The Middle Class Recovery Has Begun

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The Middle Class Recovery Has Begun

As Morgan Stanley's Ruchir Sharma recently observed in the Wall Street Journal:1

"For much of the past six years, the U.S. recovery was characterized by a growing gap between Wall Street and Main Street, but there are signs that this gap is finally starting to close. Though the economy continues to grow at around 2.5 percent, it is now beginning to benefit the average consumer more than the few at the top of the income curve. The forces fueling the wealth of plutocrats—including easy money, a weak dollar, and high oil prices—are giving way to a new world of less easy money, a strong dollar, and low oil prices, which is setting the stage for a comeback of the beleaguered American middle class."

Until mid-2014, the Federal Reserve was engaged in an extensive quantitative easing. The result was a weak dollar that enhanced the revenues that U.S. companies earned abroad, and those earnings played a major role in driving up the stock prices of many U.S. companies.

For example, after-tax corporate profits have almost doubled since the fourth quarter of 2008; they're up at a 12.6 percent annual rate.2 As a result, stocks have more than doubled. Affluent Americans, who own most of these stocks, got richer in that bull market.

But while quantitative easing drove up stock-market valuations, it meant low interest rates for those on fixed incomes and relatively high prices for imports. Despite stronger exports, the recovery remained sluggish, which meant the middle class still struggled with high unemployment and stagnant wages.

The Fed's easy-money policies also slammed the middle class by encouraging speculation in commodities like oil and food, pushing up prices of gasoline and groceries. That's important in terms of perceived inequality, because food and fuel are merely incidental expenses for the top 10 percent, but a real burden for everyone else. So, this reality helped drive America's debate over rising inequality and the squeeze on the middle class.

Fortunately, the underlying reality is in the process of changing, and with it the national mood. In June 2014, the Fed clearly signaled an end to its quantitative-easing program, spelling the end of "easy money" and with it the forces that have favored the rich at the expense of everyone else. Specifically, from June 2014 to February 2015, the dollar rose by about 17 percent, undermining corporate earnings and destabilizing stock prices.

The biggest story of the past year was the collapse of global oil prices. Most of the attention has focused on the supply-shock created primarily by the Saudi response to cost-effective fracking technology in North America...

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