Image: Anthony Mirhaydari

Anthony Mirhaydari

Sure, life appears normal. Children are shuttled to school. Milk is on the shelves. Most who want to work are working. But beneath it all, tensions are rising.

We see preferential treatment -- from tax breaks to bailouts -- lavished on the wealthy and powerful while mere crumbs of policy support (stimulus checks, Cash for Clunkers, etc.) fall to the rest of us. We see growing income inequality and widening gaps of wealth while upward mobility becomes harder and harder. We see a frightening increase in corporate influence in politics.

We're not splurging. We're not reaching. We're coping. And we're angry about that.

Much of this anger is directed at the so-called 1%, the elites, in what's become a rehash of the old-time division between the aristocracy and the common folk. As an investment professional and a capitalist who came from nothing through hard work and scholarships, I'm wary of drawing such lines, as I believe anyone can still make the leap from one to the other.

But I'm starting to wonder if the 99% is on to something. If so, and if the unruly tide continues to rise, it will go way beyond college kids sleeping in parks or burning trash bins. It will have major implications for public policy, the economy and the markets in the years to come.

Fed up all over

Indignation was on display in Europe last weekend as French President Nicolas Sarkozy and the ruling coalition in Athens were given the boot by voters. This comes hot on the heels of the breakup of the Dutch government, one of the few remaining AAA-rated eurozone countries. That came amid a bitter debate on balancing the budget to comply with the new fiscal pact -- which forces deficits to be quickly closed -- championed by Germany, a country that's tiring of its role as the eurozone's savior.

In less than two years, 12 of 17 member states in the eurozone have seen their governments collapse or get voted out. The masses are tired of harsh austerity, crushing unemployment (Spanish joblessness sits at 24.1%) and a lack of pro-growth measures. Berlin is already pushing back against the French and Greek election results, with German Chancellor Angela Merkel saying the deal, which was signed with great fanfare by 25 countries back in December, is not negotiable.

I've written before -- in columns such as "Welcome to political chaos" -- that history shows that when leaders attempt budget austerity during times of vulnerability, social and political chaos result. That's exactly what's happening now. Kristen Cooper of Stratfor, a research outfit that's Wall Street's equivalent of the CIA, told clients recently that it's becoming clear that "traditional political elites are losing control of the system they once dominated."

There's been plenty of sound and fury here at home, too -- something I experienced firsthand on the streets of Seattle during May Day protests last week. I met a colleague for lunch in the financial district amid broken glass, vandalized banks, hooded vigilantes and hotel managers preparing to barricade doors, medieval-style. As the weather warms, the Occupy Wall Street movement that set up encampments around the country last year looks resurgent.

To be sure, while relatively few 99-percenters are out breaking windows or even demonstrating, there is plenty to be upset about. Things just aren't going well for most people.

University of Michigan: Consumer Sentiment

You can see it in the workforce participation rate, which has fallen to levels not seen in more than 30 years; for men, it's fallen to record lows since the data started in the 1940s. You can see it in the way inflation-adjusted wages have flattened over the past five months, something that's never happened outside a recession before. You can see it in still-depressed measures of consumer sentiment, shown in the graph above.

The simple fact is, despite a "recovery" that's nearly three years old, the average person is still being pinched. You can see this in the precipitous drop in the savings rate, in the huge upswing in people relying on the welfare state via disability and food stamp benefits, in the way credit card usage is on the rise again while student loan debt explodes, and in the way this economic cycle has been led by products -- often pioneered by Apple (AAPL) -- that are in truth merely delivery devices for cheap entertainment courtesy of YouTube and Facebook. You can't put millions back to work in an economy obsessed with costless, mindless diversions.

Americans are used to bigger and better business cycles. This just won't do.

Selective bailouts

The causes of the malaise are numerous, complicated and interconnected -- from excess indebtedness to the festering wound that is the housing market to the predatory, unfair trade policies of mercantilists like China -- and have been the subject of many of my columns. Now, new problems are approaching -- such as America's structural deficit, which is driven by an aging population fueling out-of-control health-care inflation. Meanwhile, the job market for the young -- even college grads with good degrees -- is dismal.

Welcome to austerity, courtesy of the financial meltdown. But it's been a selective austerity.

When the housing bubble collapsed in 2007 and 2008, the central bankers and policymakers scrambled to put our Humpty Dumpty financial system together again with multiple doses of stimulus aimed at the banks, and benefiting mostly the 1% (really the 0.1%, but let's not split hairs).

The big banks that gorged on risky mortgages and got in trouble got tons of help -- capital injections and ultralow-cost loans -- in a rescue of historic proportions. Homeowners who took out risky mortgages? Not so much.

