Has Inflation been Defeated or Redefined?

And What has Happened to our Household Dollar?

The economic refrain of my college days in the 70s was that the government had borrowed too much for social programs, and that the resulting “national debt” was creating a cycle of government borrowing and INFLATION! (which crowded out wage growth and raised interest rates). This now seems quaint, as the debt was relatively small then, and consequently “Reagan whipped inflation”. Running my own numbers, I’m learning that the Consumer Price Index (CPI) may not be exactly what the government has been telling us, plus “wage crowding” may not have been as bad as we think.

Tokyo economic protest-the Japanese “deflation” of the 90s resulted from an investment bubble, then too-high interest rates causing a panic, then too low interest rates that caused people to hoard cash?

I started writing this article to explore whether inflation was the outgrowth of government debt and linked to interest rates. What I learned is that we’ve been living under a kind of economic delusion these past 50 years, that inflation hasn’t really been “whipped”, nor was it as bad as originally thought. The punch line is that international free trade and guest workers have actually lowered the price of food, clothing, and electronics considerably, while medical has gone up astronomically. The net effect is that the cost of basic family necessities have remained relatively stable, while benefits/investment for white collar workers have increased, while blue collars have declined. As for investors, investing in ANYTHING (especially housing and stocks) has netted a HUGE return since 1970, allowing one to stay well ahead of this debt. For the average person who doesn’t have the money to invest, inflation appears to have been higher than the stated government levels, crowding out wage gains to some degree. It would appear that inflation is tied more to interest rates than national debt, since after the Fed Chairs learned to increase the money supply or ease the prime rate on many occasions, inflation dropped. Going forward, there is an urgent need to control high medical costs and maintain international trade and guest worker programs. There is also the specter of “deflation”, as this may be the result of too-easy government credit and resulting bad investment. The elephant in the living room overshadowing all of this might be termed “good debt vs. bad debt”.

To put this in perspective, we should first learn a few things about inflation and deflation. I would venture to say that some inflation or deflation are good things, while too much of either is bad. Modest inflation is a sign that investors are making money and the economy is growing, and even Seniors aren’t hurt as much now that cost of living adjustments are in place. High inflation of course, is a sign of panic and lack of faith in the economy. Deflation is initially associated with recessions, as investors get gun-shy and many prices (and wages) drop. Modest recessions/deflations are actually kind of good, as they are “where bad ideas go to die, and good ideas are born”. They are also a “cooling off” of an overheated economy, that might be over monetizing bad assets (think the 2008 recession when many bad home loans were made). Of course, a large, extended deflation (like what Japan experienced in the 90s) is a bad thing, as no one wants to invest in anything and everyone loses. The theory is that Japan became so flush with success and money that they created a bad-investment “bubble”, to which the government initially responded with too-high interest rates, causing a panic and bubble-burst. Then the government tried to intervene with too-easy credit, which in a strange way extended the deflation (by creating a disincentive for people to invest, and instead hoard cash). The overall lesson learned might be that “well-conceived growth” (investment in things that are truly good ideas) is good for everyone, while “foolish growth” (funding bad or corrupt ideas) is bad for all. Its strange how time after time, we must learn this lesson, but as Americans we can also say we haven’t done it to excess (not yet anyway). (Prescott, Fingleton, Werner, Krugman, Ohno, et al),(Ashford, 2020)

So let me start with what has happened to household expenses in our Country the past 50 years. The following chart (compiled from various internet sources) shows these costs as percentages of household income (to create a common reference frame). The household costs referenced are used to create the Consumer Price Index.

Household costs as a % of Household Income, 1970 to 2020. Sources: Johnson, Rogers, Tan, 2001, Bruner, 2019, Barclay, 2015, Amadeo, 2018

As for the apparent decline in housing costs, let me point out that though owners have made out big on housing appreciation, the “rental” part has actually been relatively affordable (when the “investment” part is removed). Since interest rates have dropped, this “rental” portion has actually dropped from about 47% in 1975, to about 32% today. Also, there has been a clear drop in food, clothing, and electronics prices (due to International Free Trade and the influx of guest workers). In fact, the “% of Income” expense of everything has dropped, EXCEPT FOR MEDICAL, which has climbed enormously, from about 3% of household income to 19%!!! The big driver of household costs, it would seem, are the aforementioned international trade and guest workers, plus interest rates (which greatly affect housing costs), and MEDICAL, MEDICAL, MEDICAL!!! In conclusion, when I added up all the costs and measured their growth, inflation from 1970–2000 may not have been as bad as the CPI states, and the last 20 years it may have been worse. I suspect that since the CPI is tied to retiree “cost of living adjustments”, or COLAs, that it has been muted by statistical sleight-of-hand. Again, it is hard to separate what is a “fixed asset” from what is a “temporary asset” (ie home ownership vs rental), and to allow for regional and “quality of life” differences. (Reich, Hobijn, Lagakos, Losey, Gibson, et al)

US Historic stated CPI and Inflation, plus my “Real Inflation” numbers. Stated CPI/Inflation can be controversial as it is hard to separate the “rental” portion of home ownership from the “investment” portion, plus there are regional differences. Source: US Consumer Price Index 1969–2019 Wikipedia

