1. America is at the beginning of a new economic renaissance.
2. America is in the final stages of economic collapse.

So what's the right answer? I believe the 'renaissance' answer oversimplifies the current scenario.

Renaissance: Strong Corporate and Asset Performance

Judging by the performance of the S&P 500 (SPY) you'd think we're back to the roaring 2007s. The price level for the S&P 500 is nearing historical highs touched in 2000 and 2007. If you include dividends, the S&P 500 has done even better.

SPY data by YCharts

For the market to do well so must its component stocks. One look at Apple's (AAPL) share price and you'd think the American consumer has money falling out of his pockets. iPads and iPhones aren't cheap, yet the company has roughly quadrupled revenues since the start of the 2008/2009 recession.

AAPL data by YCharts

This story isn't restricted to Apple. Although analysts are forecasting a decline in S&P 500 earnings next quarter, the fact is that corporate profits have reached an all-time high! Tell that to the average person in the street who is still saying we are in a recession. They won't believe you.

The fact is American business is doing better than ever, and the 2007 high in corporate profits was surpassed long ago. Couple profit performance with the development of continental energy resources and the onshoring of manufacturing, and, to some, American businesses appear poised for a wave of growth. However, I don't believe this is the case.

US Corporate Profits After Tax data by YCharts

Collapse: The Beginning of the End for the American Economy

So what's the problem?

It starts and ends with American businesses. Throughout the 2008/2009 near-collapse, American corporations slashed and burned overhead. With a new, lower cost structure companies quickly returned to profitability even with weak recoveries in top-line revenue.

The important lesson, however, that many businesses learned through the recession was that they could operate with less. Millions were laid off and business investment was slashed, yet profitability quickly returned to normal and continued to grow without a re-investment in people or machinery.

While this is a simplification of a complex issue (in other words, this doesn't consider the red tape small businesses - the engine of employment growth - must endure to hire people), it sums up the decision for many executives. Why hire people when they're not needed? Instead of investing in people or capital, and instead of returning cash to shareholders, executives are hoarding profits as cash on the books.

The chart below shows the massive growth in cash and short-term investments for index majors General Electric (GE), Microsoft (MSFT), Apple, Wal-Mart (WMT), Coca-Cola (KO) and Google (GOOG).

GE Cash and ST Investments data by YCharts

So while many American businesses are performing beautifully, the wealth is not trickling through the economy. America has learned to operate with less, and nowhere is this more evident than in the employment-to-population ratio (chart below). Business profits are hitting record highs while the employment-to-population ratio has fallen to levels not seen since the early 1980s - a time when single-income families were far more prevalent.

(click to enlarge)

This has grave implications for society, and reminds me of social issues first raised by folks like Karl Marx and Thomas Malthus. The battle between capital and labor, bourgeoisie and proletariat, becomes one-sided when labor is no longer needed. The middle class is hollowed out and labor is pushed down to a subsistence wage. Income disparities widen and society breaks down. Revolutions happen when the 99% has nothing to lose.

America is still far from the nightmare scenarios painted by Marx and Malthus. However, the positive post-war American trajectory has decidedly shifted. The dichotomy between rich and poor, capital and labor, the 1% and 99% is creating a new systemic risk for American assets. Things that American assets haven't had to price in for perhaps hundreds of years - rebellion, anarchy, mass social strife - are now becoming mainstream concerns. (I won't politicize this article, but the government's recent policy development actions show that the government too is concerned about these risks.)

[Making matters worse, this systemic risk simply adds to the pile of systemic risks already faced by America. America's prosperity is supported by a system that props up the losers (moral hazard), encourages excessive risk, relies on currency debasement and is dependent on credit to expedite forward expenditures. A growth imperative is endemic to this system, and a change in any of these characteristics could send the US economy into collapse.]

However, this disparity between capital and labor cannot continue forever. Most (all?) societies that have let the majority of its citizenry rot to concentrate wealth among a tiny minority have eventually succumbed to revolution.

