The New York Times recently published an article entitled “Median Income Rises, but Is Still 6% Below Level at State of Recession in ‘07”.
I found that article to be both amusing and irritating in that: 1) it told the truth; but 2) it did not tell the whole truth; and 3) its apparent purpose was to deceive rather than illuminate.
According to that article,
“Median household income has begun to recover over the last two years, but households still have not come close to regaining the purchasing power they had before the financial crisis began, a new study says.
“The study, issued on Wednesday by two former Census Bureau officials, suggests why many people remain glum even though the economy is growing and unemployment has declined.
“Although median annual household income rose to $52,100 in June . . . . median household income [is] 6.1 percent—or $3,400—below its level in December 2007, when the economic slump began.”
OK—if our nominal incomes (the number of dollars we receive for our work) are, on average, 6% lower than they were six years ago, that doesn’t seem so bad. You used to make $1,000 a week; now you make $940/week. Your “nominal” income has been reduced by 6%. Is that enough to make Americans feel “glum”?
I don’t think so.
In fact, losing 6% of your income over a period of 6 years works out to an average loss of just 1% per year. That’s not cause for celebration, but how many would even notice a 1% loss per year?
But, if reports that we’ve lost 6% in nominal income over the past six years are “not so bad,” they’re also not so honest.
The nominal loss in our income is not the only loss we’ve experienced. We’ve also suffered much larger losses in purchasing power caused by inflation. So, it strikes me as at least disingenuous for the researchers’ and the NYTimes to imply that Americans have lost only 6% income over the past 6 years.
In other words, what if, at the same time you suffered a 6% loss in your nominal income, your currency also experienced significant inflation and significant loss of value? It’s easy to see loss in nominal income—all you have to do is count and compare the number of dollars you received then to the number you receive now. But it’s much harder to see and accurately assess the slow, almost “invisible” losses we’ve also suffered due to inflation.
More, in the past, we experienced price inflation on a regular basis, we also experienced a roughly-equivalent wage inflation. If prices rose 10% due to inflation, so did our wages and thus inflation was mildly interesting but no cause for alarm.
But that’s not happening today and that’s why a 6% loss in nominal income is actually devastating. Inflation is reducing the value of the dollar and pushing prices up, but wages aren’t rising proportionally. Instead, American wages have reportedly fallen 6%. Under that scenario, inflation must cause painful losses to consumer incomes and spending.
• To illustrate, suppose you received $1,000 for a week’s work in A.D. 2007 and today you receive only $940 dollars a week. That 6% nominal loss is easy to count but not so bad. You can afford to lose $60/week without too much discomfort.
But suppose you also factor in inflation over those six years—your lost purchasing power (value of dollars) might be much greater than 6%.
I.e., suppose the national inflation rate had been 2% per year (more or less what the government claims or has wanted for the past 6 years). Then, your purchasing power wouldn’t have merely declined from $1,000 to $940, but instead, would’ve declined by an average of 3%/year (1% nominal loss + 2% inflation loss) to about $832. (You’d be paid $940 per week, but that $940 would only purchase about $832 worth of products as compared to $1,000 in A.D.2007.)
Thus, over a mere six years, your purchasing power may have fallen by almost 17%. Now, that’s cause to grumble. You can afford to lose $60 a week out of $1,000 without much inconvenience. You cannot afford to lose $168 dollars in purchasing power each week without having to change your lifestyle significantly.
• How much inflation we’ve experienced over the past six years is debatable. John Williams at Shadowstats.com places the current inflation rate at nearly 10%. The price of gold has risen over 100% in the past six years = annual average inflation of roughly 16%. The price of silver has risen 43% in the past six years = annual average inflation of 7%.
Therefore, it’s not unreasonable to guesstimate that the average rate of inflation over the past six years has been, say, 7%. If so, then over past six years, the average American’s purchasing power has slowly, almost invisibly, declined by about 8% a year (7% inflation and 1% nominal loss) from $1,000 week to $606—a loss of purchasing power of roughly 40%.
And that is roughly what’s happened to the average American’s real income over the past six years. He’s lost roughly 40%—not just 6% as the NYTimes reported—of his purchasing power. (Those who remain unemployed have lost even more.)
For anyone hoping to sustain our economy, that 40% loss is truly something to be “glum” about.
For anyone who’s objective, that loss suggest that no economic recovery is possible in the foreseeable future. I.e., can a “consumer” economy “recover” while the consumers are still suffering a 40% loss in their purchasing/consuming power?
• The only way the consumer economy can recover is if consumers see their American wages increase as rapidly as American prices. But how can American wages rise in a world of low tariffs and Global Free Trade wherein American workers are called on to compete “head-on” with the workers of China, India and Mexico? So long as we have Global Free Trade, American’s nominal wages will tend to go down. In conjunction with those nominal losses, the additional losses caused by inflation will drive American workers from the ranks of “consumers” and into the ranks of poverty.
When was the last time you heard a politician of either major political party argue that Americna wages should increase? When was the last time you heard a politician argue that we should raise out tariffs and get out of Global Free Trade?
I’ll bet your answer is “not lately”.
So long as that’s true, the decline in the average American consumer’s wages and capacity to consume will not be reversed. So long as the consumer can’t consume much, the consumer-economy can’t recover.
The losses in nominal income plus the losses due to inflation tell us that the “consumer-based economy” is a failed economic theory that must soon be abandoned and will inevitably be replaced by a “producer-based economy”. In the coming “producer-based economy,” your individual prosperity and even prospects for survival will be directly proportional to your capacity to produce and save rather than borrow and consume.
• The shift from “consumerism” to “producerism” (to coin a term) might even help explain part of the current shift in wealth from the middle class to the super-rich.
Insofar as many of our productive jobs and industries have been sent to foreign countries, the middle- and lower-classes are no longer capable of “producing” to the same extent possible 20 or 50 years ago. Insofar as our government gives welfare to the poor and subsidies to the upper-middle class and rich, we’ve adopted a national mentality that believes we’re somehow entitled to “shop (consume) ‘til we drop” or at least survive without working. Many Americans have lost recognition and understanding of our need to produce.
I won’t say it’s true, but it’s at least arguable that America’s only remaining “producers” (those who produce more than they consume) are the super-rich. Those who produce more than they consume are going to get rich or at least survive. Those who consume more than they personally earn and produce are heading for poverty and perhaps starvation.
• If you want to survive the coming difficult years, you’d best find a way to produce something that other people don’t just want but actually need. You’d better adjust your mindset to increase your capacity to produce moreso than your capacity to consume.
If you’re on welfare, if you depend on government subsidies or even government retirement programs, you might be wise to start looking for another way to support yourself. Get some tools, some education, some expertise in something productive and necessary.
If you’ve lived a productive life and produced more than you’ve spent, you should have savings. You should be protecting your savings in a medium other than paper debt-instruments that are subject to inflation. You should therefore have gold and/or silver.
If you have enough savings, and if they’re in a medium that can’t be wiped out by inflation, your savings might see you through the coming difficult years. Maybe.
Even so, you’d do well to find some sort of productive work that you can perform in the near future. Get some tools, experience and expertise in a blue-collar occupation that provides the economic needs like food, water and shelter. So long as people need to eat, there’ll be work for farmers. So long as people need water, there’ll be work for plumbers. So long as people need shelter there’ll be work for carpenters and electricians, etc.
This is not the time to learn the cosmetology or travel-agent businesses.
Consumerism is dying. If you don’t want to die with it, learn to produce something.