The Deepening Dysfunction of the US Economy: An In-Depth Analysis
A System Flipped Inside Out
The US economy has experienced a fundamental transformation over the past several decades, one that has left it severely dysfunctional. An illuminating chart reveals that the entire system has been flipped inside out — not just recently, but over a prolonged period spanning more than ten years. This shift has reached an extreme level that some experts believe has pushed the nation past what might be considered a point of no return.
Diverging Trends: Corporate Profits vs. Personal Income
At the core of this systemic reversal are contrasting trends in corporate profits and personal income growth. Historically, from the 1980s through the 1990s, personal income grew at a faster rate than corporate profits. This balanced growth supported a healthy economic environment where wealth accumulation was more evenly distributed.
However, in the last 15 years, this relationship has dramatically reversed. Corporate profits have surged, while personal income growth has stagnated or slowed significantly. Specifically, the real annual growth rate of corporate profits between 1947 and 2002 was approximately 2.7%. Since 2002, this rate has more than doubled, reaching roughly 5.1% per year after adjusting for inflation. In stark contrast, personal income growth has declined from a prior rate of about 3.4–4% to a meager 2% annual growth.
This divergence has profound implications for wealth distribution and economic stability. When corporate profits expand at a faster rate than personal incomes, it signals a potential transfer of wealth from the individual consumer to large corporations and shareholders. This trend sets the stage for a significant redistribution of wealth in the coming years, favoring those who own and profit from corporate assets at the expense of individual wage earners.
Analyzing personal income as a percentage of Gross Domestic Product (GDP) reveals a pattern consistent with this trend. Historically, fluctuations in personal income share correlate closely with consumer confidence, as captured by the University of Michigan’s consumer sentiment survey. When personal income takes up a larger share of GDP, consumer sentiment tends to improve, and vice versa.
Conversely, corporate profits as a share of GDP display an inverse pattern. When personal income share rises, corporate profits tend to decline, and when personal income share shrinks, corporate profits swell. Since the 1980s, the share of personal income in the GDP has steadily declined, whereas corporate profits comprise a larger slice of the economic pie. The gap between these shares is now as wide as it was immediately after the 2008 financial crisis.
The Divergence Between the Real Economy and Financial Markets
This creates a paradox: despite steady or even impressive growth in GDP and stock markets, the real economy faces crises such as soaring housing costs, stagnating wages, declining consumer sentiment, and rising social unrest. The disconnect lies in how wealth and profits are distributed versus how economic growth appears on paper.
Therefore, current conditions present a rare opportunity for investors. While the "real economy" faces challenges, financial markets are offering abundant opportunities, driven mainly by corporate profits and asset valuations supported by favorable monetary and tax policies.
A critical question arises—will this divergence persist indefinitely? Theoretically, it can. As long as corporate profits grow while personal income remains constrained, the economic divide could deepen further. However, this scenario risks significant correction.
A key chart compares corporate profits pre-tax and post-tax. Currently, after-tax profits are at their highest level in history, fueled by very low corporate tax rates. When back in the 1940s and 1950s, corporations were making similar pre-tax profits but faced higher tax rates, their after-tax share of GDP was substantially lower.
If taxes were brought in line with those historical levels, corporate after-tax profits could shrink by about 50%, potentially plunging the stock market and the broader economy into a sharp downturn. Such a contraction would lead to layoffs, reduced personal incomes, and economic shrinkage.
The Wealth Transfer Scenario
While this might seem damaging in the short term, it could trigger a redistribution of wealth. Asset prices, closely tied to corporate profits, would likely fall sharply—possibly by 50%—causing significant economic pain initially. However, during this process, the share of personal income in GDP could rise again, signifying a more equitable distribution of wealth and resources.
One of the most critical aspects of this analysis is timing. The potential for such a correction exists in the near to medium term—possibly by 2026—though it could also be delayed until 2030 or beyond. Currently, the environment remains highly profitable for stock market investors, bolstered by a pro-business administration and unclear future policies stemming from upcoming elections.
The authors emphasize that political shifts, particularly changes in tax policy with new administrations, could accelerate or delay this correction. A more tax-friendly government might sustain current conditions longer, while an administration more focused on higher taxes could hasten the correction.
This analysis is presented as an objective, non-political perspective on the economic trajectory of the United States. It underscores that, while the present environment is extraordinarily favorable for stock market investments, underlying systemic issues threaten future stability. The divergence between the real economy and financial markets is a critical theme that investors should monitor closely.
Concluding: Opportunities Amidst Uncertainty
Despite looming risks, current market conditions offer unparalleled opportunities. Investors willing to navigate the potential volatility and systemic shifts could benefit significantly if they are prepared for a correction and adjust their strategies accordingly.
For those interested, the creators of this analysis have provided a detailed quarterly report, now available for free, outlining specific sectors and assets poised to outperform in the near future. While uncertainty persists about the timing of a possible correction, understanding these underlying trends is vital for making informed investment decisions today.
Note: The insights herein focus on economic and market analysis and do not constitute financial advice.
