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A bad, likely, and seldom mentioned scenario for the US during the next few years

8 February 2011

Summary:  Summary: Rising inflation would be bad. But there is something that might make inflation far worse, is more likely, and almost never mentioned: prices rising faster than wages..

About the past

The cost of living rose during the great inflation of the 1970’s.  But people got by because wages also increased, the value of their home rose, and their debts were inflated away.  Only in 1978 did things spiral out of control, with prices rising faster than wages.  Then the public turned against inflation, and President Carter appointed Paul Volcker as Fed Chairman in August 1979.  As seen in these graphs from the St. Louis FRED database about private industry hourly wages and the CPI {there are many measures of wages, each has measuring one aspect well; these are both BLS data series}.

 

About today

The Fed governors worry (like any sensible people) about the CPI flirting with deflation.  Falling prices drives asset prices down.  Worse, they drive down wages — while people’s debts remain fixed.  That vise crushes the middle class (the poor don’t have debts; the rich have real asset wealth).  But the Fed’s printing presses can prevent deflation (or at least severe deflation, if not necessarily Japan-style deflation-lite).

But the opposite condition is equally bad — and also looking more likely.  Wages rising slower than prices.   That’s death for the debt-heavy US middle class.  The US is flirting with this today. 

Boomers assume that wages will follow if prices rise.  That’s not necessarily true (especially with competition from the emerging nations with far lower standards of living and costs).  Inflation might not be the get-rich-quick scheme imagined by many Boomers (described in the previous post).

Other posts about inflation

  1. Is the US Government deliberately underestimating inflation?, 8 November 2007
  2. Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  3. A giant breaks his chains and again walks the earth: inflation, 10 June 2008
  4. The geopolitics of inflation, an introduction, 17 June 2008
  5. Consequences of a long, deep recession – part I, 18 June 2008
  6. Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
  7. Inflation or Deflation? Nobody knows what path will we take., 21 July 2009
  8. Beginning of the end of the Republic’s solvency. Soon come the first steps to a reformed regime – or a new regime., 14 August 2009
  9. The falling US dollar – bane or boon?, 14 October 2009
  10. A lesson from the Weimar Republic about balancing the budget, 10 February 2010
  11. Would a default by the US government help America?, 21 February 2010
  12. Can Obama turn America into something like Zimbabwe?, 22 February 2010
  13. The Fed is not wildly printing money, as yet no hyperinflation, we’re not becoming Zimbabwe, 2 March 2010
  14. We might default on our governments’ debt in the future. Do you know how often we’ve done so in the past?, 5 March 2010
  15. Why the U.S. cannot inflate its way out of debt, 15 March 2010
  16. Can Obama turn America into something like Zimbabwe?, 22 March 2010
  17. We can try to inflate away the government’s debt, but we’ll go broke before succeeding, 16 April 2010
  18. Inflation is coming! Inflation is coming!, 7 February 2011
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