Dear Readers,
In 2021, we talked a lot about how the polarization of the world was going to go into overdrive.
Income inequality has been expanding for decades, which has been a core driver of anger within nations. The COVID response sent a flood of liquidity into the market from both fiscal and monetary directions. This liquidity came directly from governments in the way of subsidies and straight cash. Central banks dropped interest rates further and launched the largest coordinated effort in quantitative easing in history.
This took negative yielding debt to a peak of $17.7 trillion. But it was something that started way before we even knew how to spell the word “COVID.” The QT (Quantitative Easing) policy errors kicked off in earnest during the 2008 financial crisis but then were expanded over the course of the following years.
Any time a central bank even hinted at a “tightening”, the market would freak out, and the central banks would “back off” their policy adjustments. This just increased the market’s addiction to low rates and free money creating the absurdity of the chart below.
It’s also worth noting that the below chart of “negative yielding debt” only encompasses bonds that traded negative on a nominal level and not on a real level- or “adjusted for inflation.”
The rise of inflation primarily impacts the poor and middle class. Wages typically fail to cover the additional “cost” that comes along with inflation. Unless you are fully invested in an offsetting asset, your buying power will keep being reduced.
The below chart puts into perspective just how far off the earnings power is to the purchase price of a home. Asset prices have skyrocketed across the board, and it limits the ability for individuals to cross income brackets.
In the “good old days”, people would purchase a “starter” home to build up equity and eventually sell to move up to a bigger home or a different region. This appreciation enabled many in the lower and middle class to increase asset values by trading up.
Even with elevated mortgage rates back in the 1980s, the savings rate was still well over 10% and helped to offset the cost of inflation. In 2023, we still have inflation of over 6% with savings rates at only .25%.
The below chart does a great job of putting into perspective how inflation has been draining the purchasing power of individuals going back to 2008. Hourly earnings increased by 4.4% in January, the slowest growth rate since August 2021.
This is the 22nd consecutive month where inflation outpaced the growth in wages, a decline in prosperity for the American worker, and the primary reason why the Fed will hike again. Even though the job market remains tight, we aren’t seeing wages keep pace with the rate of inflation. When we look back over time, there has been a slow bleed in the purchasing power of the average consumer.
The consumer has had to rely more and more on debt and credit card spending to make up for the shortfalls. We have quickly surged past the short-lived decline of credit card debt as excess savings was drained and consumers relied heavily on credit to close the gap in the cost of living.
Tomorrow we'll cover how food inflation threatens societies at home and abroad.
Kind regards,
Freedom Financial News
