If you want to know why Americans are so angry about the economy, let’s start with the fact that despite strong job growth and big wage increases, their incomes simply aren’t keeping pace with inflation.
Americans don’t feel poorer – they are poorer. In fact, they have never lost that much purchasing power in a single year.
And if you think our inflation crisis stems from “too much money chasing too few goods,” you should breathe easy now that American families no longer get all that money from Uncle Sam and Uncle Joe. Inflation will definitely fade now, right?
Mostly not. My view is that inflation has more to do with supply issues than with excess demand. I think inflation will remain high until supply constraints are resolved or the economy collapses.
Here is the data:
The Bureau of Economic Analysis predicted on Wednesday that real disposable income – the amount left after taxes and inflation – fell at an annual rate of 7.8% in the first quarter of the year. A drop of this magnitude is unheard of outside the recession.
Read more about the GDP report: US GDP in the first quarter shrank 1.6%. The second quarter does not look much better for the economy
It gets worse. Real incomes available for spending have fallen in each of the past four quarters and are down 12% from the previous year through the end of March, a drop that broke the previous pandemic record of -2.6% set in 1974.
The bureau said Thursday that after-tax income and inflation fell 0.1% in May and were below the first-quarter average.
Income has fallen by $2.5 trillion since March 2021. The extraordinary decline in real income can be explained primarily by rising inflation and income lost due to the end of many federal tax and spending programs designed to provide relief to struggling families and businesses during a pandemic.
“ Federal Reserve Chairman Jerome Powell argues that the economy is in good shape and can handle higher interest rates because families are in a strong financial position with plenty of liquidity. “
Now, many people think that this drop in income is a good thing, because they believe that the current inflation problems are caused by the government giving people a lot of money in the form of higher unemployment checks, large-scale stimulus checks, expanded Medicaid, the monthly tax credit for children, and various Other tax and spending programs.
Stimulation worked, but did it work well?
This relief is credited with keeping millions of people out of poverty as the economy slowly shuts down and reopens during the COVID pandemic in 2020 and 2021. But many critics say the extra liquidity has fueled inflationary pressures that drove consumer prices up 6.3% in the past year. (As measured by the same price index that the BEA uses to calculate real disposable income.)
They say our inflation is simply a matter of too many dollars chasing too few goods and services.
Most of those government programs have now been dropped or curtailed. Remittance payments from the government have fallen by $2.5 trillion since they peaked in March 2021, with nearly all of those losses hitting poor and middle families.
Meanwhile, taxes paid rose by $500 billion, buoyed by capital gains booked after another year of double-digit gains for the S&P 500 SPX,
Arch creep and expiration of the child tax credit and other temporary tax provisions. Taxes rose to 14.4% of personal income in the first quarter, just a tick above the record high of 14.5% set in 2001.
But while the government has stopped giving American families “a lot of dollars,” that doesn’t necessarily mean our inflation problem is resolved, the Fed and others say. Since American families have saved a lot of money (between $2 trillion and $4 trillion) during the pandemic, they have plenty of money to spend, despite their lower incomes.
Latest word from the Federal Reserve: Powell says there is no guarantee of a soft landing for the US economy
Fed Chairman Jerome Powell endorses this view, arguing that the economy is in good shape and can handle the expected higher interest rates of FF00,
Because families are in a strong financial position and have a lot of money saved.
Rex Notting: Why interest rates aren’t really the right tool to control inflation
Theories fill the void left by facts
Here’s where the facts I’ve been following fade away: All the numbers I’ve discussed so far are aggregate data. The government is adding everyone’s savings, from Elon Musk to the homeless under the track and everyone else. What we don’t know is how the $2 trillion or $4 trillion in “excess” savings is distributed to the 333 million people living in this country.
If the cash treasury is mostly owned by middle-class families who have provided their stimulus and tax credit checks for children, they can spend those savings for months or even years while trying to maintain a lifestyle that their monthly income can no longer support. . This would keep inflation at a boil, because consumer demand would continue to outpace the supply of goods and services.
The odds of a recession are growing, but the US economy isn’t doomed to a recession
But if the excess savings were mostly held by fanatics who got some of their paper wealth during the big bull market of 2020 and 2021, then inflationary pressures in the future would be weaker, because much less of this cash treasury would be spent and there would be less surplus in Demand to push prices up.
The Fed tries to estimate the distribution of different asset classes every quarter in the Money Flow Report, but the Fed admits that its model falls short of the task of accurately assessing what kind of families are saving — rich or poor, young or old, black or white. The Fed is now conducting a 2022 survey of consumer finances that will determine the distribution of cash stock, but that data won’t be released for years.
Fed economists strongly believe that average households have increased their savings too much during the pandemic. Researchers looking at anonymous bank account data from JP Morgan Chase and Bank of America came to the same conclusion.
But this does not pass the smell test for me. If most families have tens of thousands of dollars in the bank or money market fund, why are they so concerned about inflation? Why are they so angry? They saved for a rainy day, and it’s raining.
My hunch is that many, if not most, families are struggling to pay the bills, and they’ve started cutting discretionary expenses as the cost of buying necessities has risen. If I’m right, consumer spending will slow faster than economists and the Federal Reserve expect.
In fact, the government said Thursday that consumer spending fell 0.4% in real (inflation-adjusted) terms in May. This prompted many economists to lower their estimates of economic growth this quarter and this year. Which means the Fed could experience the recession it hopes to avoid.
The key to growth this year may depend on the answer to one of the biggest unanswered questions: How much do typical families have in the bank? We need some answers to this question now, not in a couple of years.
You should read more about inflation:
The Fed can’t even get the economy going right
Inflation is now rooted in the necessities of life. Which means the Fed has little hope of lowering the cost of living without putting millions out of work
Inflation inequality is hitting the working class harder than ever before