The banks also got the velvet glove treatment when it came to new financial regulations. The Dodd-Frank Act, despite virulent protestations from the right, is a far cry from what's really needed to end the too-big-to-fail problem.

Big corporations have benefited from a desperate workforce and strong export markets. Costs were slashed and wages frozen. Labor productivity zoomed higher. Employees were squeezed.

But something surprising happened as profits soared to record highs. The market cheered as earnings surprised to the upside. Executive salaries soared -- something my colleague Michael Brush has documented in his "One-Percenter of the Week" series. But a lot of stockholders were left disappointed, as 401k's simply scratched back to the levels of 2007 and 2008 -- capping the worst decadelong performance for the stock market since the Great Depression.

By the one metric that matters above all others, the benefits of this massive rescue did not trickle down. This is a jobless recovery.

Gluskin Sheff economist David Rosenberg notes that if the labor participation rate had stayed at levels seen just as the recession was ending in the summer of 2009, the current unemployment rate would be north of 11% (versus 8.1%). Normally, as an economic rebound brightens job market prospects, people re-enter the workforce in droves; the opposite is happening this time.

2 options, neither good

And now, with stimulus tapped out, interest rates still near zero and fresh signs the economy is slowing again (the United Kingdom and much of the rest of Europe are already in a technical recession), people are wondering what kind of recession follows a jobless, mediocre recovery -- a recovery that's alive only because of massive doses of fiscal and monetary policy stimulus. We can't pull the same trick twice.

If the economy dips down now, from a much weaker economic footing than our 2007 pre-recession highs, the debt/deficit problems faced by much of the rich-world governments would seem to prevent another round of stimulus via tax cuts and spending hikes.

As for monetary policy, the cost-benefit balance of the Federal Reserve's efforts to bring down the value of the dollar, lower the debt and stimulate growth is growing increasingly negative. We're seeing little growth at the expense of too much inflation. The Fed will probably do a third round of quantitative easing or "QE3" this summer. The financial markets will love it and fuel a big stock market rebound rally, no doubt.

But it won't fix the jobs problem. And resurgent food and fuel price inflation will only tighten the noose around household budgets as stagnant wages lag behind a rising cost of living.

The opposite course is austerity in the hopes it restores confidence. As I discussed recently, fiscal tightening of as much as 4% of gross domestic product is due in early 2013 when a set of tax hikes and spending cuts takes effect -- unless Congress can do something about them. Even if it does, America's credit rating could take further damage beyond losing its AAA status last August.

But austerity didn't work when it was tried in 1936 and 1937. And it's unlikely to work now. Austerity in Europe is pushing the continent into recession amid political turmoil. In the U.S., even the supposedly debt-wary Tea Party started with seniors chanting "keep your hands off our Medicare," so it likely won't fare well here, either.

Thus, the protests and political venom.

Eat the rich?

Against this background, the calls to shift the burden from the 99% to the 1% are growing louder. Call the movement "share the austerity."

Polling suggests that of all the options being considered in Washington to close the budget deficit, taxing the rich enjoys much more support than cutting military spending or government benefits. A recent report by the Boston Consulting Group (.pdf file) suggests using a one-time wealth tax to solve our indebtedness problem by funding mortgage principal write-downs, sovereign debt restructurings and a nationalization of the banking system.

Is there any merit to indulging these eat-the-rich fantasies? Actually, according to the International Monetary Fund, there is.

Researchers there have found (.pdf file) the share of economic growth captured by laborers has been falling precipitously since the early 1980s. During the Great Recession and the rebound that followed, American workers lost a big piece of the proverbial pie as profits soared. In fact, only Spanish and Greek workers suffered more on this measure. The IMF research has also found that high income inequality limits overall growth and contributes to high indebtedness as the 99% borrow heavily from the 1% to stay afloat.

This dynamic, it is believed, was responsible for both the 1929 start of the Great Depression and 2008 financial crisis.

The takeaway here is that -- while I don't condone the violence of May Day, the delinquent behavior of the Occupy movement, or the rise of fringe European political parties and some of the other groups flying the banner of the 99% -- I do have to agree with the overall theme of their message.

After all, austerity aimed only at the 99% sounds a lot like "let them eat cake."

We need to stress short-term growth initiatives that benefit everyone, not simply harsh tax hikes and spending cuts; consider write-downs and restructuring for excessive public and private debts; address the regulatory gaps in the financial system that got us into this mess; and look at ways to close the inequality gap and let more people share in economic growth. Reform of tax, trade and labor policies would be good places to start.

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The IMF's Andrew Berg and Jonathan Ostry, who have been exploring the inequality issue, use a classic analogy to drive home their point: "A rising tide lifts all boats, and our analysis indicates that helping raise the smallest boats may help keep the tide rising for all craft, big and small."

Policymakers have two choices: Heed the call or get out of the way.

Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.