Aftershock | David Wiedemer

Summary of: Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown
By: David Wiedemer

Introduction

In the book ‘Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown,’ David Wiedemer dispels the conventional belief that excessive consumer borrowing was the main cause of the 2008 financial crisis. Instead, he highlights the growing income disparity between the rich and the middle class as the primary culprit. This introduction aims at providing a snapshot of the key themes tackled in the book, including the historical fluctuations in income levels and the effects of globalization and technological advancement on the economy. The book summary delves into the importance of a working middle class for a thriving economy and the need to reestablish the basic bargain that links wages with overall improvements.

The Real Reason for the 2008 Recession

The 2008 recession was not caused by excessive borrowing, but by the growing income disparity between the rich and middle class in the US. While massive mortgage lending did contribute to the speculative bubble in real estate, high debt was only a symptom of the recession. Middle-income wages failed to keep up with a growing economy, leading to borrowing as the only way to maintain living standards. Income levels have historically swung from prosperity among the richest to more even distributions among the working and the wealthy. However, after the Great Depression and World War II, prosperity began to coalesce at the peaks again, leaving the poor and middle classes with a smaller share. Globalization and technological advancement began to further cut into US jobs, and politicians removed safety nets based on their belief in deregulation and the power of the free market. This increasing income disparity explains the slow recovery following the 2008 recession and presents a social and political predicament that will lead to upheaval and reactionary politics if not addressed.

The Broken Bargain of the Middle Class

The US economy heavily relies on the purchases generated by a working middle class. The basic bargain is simple yet powerful. In a virtuous financial cycle, decently paying jobs lead to demand for goods and services, generating employment and consumerism. The government intervenes when the economic problems break this cycle, temporarily funding the economy to reinstate jobs and create demand, which stimulates recovery and maintains the core fact that the US must keep its middle class productive by “giving workers a proportionate share of the fruits of economic growth.” However, the middle-class incomes have stagnated, and this has broken the bargain.

The middle class has not seen any benefits since the 1970s, and the US economy has grown immensely since 1980. The wealthy invested in a limited range of assets, sending stocks and real estate soaring, while to maintain their diminishing living standards, the middle class started saving less. Meanwhile, borrowing increased from 55% in the 1960s to 138% in 2007, causing unsustainability. The growing economy’s financial returns had gone more to the rich rather than the poor and middle classes, causing the stock and real estate bubble to materialize.

The wealthy don’t spend enough money to generate jobs for the lower classes, and what they don’t spend they invest in speculation, leading to boom-bust cycles. Despite conspicuous consumption on lavish mansions, fine art collections, and yachts, politicians ignored the failing middle class and consumer demand. The politicians cheered the climbing stock market and relied on Wall Street to lead the economy. Wealth does not trickle down sufficiently to keep the US economy running smoothly.

“Inequality means that an economy is working well only for those at the top. Worse, extreme inequality means it is not working at all for the 60% of people who are well below the “top” tier, and are unable to achieve their potential or enable their children to do so.”

The Rise and Fall of America’s Prosperity

From a thriving post-WWII economy to diminishing government support, outsourcing, automation, and Wall Street greed, America’s prosperity has dwindled. For 30 years, Americans enjoyed steady wage growth, government-backed safety nets, and subsidized mortgages that helped them achieve the American dream. However, by the late 1970s, globalization and automation led to job and wage losses. Instead of stepping up to the challenge, the government started to cut back on social services and infrastructure. Tax cuts for the wealthy, tax havens for corporate earnings, and deregulation of Wall Street worsened the situation. Today, many Americans struggle with low-paying jobs, increasing healthcare costs, and limited access to safety nets. It’s time for the government to re-invest in its people and restore prosperity.

Coping Mechanisms for a Broken Economy

Most Americans supported the free market ethos against government interference, but the coping mechanisms that the middle class used to face financial struggles are no longer effective. Women joined the workforce, people worked longer hours and infinite credit was readily available. However, with the cost of childcare surpassing the incremental pay of two-income households, job opportunities paying less and easy credit a thing of the past, these mechanisms have become obsolete. Americans are now abandoning their debts, working later in life, and adding more strain to an already stretched job market. “America cannot succeed if the basic bargain at the heart of our economy remains broken.” The generational memory of experiences with poverty and prosperity are now lost, and finding new solutions to the country’s economic troubles will require a new approach.

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