Why We’re Headed for the Mother of All Financial Crises

Maybe, like most people, you’ve wondered, staring at your bank account and shuddering: hey, how much does everyone else have in their bank account? You don’t wonder in an envious way, particularly, but more in a traumatized one. Because by this point in life — whatever point you’re at — you expected to have done better. We’ve all wondered. It’s OK to admit it. The veil of financial secrecy is one of the weirdest norms in our society — and I’ll come back to that.

First, I have some good news, and then some comically terrible news. The good news is I’m about to tell you how much everyone else has in their bank accounts. The bad news is: it’s like an economic horror movie out there.

See the chart above? That’s recent research on how much everyone has in their bank accounts. Grouped by decades of age, for even more information. And the findings? They’re grim, to say the least. People are broke, my friends. In case you were wondering, it’s not just you. Sure, you might have gotten lucky, had wealthy parents, or struck life’s jackpot — but what the research tells us is that most people in our societies are effectively poor. Not just “the poor,” but most people, even erstwhile middle-class professionals, and I’ll come back to that.

First, let’s discuss the research a bit — and then what it means going forward into this new economic era we find ourselves in.

Why is this research like an economic nightmare? Take the basic finding: across ages, people have about $5K in their bank accounts. Young people have way less than that, but even old people don’t cross $10K. It’s true that there are many people to whom $5K is a lot of money. But on an economic level, it’s not. It’s an incredibly meagre amount of money to have in your bank account — in all of them, which is what this research looks at.

Why is that such a meagre account? Well, it’s about one month of median income. So what this research tells us is that people on average are barely getting by: they’re managing to keep just one month of income in the bank. That’s…not a lot. Because of course if anything happens — emergency, problem, life event — what then? One month’s income in the bank is an incredibly thin tightrope to be walking. Financial advisors say you should have six months’ worth of rent or mortgage payments in the bank — this is less than half of (half of) that.

Don’t laugh — I know it’s more or less impossible to reach “financial goals” like that. That’s the point of this research, really. It buttresses the notion that people are living paycheck to paycheck, right at the edge. With just one month’s income in the bank, people can barely afford to do much of anything. One emergency spells financial ruin. Retirement’s a pipe dream — see how little even the aging have in their accounts? And for young people, the picture’s incredibly dire — they barely have a month’s rent in most cities in their accounts.

Like I said, an economic nightmare. What this research really tells us is that our economies are abject failures. People should have done better than this. It shouldn’t be the case that the average young person has maybe a few grand in their bank account, the average prime working-age person barely $5K, and the average elderly person less than $10K. All of this says that the economy such as it is has failed the average person, who isn’t really able to amass much wealth — and we’re not talking being that Crazy Weirdo Who Runs an Electric Car Company levels of billions — just living some semblance of The Dream.

People shouldn’t be this poor.

The reason that they are is sadly simple. The economy, over the last few decades, has experienced something very much like hidden hyperinflation. The costs of basics have exploded. They’ve gone up by thousands of percent. Healthcare, house prices, rent, food, education — all of these have seen staggering increases. The textbook examples are things like healthcare — now the horror stories of having to choose between your life or your family’s home are commonplace — and education, where sending a kid to college can cost as much as a home.

All of this means that the average person is under an incredible amount of financial stress. Take a deep breath, because if you’re anywhere near the average, you are too, and so is everyone else. Because our societies have this weird norm of financial secrecy, most people suffer in silence, and don’t quite realize that it’s not just them — more or less everyone’s barely getting by. Financial stress is real, it’s serious — it is seriously traumatizing having to live with a financial guillotine dangling over your head. And yet what the numbers above tell us is that must be endemic.

One month’s income in the bank? You’re constantly having heart palpitations about if something happens and you can’t pay the mortgage, the rent, afford this bill, food, utilities. Maybe this time next month, you could be out on the street, have to move in with friends, tell your kid to skip a year of school, put off that life saving operation or medicine. And those thoughts recur every month. Yet because they’re basically forms of existential risk — my God, my life could be over in a month or two — they’re traumatic just to have to think about, much less over and over again.

