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Inflation As Solution: Hosing The Middle Class
By Wolf Richter www.testosteronepit.com
The FOMC's often and clearly stated policy of creating sufficient inflation has been effective: up 3.8% from August 2010 and up a breathtaking 36% from January 2000. But there are winners and losers.
Tax revenues? Huge winner. Yes, inflation is taxable. If we bought a stock in early 2000 for $100, and we sold it today for $136, we'd pay taxes on a "gain" of $36 though that "gain" just kept us even with inflation.
Stocks? Losers. For the NASDAQ to reach its 2000 high on an inflation-adjusted basis, it would have to close at 6,800, the S&P 500 at 2,040, and the Dow at 15,000 (based on the BLS CPI Inflation Calculator). OK, we did earn dividends, but we also paid fees, commissions, and taxes. Yet the eye-popping ups and downs of the markets tend to distract us from the insidious, hidden worm that gnaws away at our assets day and night.
Home owners? Losers. The housing nightmare hasn't fully played out yet, but it's already destroying the old saw that housing keeps up with inflation: Adjusted for inflation, home values are now back at a level they first touched in 1989 (excellent graph here).
Bondholders and savers? Huge losers. The Fed has taken the credit markets hostage with its asset purchases and interest rate policies, and the U.S. Government owns 95% of the mortgage market outright through Fannie Mae, Freddie Mac, and the FHA. Between them, they can do with the credit markets whatever they want. So the Fed has forced yields below the rate of inflation across the entire yield curve. Bondholders and savers turn over their money without being compensated for inflation or credit risk, and their income streams have dried up.
Gold and silver? That'll be a fun conversation a few years from now.
Debtors? It depends. Inflation is good for debtors if their salary, operating profit, etc. rises at the same rate or faster than inflation. The $1,000 payment of a fixed rate 30-year mortgage will get easier to make as income goes up with inflation. A business that can raise its prices and keep its costs down (!) will also benefit.
Middle class? It gets hosed. Wage increases make the Fed nervous. It wants inflation in goods and services. But when wages go up, all hell breaks lose, and it slams on the brake. Alan Greenspan's Fed famously did so in 1999 - 2000, and then started again in 2005. In 2006, Ben Bernanke's Fed continued the rate increases. The stated goal was to avoid an "inflation spiral" where rising wages and prices push each other up. The actual result was that real wages (adjusted for inflation) crashed 1.8% from a year ago and 9% from early 2000.
The Fed's bifurcated approach to inflation and wages has devastated the middle class over the past decade, not at one fell swoop, but in tiny increments, year after year, in a planned disciplined manner that makes hyperinflation unlikely. Declining real wages result in declining purchasing power. The hole is often filled by using credit cards. But the ensuing pile of costly debt only makes the problem worse. Squeezed from all sides, homeowners find that mortgage payments get harder to make, not easier. And they join the ranks of the losers among the debtors.
Companies can be winners or losers. They benefit from cheap labor, cheap or free capital, and an ability to raise prices to make their numbers look good. Walgreens reported a 6.5% increase in sales today. How much of that was due to price increases? However, inflation can eventually eat into corporate profits through rising input costs and expenses (healthcare, for example). Over the longer term, a hollowed-out middle class spends less. Demand becomes an issue, and job creation dries up. That's where we are today. Yet, the Fed seems determined to stay the course.
Speaking of the housing market: US Housing Hangover Or 20-Year Japanese Nightmare
Wolf Richter www.testosteronepit.com
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Why are you busting my bubble? Hand me another Bud and switch the channel to Dancing with The Stars. I've got to finish watching TV so I can get up and go wind-surfing tomorrow.
Middle class slumber...that's what it is.
good summary...but I'm toto busy wathcing early morning reruns of balloon boy...
How does it end again?
I went to public school,
The middle class is an abberation. We are going back to feudalism, with a rich upper and the serfs.
It's called the "boiling frog syndrome". Been going on a long time. Inflation is a game you CANNOT win over time. Only the big boys do (they have assets----you don't). Deflation causes nearly everyone to lose, even the biggies. That's why the Fed will ALWAYS try and go with inflation. They are only protecting their own clients. HINT: you aren't one of them.
IN deflation, prices fall faster than wages. In real terms, this is a net win for the middle class. Asset holders lose, debtors lose, savers win. Other than that ("Delation causes nearly everyone to lose..."), I agree with what you say and the reason for inflation.
"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
From the last two paragraphs of Gold and Economic Freedom by Alan Greenspan. 1966.
see: http://www.constitution.org/mon/greenspan_gold.htm
isn't gold a safe store of value? If not, then a lot of people have been lying. You don't need a "gold standard" to make it a store of value. It either is or it isn't.
Excellent article. My thoughts exactly.
I think that when they destroy the Middle Class they will end up Destroying themselves. Unintended consequences of their actions to only concentrate on propping up the Banks and Businesses.
The biggest downside is the loss of revenue thru Income Taxes. Lower wages, less Income Tax, Lower Housing prices, Lower Capital Gains Taxes, no Jobs, No Income Tax. No one left to support the Government, except the Corporations who the Fed have been supporting.
Plus, with Job loss and unemployment the Government has to pay MORE to these people thru Welfare, Medicade, Food Stamps, early Retirement and Social Security Benefits for those who are old enough to qualify and Unemployment Insurance.
Kind of comes full circle at some point.
"Plus, with Job loss and unemployment the Government has to pay MORE to these people thru Welfare, Medicade, Food Stamps, early Retirement and Social Security Benefits for those who are old enough to qualify and Unemployment Insurance."
Except when austerity foils those plans.
The government doesn't "have to" pay anybody.
"The government doesn't "have to" pay anybody."
