Wednesday, June 9, 2021

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.



jim rock said...

Saw a meme a few days ago. 1962 minimum wage was $1.25. Five silver quarters.
Melt value of junk 90% silver was that day $26 and change.
Talked to my dad about it. He graduated HS in'62.
Gasoline in our town was 5 gallons for a dollar.
A loaf of GOOD bread was $0.15. Our money is for sure worth a very high level of alot less.
Can't eat silver my friend.
But ammo, lots of it.

Eaton Rapids Joe said...

I overheard a conversation between a couple of builders. Jennifer Granholm, Governor of Michigan at the time, enacted several codes that mandated insulation beneath the basement floor and insulation of basement walls.

The Michigan Builder's association estimated that that, and her other mandates, added $63,000 to the typical 2200 square-foot, stick-built house. The insulation didn't just impact the foundation but it impacted the electrical and plumbing as it denied them the real-estate that they needed to run service to outside walls.

Same deal with autos. Government mandates turned them into rolling computers with hundreds of millions of lines of code. They are also filled with explosive air-bags and more sensors than the moon-shot.

I think those simple comparisons conflate content-creep and inflation. The numbers would be much closer if it was possible to buy a 1600 square-foot house that was compliant with 1970 building codes or a high-performance, off-road vehicle like a Polaris Ranger 500 ($10,000)

Uncle Lar said...

The one thing that keeps getting ignored in the minimum wage discussion is that it was never intended to be the wages required to support a family. For the most part it was and is intended for entry level unskilled new hires, and for certain food service jobs with potential for augmentation with tips.
Anyone working full time at minimum wage has issues, either lack of skills, extremely poor work habits, or are victims of a predatory employer taking advantage of some situation preventing them from seeking a better job.
Bottom line, for those expecting massive raises with a minimum wage mandated increase no matter what the new number, they are in for serious disappointment due to the fact that their services simply will not be worth the newly mandated wages. They will be replaced by automation, or their employers will abolish their jobs and create new jobs where a single skilled worker can accomplish the tasks formerly done by multiple minimum wage employees.
My main objection to a $15 minimum wage or any number at all really, is due to the reality that it will most adversely affect entry level and part time employment.

Steve S said...

And thus you see why the gubermint leaves out cars and housing from their fantasy inflation index.

Unknown said...

Other commenters above have also made these points. For the economy car comparison to be valid, we must make the cars comparable. Since the Honda Civic comes with a more powerful engine, air conditioning, power windows and locks, automatic transmission, cruise control, etc., we'd have to equip the 1970s economy car in the same way to get close to a true comparison.

Alternatively, we could pick a more economical economy car, like the Kia Rio for $17,000. It still has the features that would have been considered luxury items in 1970. And even at this price point, the modern car has equipment that wasn't even available in the 1970s - electronic stability control, airbags, ABS brakes, smart phone integration, and so forth - so that we can never get a true comparison value.

Likewise the bit about skilled welders - true, that can't yet be automated, but I don't know of any skilled welders who are just making minimum wage. Even the illegal alien day laborers around here are charging $12.00/hour for their work. So just looking at the minimum wage as a comparison is not valid.

Aesop said...

You could also start by making dollars and quarters worth what they were in 1970, by going back to 90% silver coinage from pre-65, and dollars tied to actual physical gold.

Aesop said...

For reference, 6 90% silver quarters now would be worth $21.

We don't need higher wages; we just need honest money.

Tschifty Mccoy said...

Yep. All the help wanted ads around here are offering waaay above minimum wage. Focusing on MW is a red herring, meant to pander to the low info voter who likely will never look for a job anyway.

Etaoin Shrdlu said...

Some thoughts, not necessarily set out in an orderly way.

1. When times are good, commodities generally or precious metals, do not keep up with returns from a diversified portfolio of commons tocks. Researched and proven. over and over. These are good shelters in inflationary periods of time, but speculators and market players will bet there first and drive up the price, lowering your returns.

2. Returns from commodities and PMs can be very good, but transaction costs for the real thing are very high. Buyer beware. Fraud (like the notorious gold-plated tungsten bars) and theft are things which happen.

3. The mi wage is not supposed to be something you live on. It works better as a limited protection from gross exploitation for working high school kids and "the least of these" among us.

