Inflation is all around us if you know where to look: Spiking food costs, rising home prices and rents, and more expensive energy.
Inflation is accepted as a normal part of our economy similar to how we take it for granted that the sky is blue. It is close to a religion where people simply believe that inflation is part of the economic fabric of our nation. Yet inflation with no subsequent rise in wages is tantamount to a loss in living standards like a lumberjack slowly chopping away at a big pine tree. Inflation is a slow process and erodes purchasing power through a variety of avenues. We sometimes need to step out one generation to see how massive the changes are in the system. Even today inflation is hitting the pocketbooks of most Americans. First, inflation adjusted wages are simply not keeping up. You spend more at the grocery store and get the same or even less amount of goods. Sending your kids to college? More of your money is being allocated to this purchase compared to the previous generation. Housing? The large push of investors in the market has caused housing prices and rents to go up. What this means for most Americans is that more income is being siphoned away into housing. All of these are very tangible impacts of inflation so why is it that central banking policy is practically ignoring all forms of this erosion of living standards to continue monetary easing?
Do you remember what you had for lunch yesterday? Probably. What about two weeks ago? Probably not. Our mind isn’t designed on remembering every single detail of every single event but has adapted itself into remembering important events. Our brain is designed to look forward and for the most part is resilient. This is why the stock market rally starting in 2009 has washed away the memories of the market crashing down for many people. This also gives us a financial blind spot. The stock market has had a nice run since 2009 rising 168 percent as measured by the S&P 500. Many of the reasons for the crash were never fully addressed including too big to fail, debt strapped consumers, and a national debt that is getting to a level that is simply unsupportable. This market rally has occurred under the guise of favorable policies to the banking system. The Fed has punished savers and has created massive incentives for large pools of money to flood into every corner of the economy including the real estate sector. This has crowded out many regular households. Yet the stock market is turning and a modest correction is coming over the horizon. I have seen no articles that give a clear reason as to why the stock market should be up 168 percent in five years despite the underlying weakness in the economy.
Goodbye American middle class: New report reveals that 62 percent of Americans earn $20 or less per hour. Household income stuck in neutral for a generation.
The latest figures from the Bureau of Labor and Statistics (BLS) reveals that 62 percent of Americans earn $20 or less per hour. And this only examines those that actually have a job. Most of the new jobs added since the Great Recession ended have come in the low-wage segment of our economy which seems to be adding the bulk of employment. These are certainly interesting times that we live in. The US has close to 130 million jobs. 18 million jobs pay less than $10 an hour and 63 million pay between $10 and $20. These two segments makeup 81 million jobs so it is understandable why the two income household is more of a necessity rather than a luxury. The median household income in the US is roughly $50,000 per year. Adjusting for inflation income is back to levels last seen in the 1980s. Americans feel poorer because their purchasing power has been eroded by inflation and also the swarm of lower paying jobs that now dominate the market. The US middle class is shrinking and to ignore this is to ignore the actual facts.
Why you should fear inflation: The CPI understates the true nature of inflation. BLS only allocates less than 2 percent to tuition in CPI. Missing big on the biggest expense in housing.
Some people believe that inflation is simply a part of the normal economy like seeing the sunrise every day. Over time prices will rise on everything, or so the argument goes. I’m not sure if most dig into the question any deeper and question the nature of prices rising. If we look at inflation over generations the dramatic impact is clearly seen. If we see a reasonable rise in wages that accompanies higher prices then things typically even out and the public goes on with daily life. However, what we have seen for more than a decade is that wages are simply not keeping up with the overall change in prices. The middle class is disappearing because purchasing power is getting weaker. Sure, starting in the last two decades people went on a debt binge and this masked some of the loss in purchasing power but debt needs to be paid back. The loss of good paying jobs is a trend that continues and higher prices in housing, medical care, and college tuition continues to eat into the money Americans currently have. You feel poorer because your dollar is getting eaten away by inflation. The BLS tries to measure inflation by looking at a basket of goods in their CPI but misses on weighting some major components accurately. For example, it radically understates college tuition and housing costs. Inflation matters more than some people think.
The temporary employment recovery: Quantitative Easing and favorable banking policies creating a rising tide of temporary workers similar to Japan. Part-time workers up nearly 100 percent in US since 2007.
This recovery unlike other recoveries has been very weak in creating a large number of good paying jobs. Corporate profits are up under a market where wages, benefits, and quality of jobs have decreased while low-wage jobs continue to be added in the tens of thousands each month. Why the reluctance for firms to boost wages? There is still a large pool of people working part-time gigs in the US hoping for full-time employment. We have a large number of people working in this category, nearly twice as many since 2007. What is interesting is that Japan, over two decades ago followed a similar path of recovery focused on Quantitative Easing to support their banking apparatus after a gigantic stock market and real estate bust. The results after a generation? A permanently high level of part-time/non-regular type of work for their labor force. We seem to be offering a similar future to the young in America. Many of the jobs that were lost during the Great Recession came in the $20+/hr job range while we’ve been adding jobs in the $10+/hr job range in this recovery. Do policies favoring banks and larger corporations create a situation where low-wage employment is simply the end result like in Japan?
Sticking it to Millennials and young Americans when it comes to wealth: Households headed by those 40 years old or younger see inflation adjusted wealth 30 percent below 2007 levels while older Americans recoup losses.
The evidence continues to mount on the deep pangs of financial pain faced by younger Americans before and after the Great Recession. The Federal Reserve Bank of St. Louis posted wealth information and what we find is that for those 40 years old and younger, there has been little recovery since the recession ended officially five years ago. Younger Americans were exposed to housing closer to the peak but also, did not partake in the rapid rise of the stock market which is really the domain of a small portion of the population. What is problematic with this situation is that we have a major challenge ahead of us when it comes to retirement because so many older Americans are depending on Social Security for the bulk of their retirement income. The recovery in wealth for older Americans largely is coming from the housing market moving back up. Yet the housing market is not the equivalent to an annuity or a job. There still needs to be some income coming in for items like food, health care, and probably supporting kids with higher expenses from expensive colleges and lower paying jobs. That will be an issue given that the older retiring population will depend on the active incomes of those working. The young have seen a massive hit to what little wealth they had.
The looming retirement train wreck: Pension issues, lack of retirement savings, and extending the date of retirement all part of the current economic future.
The concept of retirement is a fairly modern one. In fact, we can argue that only one generation actually got to enjoy a long and relatively healthy stay in retirement over a mass population. For most of history, life and work went hand and hand and people retired essentially when they keeled over. The only people that had any semblance of retirement were the small wealthy elite. The massive middle class in the US that emerged after World War II seemed to sell the concept of retirement to all. Long endless walks on some unnamed beach followed by bottomless margaritas. This dream seemed like a fantastic vision but they never really specified how all of this was going to be funded. It probably isn’t attractive to talk numbers with people especially when pitching this giant dream. As it turns out, in the early 1980s when companies started easing people off of pensions and into self-funded options like 401ks and IRAs the stock market was on the verge of a major long-term rally. Save a few hundred bucks per month and you would have millions for that picturesque retirement. Here we are nearly a generation later and that plan has ended in complete disaster. People did not prepare and save (or could not save) because of the rising cost of living and real stagnant wages. Since we can’t reverse time, many are now going to rely on Social Security for that retirement dream. We have a major problem when it comes to the future of retirement here in the US.