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Economic Ground Zero

  • Economics
  • 4 min read

Today, the economic focus is inflation. Many consider it Economic Ground Zero. Tomorrow, a major recession or depression will be the concern.

Despite attempts to suppress the magnitude of inflation, individuals see it every time they purchase gas, food or other necessities. The Bureau of Labor Statistics, responsible for calculating inflation, understates the problem (see Shadowstats.com for a comprehensive look at how and their estimate of the understatement). Politicians and governmental agencies encourage (demand?) that statisticians to keep reported inflation low.

Inflation 

John Mauldin publishes a weekly newsletter commenting on politics, economics and business. His current one references the latest Hoisington Quarterly Newsletter, which contains the following information and charts:

“Most Americans have suffered a substantial fall in their standard of living over the past 12 months. In the latest available 12-month change, 116.2 million American wage and salary workers suffered a 3.7% decline in their inflation-adjusted paychecks, the largest drop since 1980 (Chart 1). This alone more than offsets the gain in income going to the 6.5 million newly employed in latest 12 months. In addition, salary workers suffered a larger loss in standard of living than hourly employees (Chart 2). Inflationary damage to the 70 million retired Americans cannot be calculated in precise terms, but qualitatively the situation is not good. Those covered by Social Security received a 5.9% cost of living adjustment (COLA), however most private pensioners do not have COLAs. 

Source: Hoisington

“A rough estimate is that approximately 50 million or more retirees’ real income has been seriously eroded by the 40-year decade high inflation rate. Summing those whose income trailed price increases (116.2 + 50) yields a figure of approximately 170 million Americans. The sizeable adverse impact of inflation is consistent with a decline in real disposable personal income in 11 of the 13 latest months. Eighty five percent of U.S. households make under $150,000 a year, with many living from paycheck to paycheck or on steady salaries. The imbalance between those who benefitted and those who were harmed from the monetary and fiscal policies pursued over the last two years is abundantly clear. The 8.5% inflation rate has dramatically lowered the standard of living of over 170 million individuals.”

It has been over 40 years since inflation was this high! 

Where Next?

The political class and their central planning apparatus, the Federal Reserve, created this problem from which there is no escape. Neither has the interest of the average American in mind. Neither considers economics particularly important when it conflicts with short-run politics. Both want you to believe they can continue to intervene and that such meddling can produce better outcomes or at least “better data.”

Times are Different

Inflation in the late 1970s and early 80s was bad. The inflation numbers were comparable to the current ones. Paul Volcker and Ronald Reagan addressed the problem head-on. The results were remarkable, although interest rates soared. (I remember mortgage rates approaching 20%.)

Paul Volcker or Ronald Reagan could not save this economy. It is doubtful that men with courage like Volcker or Reagan exist today. Indeed, even if they did, current problems are no longer amenable to their solution (see here).

Why are Things Different Today?

Few modern politicians try to fix economic problems. They fix political problems. Most of their “solutions” hide or create economic problems. “Out of sight, out of mind” works in politics but not economics.

Hiding problems is easier than undoing the poor decisions that created the problems. Real economic solutions need to reverse these actions. But doing so harms some constituents while requiring a rollback of the factors causing the problems. Truly correcting problems requires the admission of:

  • failed policy
  • admission that the State cannot solve all problems

Santa Claus never takes “gifts” back, and no politician aspires to be Scrooge! That is why politicians rarely solve economic problems even when responsible for them.

This political behavior, coupled with the insane notion that spending need not be constrained, made it easy to “throw more money toward unpleasant situations.” This behavior created inflation and lowered current and future living standards.

It also created the conditions that make it impossible to solve the inflation problem without massive, dire economic circumstances.

 

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