Jan 31, 2008

January 8, 2008: Don’t Cry for Me Argentina, Inflation is a Cruel Mistress, Midnight in New Hampshire

For a generation now we have watched and listened as the political leadership have wrapped themselves in the clothes of the common man. First there was Jimmy, famously carrying his own bags as he stepped off his chartered plane, masquerading as one of the folk and when in power levying taxes on unemployment. Then there was Ronnie, he of “Death Valley Days”, who spoke of freeing capital so that the benefits thereof would be shared by all and when in power crushed the unions, cut to shreds the safety net, raised social security taxes and presided over an economic boom that left main street America uninvited. Then came the Clintons who talked the talk of social justice but proceeded to cut to shreds the Federal commitment to welfare and likewise presided over an economic prosperity that did it’s level best to replay the 1920’s and 80’s.

The upshot is that for the last 35 years the income of middle class households, adjusted for inflation, has fallen. Median household income has declined and markedly so since the political larceny of 2000 during which time the median household has lost nearly $1,500. in yearly purchasing power. The numbers generally go unreported in the mainstream media and the situation is much more critical than the numbers reveal. On page 42 of the October 12, 2007 edition of “Business” magazine a report by Daniel Gross cites inflation numbers that the Feds choose to ignore. Reporting that the Feds post an annual inflation rate of 2.3%, Gross points out that this ignores 12.7% inflation rate for food and a 5.6% rate for energy because the Federal Government excludes the costs of food and energy from the calculation of the annual cost of living index.

Inflation is a cruel mistress. It benefits certain segments of the economy by making it possible—assuming annual wage increases—to repay loans on durable goods such as homes and automobiles with ever cheaper money. But as one descends the income ladder it works to disproportionately rob the most vulnerable among us with what little purchasing power limited resources possess. For instance: Assuming a family of three spend about $120.00 a week or $480.00 a month on groceries and $520.00 a month on gasoline, electricity and natural gas. At current inflation rates this will add an additional $90.00 a month to household expenses over the last calendar year. Notice that this cost is not related to income but to the cost of goods and services. Now as we descend the income ladder notice how this cuts into the disposable or “spendable” household income---money left over after taxes to live on. With after tax money of say $3,200 a month the inflation of the cost of food and energy add 2.75% to the cost of living producing a real inflation rate (2.75% undeclared inflation of food and energy plus the 2.3% the Feds do declare) of 5.05%. Now look what happens when income drops. With after tax money of $2,000.00 per month the inflation on food and energy relative to income is 4.5% and a real overall inflation now becomes 6.8%. Why? Because the $90.00 of additional expense per month is now a greater proportion of a smaller income. Similarly, with a disposable income of $1,500.00 a month---now down to the levels of the working poor, the numbers jump to 6.0% and 8.3% respectively. So the lower the income the higher the impact of the inflation rate on one’s well being. This is so because there is almost no discretionary spending at these levels of income. The poor can, and often do, exercise their discretionary spending power by opting not to seek increasingly expensive educations or medical attention. But with food and energy one is left with little choice, one simply has to pay the price at the pump and the check-out counter. The untold story, then, is not simply that the feds are underreporting inflation but how this inflation impacts the constituent parts of the republic.

With real inflation at between 5 and 8 percent for middle to lower income Americans-- extending over a period of years-- it is clear how a reduction in real purchasing power now hovering on average of $1, 500. Annually occurs. I would not be surprised to learn, given administration misrepresentation of social security numbers, that the decline in purchasing power is much worse. The concurrent evidence suggest that it is: growing numbers of foreclosures brought on by subprime loans made in part to large segments of the public who did not have the purchasing power, and record levels of credit card and other personal debt. The country is clearly borrowing in a frantic effort to maintain its tenuous hold on the American Dream. Americans are also cashing in personal wealth by way of home equity loans, to fund credit card purchases, and reverse mortgages in which the elderly cash out the equity of their estates to meet the ever increasing cost of living. This is what is driving the poll numbers that tell us that 70-80% of the country now think that we are on the wrong track, and that for the first time we have a generation of Americans who fear that they will give their children a poorer country than the one they inherited. This is what is driving the message of change now reverberating through the political corridors. The question is: do these morons get it or are they simply playing lip service to the crying need while harboring a political agenda that will once again be in service of their corporate paymasters? And if we should luck up on the right candidate will such a champion have the experience and administrative skills to tackle the legion of problems that await the hapless bastard? We grope blindly now as we reach out in the darkness.

Every four years a political ritual is observed in Dixon Notch, New Hampshire. The good citizens show up in the middle of the night and the entire village casts the first votes of the quadrennial primary season. Tonight Obama and John McCain took the village and the early lead. Later polling showed Romney ahead on the Republican side but the Democrats following the good villagers in their stated preference. Obama has reached into the icy cold of the great white north to become their champion. What this means remains in the telling.

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