All that’s true even if you’re “middle class.” This research looks at median amounts, and so this is how much the vaunted middle class have in their bank accounts. Shudder even more, because that’s the truly grim part. Median means 50% of banks accounts have less than the amounts above. The numbers above are middle class numbers. Middle class young people have a few grand in their account, middle class prime working age people maybe $5K, middle class elderly people less than $10K. That’s a horror show — and what it really tells us is that “middle class” is more or less a meaningless term at this juncture. At least in the old sense of stability, security, savings, it doesn’t exist. Now, there’s just one vast underclass, experiencing relative degrees of poverty, and the trauma associated with it.

Why do I bring all this up? Well, I’m going to get even scarier shortly, so first, let me dwell on the good news. It’s not just you. You’ve wondered, staring at the wasteland of your bank account, how much everyone else has, and maybe you’ve had the feeling that you’ve done something wrong, looking at the meagre total therein. That’s because the norm of financial secrecy means that people pretend to be much more affluent than they really are. Everyone’s poor, more or less, it’s not just you. You didn’t do anything wrong. The problem is structural and systemic. Our economies are failures, to everyone but the weird, gross, super rich, who’ve gotten mega-richer over the last few decades, while the average person’s failed to get anything but poor.

Now. What does all this mean going forward? It’s not good. If you’re already slightly terrified — and I wouldn’t blame you — go walk the dog. Stop reading here, because this is where it gets really ugly.

What’s happening to the economy? We’ve entered a new chapter of economic history. Around the globe, prices are skyrocketing. And in response, central banks are forcing a recession.

It’s like chemotherapy. The idea is to kill the cancer — and stop just short of killing the patient, who’s going to get very, very sick, from the treatment, not just the disease. This is how backwards economics really is — to solve a problem like inflation, the only real idea central banks have is to aim sledgehammers at the economy, and crush people financially.

But what happens when they’re already crushed?

Let’s go back to the research. The average person has maybe $5K in their bank accounts — all of them. That’s it, that’s what they’ve got, apart from maybe something in a pension fund somewhere they can’t really touch, which probably doesn’t add up to a whole lot, either. That $5k is one month of income — and it’s all that the average person’s managed to stockpile, year after year.

But we’ve been in an economy of low interest rates. And even in that economy, the average person had to effectively debt finance their life — taking out loans from everything to a car to an education to a mortgage to a medical emergency, right down to financing household spending on credit cards. The $5K in the average bank account is basically what the average person has in the form of liquidity, which is mostly used to pay off a revolving door of debt and interest — which is why that amount never really grew in the first place, people stretched right to the limit.

What happens when rates begin to skyrocket? That $5K suddenly shrinks. Fast. Now all that monthly debt that the $5K was used to pay off in all these forms — mortgages, credit cards, car loans, etcetera — is suddenly much, much more costly, rapidly. Now your car payment costs this much more, your mortgage, that much more, your credit cards, this much more. And that’s on top of prices still skyrocketing.

What does all that mean? People are going to go broke. A very large number of them. Fast. The policy of treating the economy with aggressive chemotherapy and sledgehammers is going to leave a whole lot of people ruined. They simply won’t be able to afford all their bills rising at once, on such meagre amounts, that they were barely getting by on, to begin with.

And that implies that something very much like the Mother of All Financial Crises has a pretty good chance of being on the way. As people go broke, they can’t afford to pay their bills. Those unpaid bills turn into bad debt. Bad debts make banks fail, and they have to be bailed out on the public dime. That leaves society itself poorer, with less left over to invest in anything else, and the vicious cycle accelerates from there, because at that precise moment, what’s needed is stimulus and aid and relief.

We are heading into economic disaster. Increasingly, the world’s economic power figures are waking up to it. The IMF recently warned of “stormy waters,” and that “the worst is yet to come.” The World Bank has warned that hiking up interest rates like this is going to cause a “global recession.”