No they don't, but they always will, it will just be in even more worthless paper. Eventually we get to that that "bean and bullets" scenario, because one thing is for sure, people "have to" eat and economies "have to" have an energy source in order to run and even more energy to grow. The reset button has already pushed folks, don't be fooled by the slow rate of change and don't worry, it is excellerating. All things physical folks, and if you can, get on the other side of that usury trade.
When they destroy the middle class it wont make a bit of difference to them.
BINGO!
So, Why can't Our Elected Representatives See This?
Jobs Leave, Tax Receipts Go Down.
Bring Jobs Back!
Hurry! GET YOUR SNOUTS OUT OF THE TROUGH! ALL OF YOU DISGUSTING CORRUPT PIGS, come back from vacation! NOW!
themessagebrought to you by the fallstthinktank.
because they are puppet clowns who do whatever the people... er, the banks and corporations who get them elected tell them to do...
Sure, but you need CUSTOMERS first and this is a universal problem that the whole world is looking for a solution to (i.e. everyone wants to be providing goods and services for everyone else-impossible).
If we could only get those folks on Mars to buy more earth-made products! LMAO!
"The biggest downside is the loss of revenue thru Income Taxes"
i beg to differ
income taxes amount to about 1.1 trillion in .gov revenue
just a drop in the bucket of what they spend
not to mention most of that tax comes from payers above middle class status
Current government spending is ~1.5 trillion. How is 1.1 trillion only a "drop in the bucket". I don't know what math class you took but this is 68%, hardly a drop in the bucket. But then again, expecting americans to know math these days is about as reliable as the "mark to unicorn" accounting at all the big banks.
Current federal government spending is ~ $3.8 Trillion. Annual deficits are between $1.2 and $1.6 Trillion. You need to increase that $1.1 Trillion in income taxes by over 130% to ballance the budget. Meaning you can't ballance the budget from income taxes alone.
Politicians won't tax the poor and will only stealthily tax the middle class. The unpopular class that gets taxed, the richest 1% that already pays 38% of the income tax burden, would have to pay a tax rate of 90% after all deductions in order to ballance the budget.
Of course, that won't happen. But while we will eventually cheer their taxes raised to 50% or even 70%, we're not going to like the unprecidented intervention of the government on behalf of their star taxpayers that insures their enrichment over yours. Think about it: if the federal government is getting better than half of whatever the evil rich are making, what incentive does it have to see that anyone but those in the highest tax bracket thrive? Why should the government even allow an entity that pays 10% in tax on every dollar earned to exist when it can get better than 50% of that dollar if made by someone paying the confiscatory taxes?
The Corporations outsource Jobs outside the Country but the People in Foreign Lands do not pay taxes to the US Government. The Corporations do not pay Income Taxes on Overseas profit.
Americans lose Jobs which lowers Income Tax receipts. The loss of those Tax receipts will have to be made up by the Corporations in the end.
The Fed has encouraged Corporations to outsource their Jobs outside the US. It causes lower wages in the US which keep inflation down. It improves the Corporation's bottom line at the expense of the Tax Revenues to the Government.
This is why the Government is trying to create Jobs. Just maybe they should make Outsourcing Jobs expensive for the Corporations. Or, if any of the Corporation is located in the US to tax them in the US even for Overseas profits.
+5 to rating; from wall st. to main st you are right on the mark.
RIP capitalism fun while it lasted
Inflation . . . "up a breathtaking 36% from January 2000."
Is this guy for real? Real inflation is already in the double digits starting this year, not some 3% a year.
Gold and silver? That'll be a fun conversation a few years from now.
The late Bad Sam Kinison: SAY IT! SAY IT!!
on topic of kinison.....at this rate "move where the food is" will be peoples mantra
Bean, bullets, and ALL things physical, including a marketable trade.
i expected more of a divergance from each other...
gold vs. inflation.
Debtors? It depends. Inflation is good for debtors if their salary, operating profit, etc. rises at the same rate or faster than inflation. The $1,000 payment of a fixed rate 30-year mortgage will get easier to make as income goes up with inflation. A business that can raise its prices and keep its costs down (!) will also benefit.
************
If the dollar strengthens against all currencies-then the profit margins change and businesses can actually lower export prices from the cheaper import prices and falling wages-which we need to do-no matter what-in order to compete in global markets to regain something close to a trade surplus-
There is no inflation in the market-only higher prices in necessities and the commodity price run up courtesy of taxpayer bailout funds which all ended up in the hands of hot money investment banks that gunned the higher commodity prices that we now see at the gas/food store etc.
I was unhappy with Greenspan back in 1999-2000. There were really nice paying jobs back then in the technology sector. I believe the fed helped the dot com bust on it's way and it DEFINITELY sent unemployment up. Can't let the little guys get prosperous--they might just break the debt cycle, then they have no slaves.
do away with fiat currency, that's the ONLY way.
http://expose2.wordpress.com
Are you kidding? The dotcom era was fueled by easy money that was pumped to avoid some mythical Y2K calamity. How can anyone believe that offering $10 mm for plans drawn on napkins by recent graduates was the path to increase in productive capacity in the economy?
Even now, the internet is fueled mainly by discretionary spending (advertising dollars). The trouble with discretionary spending is that it is discretionary. Guess what gets chopped by corporations after employees, their salaries, and a few drone exectives? Right! Any discretionary spending.
Until we have economic growth driven by capital formation that comes from savings, the rest is moot.
"Until we have economic growth driven by capital formation that comes from savings, the rest is moot."
Exactly, but this is a FINITE planet that is burdened with DEBT and excessive usury, so your solution is impossible until the debt is repudiated or MARS starts buying earth-made products.