Part 1/12:
The Deepening Dysfunction of the US Economy: An In-Depth Analysis
A System Flipped Inside Out
The US economy has experienced a fundamental transformation over the past several decades, one that has left it severely dysfunctional. An illuminating chart reveals that the entire system has been flipped inside out — not just recently, but over a prolonged period spanning more than ten years. This shift has reached an extreme level that some experts believe has pushed the nation past what might be considered a point of no return.
Diverging Trends: Corporate Profits vs. Personal Income
Part 2/12:
At the core of this systemic reversal are contrasting trends in corporate profits and personal income growth. Historically, from the 1980s through the 1990s, personal income grew at a faster rate than corporate profits. This balanced growth supported a healthy economic environment where wealth accumulation was more evenly distributed.
Part 3/12:
However, in the last 15 years, this relationship has dramatically reversed. Corporate profits have surged, while personal income growth has stagnated or slowed significantly. Specifically, the real annual growth rate of corporate profits between 1947 and 2002 was approximately 2.7%. Since 2002, this rate has more than doubled, reaching roughly 5.1% per year after adjusting for inflation. In stark contrast, personal income growth has declined from a prior rate of about 3.4–4% to a meager 2% annual growth.
Implications for Wealth Transfer
Part 4/12:
This divergence has profound implications for wealth distribution and economic stability. When corporate profits expand at a faster rate than personal incomes, it signals a potential transfer of wealth from the individual consumer to large corporations and shareholders. This trend sets the stage for a significant redistribution of wealth in the coming years, favoring those who own and profit from corporate assets at the expense of individual wage earners.
The Shifting Share of GDP
Part 5/12:
Analyzing personal income as a percentage of Gross Domestic Product (GDP) reveals a pattern consistent with this trend. Historically, fluctuations in personal income share correlate closely with consumer confidence, as captured by the University of Michigan’s consumer sentiment survey. When personal income takes up a larger share of GDP, consumer sentiment tends to improve, and vice versa.
Part 6/12:
Conversely, corporate profits as a share of GDP display an inverse pattern. When personal income share rises, corporate profits tend to decline, and when personal income share shrinks, corporate profits swell. Since the 1980s, the share of personal income in the GDP has steadily declined, whereas corporate profits comprise a larger slice of the economic pie. The gap between these shares is now as wide as it was immediately after the 2008 financial crisis.
The Divergence Between the Real Economy and Financial Markets
Part 7/12:
This creates a paradox: despite steady or even impressive growth in GDP and stock markets, the real economy faces crises such as soaring housing costs, stagnating wages, declining consumer sentiment, and rising social unrest. The disconnect lies in how wealth and profits are distributed versus how economic growth appears on paper.
Therefore, current conditions present a rare opportunity for investors. While the "real economy" faces challenges, financial markets are offering abundant opportunities, driven mainly by corporate profits and asset valuations supported by favorable monetary and tax policies.
The Future Path: Potential Reversal of Divergence
Part 8/12:
A critical question arises—will this divergence persist indefinitely? Theoretically, it can. As long as corporate profits grow while personal income remains constrained, the economic divide could deepen further. However, this scenario risks significant correction.
A key chart compares corporate profits pre-tax and post-tax. Currently, after-tax profits are at their highest level in history, fueled by very low corporate tax rates. When back in the 1940s and 1950s, corporations were making similar pre-tax profits but faced higher tax rates, their after-tax share of GDP was substantially lower.
Part 9/12:
If taxes were brought in line with those historical levels, corporate after-tax profits could shrink by about 50%, potentially plunging the stock market and the broader economy into a sharp downturn. Such a contraction would lead to layoffs, reduced personal incomes, and economic shrinkage.
The Wealth Transfer Scenario
While this might seem damaging in the short term, it could trigger a redistribution of wealth. Asset prices, closely tied to corporate profits, would likely fall sharply—possibly by 50%—causing significant economic pain initially. However, during this process, the share of personal income in GDP could rise again, signifying a more equitable distribution of wealth and resources.
Timing and Political Considerations
Part 10/12:
One of the most critical aspects of this analysis is timing. The potential for such a correction exists in the near to medium term—possibly by 2026—though it could also be delayed until 2030 or beyond. Currently, the environment remains highly profitable for stock market investors, bolstered by a pro-business administration and unclear future policies stemming from upcoming elections.
The authors emphasize that political shifts, particularly changes in tax policy with new administrations, could accelerate or delay this correction. A more tax-friendly government might sustain current conditions longer, while an administration more focused on higher taxes could hasten the correction.
Final Reflections
Part 11/12:
This analysis is presented as an objective, non-political perspective on the economic trajectory of the United States. It underscores that, while the present environment is extraordinarily favorable for stock market investments, underlying systemic issues threaten future stability. The divergence between the real economy and financial markets is a critical theme that investors should monitor closely.
Concluding: Opportunities Amidst Uncertainty
Despite looming risks, current market conditions offer unparalleled opportunities. Investors willing to navigate the potential volatility and systemic shifts could benefit significantly if they are prepared for a correction and adjust their strategies accordingly.
Part 12/12:
For those interested, the creators of this analysis have provided a detailed quarterly report, now available for free, outlining specific sectors and assets poised to outperform in the near future. While uncertainty persists about the timing of a possible correction, understanding these underlying trends is vital for making informed investment decisions today.
Note: The insights herein focus on economic and market analysis and do not constitute financial advice.