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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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The K-shaped economy and affordability

  • Writer: tim@emorningcoffee.com
    tim@emorningcoffee.com
  • 5 days ago
  • 5 min read

The term “K-shaped” economy is being thrown around a lot these days, especially in discussions about the affordability crisis that is currently gripping America.  Because I am not adversely affected, affordability is not something I think about day-to-day.  However, an article that appeared in the #FT just before Christmas reminded me of this rather unusual economic reality.  The article “The gap is widening’: inside Donald Trump’s K-shaped economy” discusses the K-shaped US economy by contrasting very affluent Greenwich CT, to a relatively poor town just 30 miles away, Bridgeport, CT.  As I am currently living for a few months in Greenwich, this article rattled me and was a stark reminder of the reality of the US economy at the moment.

 

In a nutshell, a K-shaped economy means an economy in which wealthy people are getting richer even as middle- and lower-class people are feeling poorer.  This is mainly a function of the bite of inflation being more perverse at lower income levels, where people can least afford to pay higher prices for the staples necessary to live day-to-day.  The economic reality of President Trump’s “One, Big Beautiful Bill” passed last summer is crystal clear to nearly all economists: the bill is not only bad for the U.S. deficit, but it tips tax advantages to the well-off, while poorer people will be worse off[1].  Middle- and lower-income people will likely see their healthcare costs increase (or lose coverage altogether).  Poorer people that rely on food stamps to eat each day will see their benefits reduced.  Meanwhile, inflation continues to run well above the Fed’s target of 2%/annum.  For most of us that are well off, the negative effects of this sort of an economy don’t touch us at all because we are too busy celebrating the strong growth in our investment portfolios.  However, putting aside one’s partisan politics and conscience, the reality is that more and more people are suffering because it is getting more expensive for people on average incomes (or less) to live day-to-day. 

 

It would be unfair to lay this completely at the feet of the Trump Administration, or for that matter, entirely at the feet of the Biden Administration (as Mr Trump likes to do).  Looking in the rear view mirror is 20/20 of course  The reality is that the Fed – coming out of the pandemic – left monetary policy too easy for too long.  Overly accommodative monetary policy for too long, in conjunction with  three separate pandemic fiscal stimulus plans (two under Trump 1.0 and one under Biden), caused inflation to rage out of control.  Although inflation has been gradually coming down since early 2023, lower inflation does not reverse price increases.  Rather, lower inflation simply means that prices rise less quickly.  What is done is done.  However, the blame now rests squarely on the shoulders of the Trump Administration and the Republican party since they control both the Executive and Legislative branches of government.  Distract as he may, the President seems to be largely ignoring the growing crescendo from Americans regarding the current affordability crisis, referring to it as a “Democratic hoax”.  Consumer sentiment polls suggest that it is anything but a hoax.  

 

Increasingly some conservative politicians and pundits also seem bothered by growing inequality in the United States.  For example, former Republican congressman Mitt Romney recently wrote “Tax the Rich, Like Me” in the New York Times (Dec 19, 2025), and pundit/tech expert Scott Galloway (plenty of YouTube and other press regarding his views on inequality, like this) seems more than concerned about the potential blowback that might arise from growing wealth inequality.  Both are proposing higher taxes on the rich, who can clearly afford to pay them.  Like most people, I am all in favour of higher taxes as long as I don’t have to pay more!  That aside, my conscience is starting to bother me slightly as people like myself carry on in daily life, enjoying the spoils of rising asset prices, without thinking often about the growing number of families that are struggling just to live day to day. I can’t imagine how this must feel.

 

Having wealth in the form of stock market investments or owning your own home is taken for granted by many.  With a three year gain of 78% in the S&P 500, the wealth effect for investors in stocks has been phenomenal.  It has provided those folks who are wealthy enough to be long stocks with many reasons to feel very good and optimistic about the future, and to continue to spend like drunken sailors to fuel the consumer-driven U.S. economy.  However, we all must keep in mind that many Americans hardly know what the stock market is.  And many people have no investment portfolios at all, so they do not benefit from rising asset prices.

 

We all have different opinions of what “rich” means.  From a purely financial perspective, I certainly don’t think I’m rich, but many people might think I am.  It’s all relative I suppose.   What I am increasingly cognisant of though is when I go to bed tonight, I am not worried about where my food will come from tomorrow.  That’s the empathy I am trying to come to grips with in a world in which the economic recovery is lifting the rich and squashing the poor.  In spite of President Trump trying to dismiss the affordability crisis as a Democratic hoax, it is crystal clear from numerous consumer sentiment polls that the crisis is very, very real. 

 

Perhaps I should close this diatribe by explaining exactly what the “K” in a K-shaped economy means.  The spine of the K refers to the economy improving (rising if you will), with the upper branch of the K respecting the well-off people benefiting from this recovery, and the lower branch representing the poorer people that are not benefiting at all as their living standards decline.

[1] If you aren’t buying this (like the Trump Administration, at their peril), you can read more about the fiscal damage of this tax bill below, including many references to the growing inequality that is the root of the current affordability crisis:

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