"A K-shaped economy describes an economic recovery where different groups or industries experience vastly different outcomes – some thrive and grow, while others struggle or decline. This term was intended to highlight the widening economic inequality during periods of recovery or downturn. It fits the saying, 'the rich get richer and the poor get poorer.'"
The term became popular after the Covid recession, yet the K-shaped economy has existed since the creation of central banks and good economists have known about it for 300 years. Marx blamed such an economy on capitalism, predicting that the rich would starve the rest until the majority rose of up and overthrew capitalism. That never happened. In fact, the majority has grown rich beyond the wildest dreams of anyone in the 19th or centuries.
A better description of a K-shaped economy is that the rich grow richer at a faster rate than the rest and that causes an increase in inequality. What causes the K-shaped economy? Not capitalism! An Irish banker name Richard Cantillon in Paris during the Mississippi Bubble of 1720 first explained it. He showed that when central banks issue new money, whether by printing more paper money or expanding credit through lower interest rates, the money doesn't flow to everyone equally. It benefits the first people to receive it, before prices rise, while hurting those who receive it last after prices have risen. This is known in economics as Cantillon effects, called K-shaped economy by journalists today who think they have discovered something new.
In Cantillon's day, newly printed bank notes went to purchase shares of stock on the stock market, carriages and real estate. Today, the Fed doesn't print more paper money but increases the supply of money by reducing interest rates and buying debt from banks. Both methods increase the money banks own to lend and encourages people to borrow more. Most of that debt goes to buy cars, real estate and shares of stock on the stock market. How little has changed in 300 years!
And where do you think borrowers put their new money in the stock market? It goes to capital intensive industries such as computer technology and AI. That explains stock market bubbles. Investors have known for over a century that they make the most money by investing in capital intensive industries.
The most robust business cycle theory, the Austrian, shows that boosting the money supply by central banks causes unsustainable economic expansions and euphoria, or bubbles, that must end in painful busts. The busts, or recessions, that follow hurt the middle class and poor harder than the wealthy, causing an increase in inequality. In fact, the most common measures of inequality do nothing more than measure the expansion of the money supply by central banks and the effects of taxation.
The K-shaped economy is not new. Good economists have known about it for centuries and have explained it better than journalists. It's not capitalism. When the U.S. was capitalist, gold was money and there was no Fed. The Fed is a socialist institution that conducts central planning of the money supply.
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