by its very nature.

All this is why Americans are under so much financial stress and pressure, too, no matter what rung of the economic ladder they’re at. Everything is poised to fall apart, perpetually and constantly. Precisely because nothing is on solid ground.

Every rung of the economic ladder above is sitting above one that’s precarious and unstable and shaky, and so the economy just stays unstable the further you go up, perhaps even more so. This is why you see the interesting and morbid effect of couples making a quarter to a half a million dollars a year jointly, which is an amount the entire rest of the world would be flabbergasted by, and who still “feel poor.” 

If you make it to the very top, which is to say, you made hundreds of millions, or dozens maybe, you can jump off the whole damned thing, buy a yacht, and sail away. But until then? You’re still trapped in it all.

VIII. A HOUSE OF CARDS IN AN EARTHQUAKE ZONE

Now think of all the shocks heading our way as a world. Trump started a foolish war that’s causing an energy crisis that’s going to cause a massive inflationary wave. The economy worldwide is stagnating. People are getting sick of tech and it’s weird man-child obsession with controlling their lives in puerile ways. Climate change. Fascism. Etcetera. AI, ripping away all those jobs from this tech meaning advertising class, and replacing them with idiot sales bots.

Any one of those alone would be enough to cause the house of cards to teeter and sway in the wind. But all of them together?

I think of the US economy as a house of cards standing on an earthquake zone. Was that a rumble I just heard?

I’d be very, very careful about where you invest your wealth these days. Wise investment isn’t about catching the breeze. It’s about foundations, resting on solid ground.

Love,

Umair (and Snowy!)

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