I suspect that there have been “Politricks” at work here, as the CPI (Consumer Price Index) has been somewhat rigged to make “inflation” (a dirty word) go away…but it doesn’t really matter since “inflation” wasn’t really the problem it was made out to be (the problem was always interest rates, national debt and whether people invested in good or bad things). Since the National Debt is more or less a measure of interest rates and whether we invest in good or bad things, I will just say that it is growing at an incredible pace and is essentially a measure of our “national arrogance” and delusion that simply “investing in anything” is a “good investment” (since that’s mostly what’s happened since 1970). The truth is that the party will end at some point, unless we start learning to invest in good things. From a household standpoint, you can first see that if you were an investor, life was much better than for non-investors (just look at home appreciation). However, somewhat contrary to a Robert Reich column, non-investors would have had a good percentage of cost/income if only MEDICAL COSTS HADN’T GROWN SO MUCH!!! The stats for historic % benefits are misleading, since these are averages and white collar benefits have increase while blue collars have declined. Also, % savings has declined, as % expenses have increased.

Walmart has provided cheaper electronics and clothing (from foreign trade) and food (from guest workers) but does not generally offer medical or pension benefits to its workers

To put this as an example, let’s consider two blue-collar workers, “Millennial” (called Miller for short) and his father “Boomer”, who live in a rust-belt state. Boomer worked at the factory his whole life, and had a Union pension plus medical benefits, which back then were very basic (these benefits don’t count as household income, so they make Boomer’s expense/income ratios better). Miller got laid off when the factory closed, and became a no-benefit handyman, while his wife got a job at Walmart to make ends meet. Compared to his father, Miller has suffered some wage and benefit loss (thanks to Michael Milken and Ronald Reagan), but since his wife works and food, clothing, electronics are cheaper, he has survived. While Boomer had some additional money at the end of the month (which he put in a 4% Savings & Loan account), Miller is forced to borrow against his credit card, plus he has Obamacare at a cost of 15% of his earnings (his daughter has a chronic condition, and he is not eligible for the cheaper, higher-deductible plans). Though Miller’s situation is not dire, he would be greatly helped by a “Medicare for All” plan, which would essentially tax the rich to make his medical not only affordable, but allow him to pay off his credit cards. However, Miller has instead elected to follow Trump, hate Medicare, blame immigrants/minorities, join QAnon, and storm the Capitol building.

Blue collar workers have been hurt by union decline, benefit loss, and a lack of investment (as compared to white collars). Nevertheless, their losses have been buoyed by a relative decline in many household expenses, due to free trade and guest workers. Sources: United States Personal Savings Rate, Schwenk, 2003, Statistical Abstract of the United States, Rise & Fall of Union Membership Density, Walters & Mishel, 2003, Median and Average Price of New Homes 1963–2016, Wikipedia, Median US Household Income through 2018, Wikipedia

America has a kind of Cadillac medical insurance (due to its robust capitalistic Medical system), with most people only able to afford a Volkswagen plan (on par with other Countries, whose plans are heavy with basic care and not some of the expensive advanced care and drugs that we have). A “Medicare Option” might mimic the benefits of other Countries, while forcing more expensive care providers to hit up employers to compensate. These employers might in turn hit up employees, but as long as Medicare is an option for everyone, people like Miller will be able to live at reasonable cost. Obviously, there are many talking points here that are worth further examination in other articles.

As for deficits and growth, modern economists are now saying that deficits don’t matter as long as there is accompanying growth. I would add that this needs to be “good growth” (infrastructure, modern tech, & benefits that make us competitive going forward) and not “bad growth” (more toys for the rich, inflationary illusions of wealth such as overcapitalized housing and stock markets, investments in dirty tech that compromise future health). Debt to fund this “growth” should be less than 5% of GDP for any one-year period? (a balanced budget amendment that allows flexibility during a National crisis anyone?)

China has been using the “Belt and Road Initiative” to invest in other Countries. Is this making a better world or “debt colonization”?

So to summarize, “inflation” is that giddy feeling when you are over-optimistic, and “deflation” is the lump in your stomach when you feel everything is going wrong. Neither feeling changes the underlying truth…that you did the right thing (invested in sensible future growth, what insures the survival of your family, community, and country) or the wrong thing (the economic equivalent of the breaking of all 10 Commandments). “National Debt” is that fat around your belly…it won’t hurt you immediately, but if you don’t do a kind of economic diet and exercise, it may someday give you a heart attack.

As for how nations should cover debt, inflation, deflation, imports, and guest workers, a few things. China has apparently learned from Japan, and invested in developing countries with their excess wealth (ie made better investments than Japan, who notoriously bought overpriced American “glitter” or had expansion limited by land and guest worker limitations). Both countries are xenophobic (distrustful of people from other countries) while this has been an American “strength” (a diversified workforce, plus willingness to cooperate with other economies). The US has been holding its own, with good investments in domestic fossil fuel, internet tech, some alternative energy, and future medical, but making money way too cheap for questionable assets (old tech such as coal, big cars, outdated ag, overcapitalized housing and stock markets, too many luxury goods and a partially oppressed workforce). Look for Biden to raise interest rates a bit, promote worthy new tech, and return blue collars to sensible benefits, while making immigration and international trade reasonable again.



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