Inflation, past and future: reality bites

 

Charles Hugh Smith, whom we've met many times in these pages, has penned two articles on his blog, "Of Two Minds", that illustrate the effects of past inflation and what's coming our way in the future.  They're both very thought-provoking.

In the first article, "Why the Minimum Wage Should Be $18/Hour", he looks at what one could buy with the early 1970's minimum wage, and what one can afford now.

Given the rising prosperity we keep hearing about, shouldn't we be able to provide minimum wage workers the same purchasing power they enjoyed 50 years ago in 1970? This is a very simple proposition: either we can provide minimum wage workers the same purchasing power they enjoyed 50 years ago or we can't, and if we can't, then all the claims about "rising prosperity" are revealed as false.

. . .

The only accurate way to measure the purchasing power of labor is to ask: how many hours of labor did it require to pay the rent, buy a new car or buy a new house? Any other measure is just sleight of hand intended to obscure the collapse of wages' purchasing power.

In 1970, I earned $1.65 an hour. A new economy car (Ford Maverick or VW beetle) was $2,000, so it took about 1,200 hours of work to buy a new economy car.

A new house cost on average about $26,000 in 1970, so it took 15,750 hours of minimum wage labor to buy a new house.

At today's federal minimum wage of $7.25/hour, it takes 3,000 hours to buy a basic 2021 Honda Civic or equivalent which costs $22,000. To buy a new economy car today with 1,200 hours of minimum wage labor, the minimum wage would need to be $18.30 /hour: 1,200 time $18.30 = $21,960.

. . .

To buy a new house for $408,000 with 15,750 hours of labor, the wage would need to be $25.90/hour. To buy a $300,000 home with 15,750 hours of labor, the wage would need to be $19/hour.

Moving forward a few years to 1974, the minimum wage increased to $2/hour, and I rented a small studio apartment in Honolulu, one of the most expensive cities in the U.S. for $120/month. Thus it took 60 hours of minimum wage labor to pay the rent.

Studio apartments in Honolulu are now around $1,100/month rent, so to pay the rent with 60 hours of minimum wage labor, the minimum wage would need to be $18.30/hour.

. . .

To equal the purchasing power of minimum wages in 1970-1074, the minimum wage would have to be at least $18/hour. Anything less does not equal the purchasing power of the minimum wage paid 50 years ago, and no amount of statistical trickery can erase this reality.

What does it say about our "prosperity" if we can't even afford to equal the purchasing power of the minimum wage paid 50 years ago? It says the 1% got the mine and the bottom 90% got the shaft.

There's more at the link.

Mr. Smith follows up with a second article titled "The Sources of Rip-Your-Face-Off Inflation Few Dare Discuss".  He points out that what drives inflation is more than just currency devaluation.

While the conventional discussion focuses on monetary inflation, i.e. expansion of money supply, the real rip-your-face-off sources have nothing to do with money supply. The rip-your-face-off sources are scarcities that cannot be filled by substitution or globalization.

Consider skilled hands-on labor as an example. Let's say some essential parts in essential infrastructure require welding. There is no substitute for skilled welders. But wait, doesn't economic dogma hold that whenever costs rise, a cheaper substitute will magically manifest out of a swirl of dust? That dogma is false in cases such as skilled labor.

The only substitute for a skilled welder is another skilled welder, and while theory holds that there will be cheaper welders who can be brought in from elsewhere, this is also not true: due to deficiencies in education and a cultural bias against manual labor, there is a shortage of skilled welders virtually everywhere.

But wait, can't we just offshore the project? Globalization always lowers costs, right? So by all means, load your busted boat trailer on a container ship to China, find a welder in Shanghai to do the work, and then ship the boat trailer back. Weeks later, you discover the plan and the specs weren't followed, so all the time and money was wasted. It would have been so much cheaper and faster if you'd just paid the welder in town a few extra bucks and had it done right in a few hours.

But wait--we'll just automate welding and have a robot do it all for next to nothing. OK, fine, pal--you manufacture the robot and program it to trundle out to the busted boat trailer, examine the breaks and do the welding so it actually works again. Go ahead and do that (at gargantuan expense), and then let's see the robot do it right in dozens of different jobs in all sorts of situations, and then add up the cost of all that compared to the relatively low cost of an experienced welder.

Meanwhile, back in the real world, people with high levels of craft skills and experience are scarce, and the fantasy of robots replacing them are untethered from reality.

As I've noted before, central banks can conjure trillions of dollars out of thin air but they can't conjure up experienced, motivated workers willing to work for lousy pay. As I noted last week, the minimum wage would have to double to even get close to the purchasing power of the minimum wage I earned two generations ago. If an economy can't pay its workers enough to live, it doesn't deserve to exist and should be shoveled into the dustbin of history.

. . .

So let's review the sources of inflation:

• Scarcities of labor across the board.
• Deglobalization / Peak Globalization.
• Cost and value-creation limits on automation.
• All the corners have been cut, now prices have to rise or companies will bankrupt themselves.
• The 'Take This Job and Shove It' Recession (5/12/21) -- Never Going Back -- people are abandoning the status quo hamster wheel.

Few are willing to acknowledge these sources because they run counter the the fantasy world narrative that's spinning the frenzied hamster wheel ... nobody in a position of power wants to discuss prices being driven by scarcities caused by actual physical limits.

Those who think prices can't double or triple haven't experienced scarcities caused by actual physical limits. There are no substitutes for essentials or skilled labor, globalization has already stripmined the planet and central banks can't print experienced workers willing to work for rapidly devaluing wages in dead-end jobs while billionaires pay pennies in taxes.

We're getting a real-world economics lesson in rip-your-face-off increases in prices, and the tuition is about to go up--way up.

Again, more at the link.

I find it hard to argue with Mr. Smith's conclusions.  I've been warning for years (to the displeasure of some of my readers) about what's coming, and - as we've seen over the past few months - it's finally arriving as we speak.  You don't have to believe me;  you can just go down to the supermarket, or the gas station, or the auto dealer, and compare prices today to what they were at the beginning of this year.

I'm worried enough about our prospects that I'm now actively seeking to protect our family against inflation as far as possible.  I'm going to keep a cash reserve, because it's always useful, but apart from that I'm going to invest any spare cash in building up reserves of things I know we're going to need and use in future - food, laundry detergent, medications, etc.  If I buy them now, I don't have to buy as much of them in future;  and I can get them at current prices, rather than at nosebleed-level inflated prices when my income won't have risen to match cost increases.

I'm also going to try to "inflation-proof" our reserves (apart from our essential store of cash) as far as possible.  I'll be looking for a store of value rather than an investment (they aren't the same thing).  For example, the one-ounce silver coins I bought in 2015 have appreciated in value by well over 50% today.  If I'd kept the dollars I used to buy them then, those dollars' purchasing power would be over 50% less today than it was then (in terms of real inflation, not the flawed, manipulated official rate of inflation).  In other words, that 2015 purchase has kept pace with inflation.  I can get 2021 dollars for it today that will approximately equal (in purchasing power) the dollars I used to buy it six years ago.  Even if I can only afford to buy one silver coin at a time, I hope that what I buy today will also hold its value and its purchasing power into the future.

I think stores of value like that will become very, very important in future.

Peter