As an investor, pay attention to the disparity between rich and poor and evaluate the attitudes of the masses, the 1% and government. For investing today is no longer simply about identifying undervalued assets - it is about protecting capital from all systemic risks: market and political.

Disclosure: I am long [[AAPL]].

Additional disclosure: This is not advice. While the author makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.

Chart source: www.kitco.com

Rumors over QE2 pushed the dollar down and gold up past previous records, closing over $1270/oz.

This means that policies pursued today may turn out well or may turn out badly. We simply don’t know. There are too many unpredictable variables to honestly forecast any further than a week into the future. What this also means is that the ‘right’ answer at one point in time – due to a prevailing set of circumstances – may not be the ‘right’ answer at another point in time. Much of our success has as much to do with the direction of the wind as it does our economic and political policies.

Yes, we can and do impact our future. But we often stop short of our goals despite our strategies for reaching them. We want freedom, a thriving middle class, poverty-reduction, peace, incentives to innovate and a generalized improvement in living standards. Have our policies helped us get there? Or have they simply been attributed as cause to the effect when they are simply coincidences? We don’t know.

For all the policies created during the 1980s and 1990s, do we really know if they were the cause of the economic boom that occurred during that period? For all we know, the stagnation and high interest rates of the 1970s created a combination of pent-up demand and a platform for long-term disinflation that sent an economic tailwind in our direction. We were swept up by the wave during the 1980s and 1990s, all the while attributing our success to how hard we were paddling.

So are there times when paddling is simply a waste of time? In other words, can there be circumstances where this is no answer? A situation where no matter what we do we simply slide into economic despair? I refer you to the stagflation of the 1970s in the US and the deflation of the 1990s/2000s in Japan. Perhaps policies prevented things from being worse – but they sure didn’t make things any better. Circumstances leading up to these economic events (e.g. in the case of Japan, the Plaza Accord and a domestic asset bubble) may have made these events unstoppable. The best we could do as a society was cope.

I bring this topic up because of the scenario we find ourselves in today. The Keynesians, monetarists and Austrians are at each-others’ throats with economic prescriptions ranging from fiscal and monetary expansion to fiscal and monetary contraction. Many intelligent people are presenting arguments that cover the full, and contradictory, spectrum of economic policies. Unfortunately, they’re all correct and all wrong at the same time.

We (the world) are in an economic predicament that calls for both fiscal/monetary expansion and contraction at the same time. Real time events are showing that these two conflicting policies are needed concurrently – we are in an engulfing quagmire.

Here’s why I say this. Leading indicators show that the economic recovery is already sputtering, Treasury yields remain low and prices are falling – this calls for the expansion of the government balance sheet to provide economic life-support. On the other hand, government debts, budget deficits and central bank balance sheets around the world are extremely bloated – as bond vigilantes pick off the weakest debtor nations the cries for fiscal restraint grow louder. One only has to look at today’s G20 to witness the current conflict in economic prescriptions. Unfortunately, fiscal consolidation – especially a globally-coordinated fiscal consolidation – will simply cause slower growth and more reason for fiscal and monetary expansion.

For the sake of my children, tell me, how do we navigate such a dichotomy?

The answer: there is no answer. Regardless of which path we choose we will face life-altering challenges. In order not to gloss over what ‘challenges’ means to me, I will list them out: more poverty, political unrest, lower standard of medical care, general reduction in living standards, widening income disparity, high structural unemployment, and more. Unlike credit contractions of the past, as far as I can see, there is no simple way to devalue and export out of this one (as has been a successful prescription for over-extended countries in the past) – not given the global nature of the credit contraction. So can we change our fate – after-all, this is not the future we are choosing today. But that is precisely the problem. This is the future that we chose over 25 years of credit expansion.

We face a situation where our fate may already be decided. At this point it is ‘written’, and what will be will be.