Why did our economies fail, and leave the average person poor? Well, because the wealth never “trickled down.” The idea for the last half century or so has been to turn the average person’s life into a bitter, bruising, Darwinian battle for survival — hey, if you can’t make it, you don’t deserve to survive. Huge, ridiculously, absurdly large amounts of wealth concentration were encouraged and designed into our economies, through tax breaks and subsidies and the idea that, for example, one person could and should “own” an entire nation’s infrastructure — and so quite obviously, the lion’s share of gains flowed to the already super rich, and made them ultra rich, while the average persons’s life went nowhere fast.

Instead of security and stability and prosperity, the average person found instability and insecurity and precarity. Go ahead and tell me how it feels to live on one month’s savings in the bank — forever. It’s heart-stopping. You grow desperate, then numb, then enraged. And along comes a demagogue who scapegoats some already powerless social group for it. That is how and why the world is experiencing a resurgence of authoritarianism, fascism, fanaticism — precisely because economic insecurity has wrecked people’s confidence and trust in institutions, systems, and each other. People driven mad by the despair and rage of poverty are easy targets for those who point fingers at scapegoats. It’s not as if everyone in the world suddenly woke up a few years ago and decided, coincidentally, to be a hateful evil bigot racist. There’s a cause at work here, and that cause is that our economies failed, and hence the average person began giving up on democracy and modernity, believing the Big Lies of demagogues, who at least acknowledged their woes.

All that is very likely to get worse if we’re heading into the Mother of All Financial Crises. The vicious cycle of poverty is going to accelerate, in that case, and that in turn will fuel the swing to the far right already visible around the world, from America to India to Russia to places like once gentle Sweden. In turn, if all this brewing chaos really does become the Mother of all Financial Crises, what’ll be left over in the end are a whole lot of ruined banks, and democracies unable to invest much in the future, because fiscal space has shrunk, meaning that people getting poorer can hardly afford to pay more in taxes, and fund the next generation of anything.

That’s not a good sign. It’d be better for central banks and Treasuries and Presidents and Prime Ministers to ask a question right about now — a simple but telling one. Why isn’t our approach to fighting inflation working? You see, they’ve been trying the chemotherapy and sledgehammers school of thought for quite some time now — but inflation shows no sign of slowing down.

And that should yield a clue. Inflation this time around isn’t driven by people having too much money and bidding up the prices of cars or wheat or what have you. Prices are skyrocketing because we are exceeding the planet’s limits now. Rivers run dry, crops are failing en masse, regions burn and flood seasonally. On such a planet, of course prices must rise, because it can’t provide the same level of abundance it once could — if only for a short period — anymore. Living standards must fall on a dying planet — unless systems are rebuilt to do more with less, and far less harmful ways.

The Mother of All Financial Crises, in other words, may itself turn out to be just the front in a kind of economic climate change: the end of Abundance, and the rise of a new age of Scarcity. If I’m right, and rising prices are more about a dying planet than about much of anything else at this point — Covid stimulus packages that ended long ago, the canard that people have too much money — then guess what? Prices are going to rise forever now. At least until we really have things like clean energy and closed loop manufacturing and green agriculture and buildings, at mega-scales.

I told you it was going to get ugly. This is where we are, my friends. That meagre $5K that the average person has in their account is literally the ashes of neoliberalism, and it’s love of hyper-capitalism. It didn’t work. It left people poor — so poor that democracies destabilized and metasiszed into fascism, while billionaires hoarded all the wealth, leaving it next to impossible for societies to invest in much to begin with. The old ways and old ideologies are historic failures.

We are going to have to rethink it all — beginning with what our economies are for, if we want to survive the next few decades, let alone the century. Are they just for a tiny handful to get richer, while the average person’s life implodes into despair and fury, which fuels fascism? Or are they there for a larger reason, like, say, helping life of all kinds flourish on this planet, so that we can too? Are they there to let fulfil potential — of human beings, by way of that of life as a force and a system — or just to give obscene amounts of wealth and power to the most ignorant, creepy, ruthless and greedy among us?

That part is still up to us. But not for long.

Umair
October 2022