When we read about the U.S. economy, we often get wage growth as a signal of a strong labor market. It’s hardly a strong market when the labor participation rate and the employment-to-population ratio are both below February 2020 levels and have been stagnant for months.
When we look at wage growth by sector, the picture is even worse. According to JPMorgan, no sector in the U.S. economy has seen a rise in wages that covers inflation. Only two sectors in the U.S. economy—information and financial services—show more than 2 percent wage growth in annualized seasonally adjusted January figures. Furthermore, construction, manufacturing, education, health services, retail, leisure, and hospitality, as well as professional business services show a negative nominal annualized change of minus 2 to minus 6 percent. This means an even worse real figure after discounting inflation.
When we look at such a scary loss of real disposable income, two things come to mind. First, in the euro area, it’s even worse, as there’s barely any nominal wage growth to start with. Second, and most importantly—citizens don’t understand it—the middle class is being eroded by the combination of inflationary policies, money printing, and bloating of government spending, added to protectionism, trade barriers, and regulatory burdens.
Inflation isn’t a coincidence; it’s a policy. Massively increasing money supply has brought levels of core inflation that many would have never imagined. Now, the narrative is to try to convince all of us that an annualized consumer price index of 5 percent is “lower prices,” when the reality is that inflation is accumulated and citizens are poorer every year.
Think about this. If even in the years when the mainstream said that there was “no inflation,” we all saw the cost of housing, health care, education, and non-replicable goods and services rise well above real wage growth, imagine what’s happening now to households.
Inflation may be cooling, but that doesn’t mean low prices or even improving living standards.
How is consumption holding up in such a negative environment? Basically, because citizens are using their savings or taking on more debt, hoping that the message coming from authorities about lower inflation may bring prices back to where they were in 2019. However, that’s unlikely unless there’s a massive crisis or governments drastically cut their enormous spending plans and protectionist agenda.
When governments announce “anti-inflation” plans based on spending even more of what’s already a massive budget with an enormous deficit, they aren’t combating inflation, they’re prolonging it.
Governments don’t need to implement anti-inflation measures because it’s government spending and political trade barriers that cause inflation. Inflation isn’t an external phenomenon; it’s the destruction of the purchasing power of the currency due to political decisions. The so-called “supply chain disruptions” were nothing less than government barriers to trade added to more units of currency going to relatively scarce assets.
Commodity inflation is always more units of currency going to relatively scarce assets. It’s so evident it was a monetary phenomenon that in the middle of the Ukraine invasion, commodities made a U-turn and ended 2022 flat or down on the year after a couple of rate increases from the Fed.
One of the worst inflationary policies is protectionism. Protectionism places barriers to trade under the promise that we'll buy and sell our own products and live happily ever after. The problem is that protectionism also makes goods and services less available and more expensive, and reducing the purchasing power of the currency through massive printing diminishes internal demand and makes everyone poorer.
The reader may say that governments know the negatives of excessive spending, high debt financed by money printing, and imposing trade barriers, so why do they implement these policies? Because government is the first beneficiary of inflation.
Artificial money creation is never neutral. Government spending is always paid for by you, even if you’re poor, through taxes, inflation, or both.
The narrative now is to convince you that 5 percent annual inflation is a step in the right direction just to make you believe that 3 or 4 percent will be a success. By the time you accept 4 percent annual inflation as an acceptable outcome, the purchasing power of your wages will have fallen by more than 20 percent. The outcome will be more citizens dependent on government support paid for with constantly depreciated currencies. Meanwhile, whatever you may save will be eroded by negative real rates: financial repression.
Inflation didn’t come out of the blue. It was a policy. And inflation, currency debasement, and financial repression are a massive transfer of wealth from savers and the middle class to governments that constantly increase their size relative to the economy.
Many will blame capitalism for all I’ve mentioned, but the reality is that the policy of middle-class impoverishment comes from two decades of rising interventionism, more government interference in the economy, rising protectionism, and widespread inflationism. None of that has anything to do with capitalism and everything to do with statism.
