Who Will Survive (and Thrive) in the "K-Shaped Economy"?
Peter Reagan

Economies usually go just one way – but now we’re going in two directions. While the wealthy ride up on rising asset prices, millions of working Americans are moving down. Here’s how the “K-shaped” economy took hold – and what it means for your financial future…

Once upon a time in America, shopping malls were the royalty of retail locations, and the kings and queens of that select group of retail locations were multistory malls.

While not so common now, back in the 1980s, children could be found riding up and down escalators finding joy in being taken from one floor to another without any effort of their own.

In some ways, our current economy is very much like those mall escalators, moving certain people up to higher levels and other people down to lower levels, all with no (or next to no) effort on their part other than being on the escalator for the ride.

Call it an escalator economy, or use Fed chair Jerome Powell’s term, a “bifurcated economy.” Specifically, Powell said:

“If you listen to the earnings calls or the reports of big, public, consumer-facing companies, many of them are saying that there's a bifurcated economy there and that consumers at the lower end are struggling and buying less and shifting to lower cost products. But that at the top, people are spending at the higher income and wealth.”

Many analysts call it a K-shaped economy – it’s all the same thing. 

One where the lower end are struggling to make ends meet. While people at the top can keep spending. 

In other words, an economy that is moving some people towards the top of the pile and everybody else towards the bottom.

What is a "K-shaped" economy?

A K-shaped economy is an economy in which wealth inequality (to use the buzz word) is growing. Put simply, the financially better off (both individuals and corporations) are getting richer while average Americans and mom-and-pop businesses are finding it even more difficult to make ends meet. 

You’ve no doubt felt it at the grocery store… or when going out for a cheap meal. 

Take Chipotle, for example. Their core business is focused on what CNN calls “Young and lower-income consumers.” Specifically, households bringing in less than $100,000 per year. 

But the company has been struggling. CEO Scott Boatwright said,

“We’re not losing them to the competition; we’re losing them to grocery and food at home. And so, that consumer is under pressure. It is one of our core consumer cohorts. And so, they feel the pinch and we feel the pullback from them as well.”

In other words, people who aren’t on the wealthy end of the financial spectrum can’t afford to eat out as often. Fast-food chain Wendy’s announced today they’ll be closing 200-350 locations (after shuttering 140 last year). 

But this isn’t a story about burrito bowls or takeout hamburgers. I’m only mentioning them to help you see a larger economic picture: We are experiencing an economy that is benefiting one group and hurting another.

And this isn’t a “recovery.” This is the new normal.

Fortunately, there are steps that individuals can take in this situation. Before we get to those steps, though, let’s talk about…

How did we get here?

The short answer is that we got here on a weakening dollar and inflation. But it’s worth knowing the details.

Probably the biggest driver of this situation is inflation. 

Now, we’ve had inflation for decades. After all, the Fed’s target inflation rate is 2% annually. 

They aren’t trying to prevent your money from devaluing (inflation). They aren’t even trying to hide it.

Inflation is bad enough on its own. You remember the 9% inflation rate in 2022, right?

Everything went up in price. And prices never went back down to pre-pandemic levels.

These higher prices have driven massive increases in consumer debt which, as ABC Newsreported, is at an all-time high. That’s according to the Federal Reserve Bank of New York.

Yes, people are having to borrow just to feed their families and keep roofs over their heads.

And it’s not just struggling everyday Americans that are borrowing. It’s high net worth Americans who are borrowing, too. 

They just aren’t borrowing money for the same reasons.

And here is where we get to the “side effect” of inflation that enables those with money to accelerate the growth of their net worth which everyday people simply can’t access.

It takes money to make money

Unlike average Americans, the wealthy aren’t borrowing money to make ends meet. Instead the wealthy are borrowing money to invest. The idea is that, if they can borrow money cheaply and get back a return on investment, they’ll end up making money. Of course, like with all investments, there is the chance of losing money, but those who can afford to are borrowing more and more money to invest more and more.

In fact, margin debt, which is money that people borrow from brokers for investment trades, just reached the highest point in U.S. history.

And while markets continue to trend upward, these investors continue to get richer.

The problem? Historically, those increases are soon followed by economic turmoil and recession. So, the wealthy are making more money now, but they are also risking a repeat of previous mistakes (like the 2008 housing bubble). Higher margin debt implies a more speculative, less robust economy... 

I want to be clear, though, that the wealthy aren’t to blame for this situation. They are simply playing the game on the field that they’ve been given. A lot of them are winning, too.

The wealthy may be benefiting from the situation we're in, but they didn't create it. They didn’t build an economy in which everyday Americans aren’t able to take advantage of the financial opportunities that the wealthy have access to.

Blame belongs at the feet of the Federal Reserve. Former Federal Reserve economist Claudia Sahm, inventor of the Sahm Rule, isn't afraid to admit it. Sahm notes that raising or lowering interest rates has different effects for different households. That's obvious but it's also not intentional. The Fed didn't deliberately set out to handicap younger families and start-up businesses while making wealthier and established businesses more successful. That's just what happens when interest rates drop below the rate of inflation. 

Unfortunately, that's not something we can change. Interest rates are out of our hands. So how can we get ahead?

Winning the long game

When the rules seem stacked in favor of those already ahead, it’s easy to feel like the economy itself has become a closed circuit. The Fed adjusts rates, credit flows to those with collateral  and asset prices rise (for those who already own them). The “up” escalator keeps going up.

For everyone else, the “down” escalator isn’t slowing – and the race to simply stay in place gets more exhausting every day.

That imbalance isn’t new. And it isn’t likely to disappear soon. 

But there are ways to step off the escalator, rather than run in place. History shows that households that anchor part of their savings in tangible assets – those with inherent value, not just promises to pay – tend to weather economic turbulence with much greater confidence.

That’s the essence of long-term financial resilience: Choosing how to preserve your purchasing power. For many Americans, that means learning more about how physical precious metals can diversify your savings to help preserve value over the long haul. Regardless of which direction the Federal Reserve or the broader economy takes.

Learn more about the diversification benefits of physical precious metals – get off the escalator that’s taking you in a direction you don’t like. 

 

 

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.

 

 

 

www.birchgold.com