4. My impression is that something is going on with lumber and farmland. They have been securitized, and are also being bought up by guys like Bill gates and Ted Turner. The LDS Church also is a huge landowner -- the biggest in Florida -- for example. It's a free country, so this is not necessarily evil, just opens the possibilities for manipulation, like perhaps incrementally withholding raw timber from the market. Hedge funds and large university endowment funds are heavily into "alternative asset classes".

Food for thought.

The Freeholder said...

"Who is John Galt?" Seriously.

I know a number of people, myself and my wife included, who have retired earlier than the traditional 65. We've all figured out how to make the money we have meet our needs and sometimes even save a bit, foolish as that might be right now. It's amazing how much money you spend so that you can work. Vehicles, fuel, maintenance, clothes, lunch and often supper out, visits to the gastro doc for ulcers and so on add up to a significant amount.

As far as the minimum wage goes, when I was minimum wage, back in the 70s, the people who were making it were part-timers like me, older folks supplementing their retirement and a few hopeless losers who couldn't do any better because of lack of skills or motivation. Most families in my neighborhood made it on Dad's paycheck and Mom raised the kids. We had one lady who was divorced, and one family where both parents worked.

It seems to me that we have all manner of physical "stuff and fluff", but we are less well off, over all, than we have historically been. We try to make up for the deficit in personal relations by buying more stuff. We'd probably be a lot better off if we could sit on the now forgotten front porch and talk to our neighbors passing by, taking an evening constitutional.

We too have been stocking or restocking, and that's going to continue. Pray for the best and prepare for the worst.


Back earlier in my career when I worked for a Auto OEM I would routinely visit the Detroit Auto Show. Good times.

But I would see the Tier One suppliers with their gimmicked-up instrument panels, and smart-this and smart-that and voice-activated the other, and wonder... who, seriously, is going to pay for all this carp?

Give me a solid car that is reliable, gets good mileage, and is safe, and forget the dash computer screens and IT razzmatazz and so on. I don't need to be connected to the internet when I'm on the highway.

Nick Flandrey said...

I'll chime in with those thinking his comparisons were poor picks.

Cars - for the reasons stated CAFE and other .gov regs mean the car of today and of back then are not the same animal

Houses - prices have more to do with interest rates, loan availability, and supply than simple inflation.

Welders - I've been one, and there isn't a shortage of skilled welders, there is a shortage of skilled welders willing to work for low wages. Ditto for machine operators, fabricators, or whatever job requires a dust mask, protective gloves, eye wear, ear plugs and knee pads. The low wage jobs go unfilled because the good guys won't work for what is offered, preferring to be well paid, or do something else. Pipeliners, pressure vessel welders, and any number of the specialties are great jobs making great money- when the President isn't undermining industry, and they pay because the level of skill is needed and properly valued.

It's possible that he means there isn't an OVERSUPPLY of skilled welders so that it drives wages down. "Learn to code" is code for "We're tired of H1-Bs and midnight conference calls with India so we want more programmers here to drive down the cost of programmers...."

He makes an even more egregious error in my opinion when he assumes the need and desirability of a federal minimum wage. All a mandatory minimum does is distort the market and add inflationary pressure.


bearcub7250 said...

"minimum wage was not intended to support a family".

that's NOT the point. the point is "To equal the purchasing power of minimum wages in 1970-1974, the minimum wage would have to be at least $18/hour."

all of us here know there isn't a service industry business that can survive paying 18 bucks an hour to all of its employees.

Jerry said...

The thought occurred to me the other day that the Communists have never been able to gain traction in the United States because there was a prosperous middle class. The answer is obvious. Beggar the middle class and a Communist "revolution" becomes possible; at least in their minds. The only fly in this ointment is the Second Amendment. Marx & Lenin always assumed that the little people would be disarmed and they would control the arms.

Jonathan H said...

While I'm willing to discuss the minimum wage and what it is best for it to be. I disagree with some of his points. While car prices are (relatively) uniform across the country, other prices aren't. Housing is the biggest and easiest example - there are HUGE variations in housing costs across the country, in addition to fluctuations in energy costs, food costs, etc.
For example, he makes a comparison to a $300,000 house - the average house price in the US the last time I looked was $175,000. I know of places where the county average is $120,000 and places where it is over $1 million.
Additionally, I know places where the average electric bill is $40 a month and places where it is over $300 a month. I don't think it is reasonable to lump all those variations together to come up with a single national cost of living.

bearcub7250 said...

i know what a loaf of bread cost in my AO 15 years ago; 50 cents. that same loaf today is $1.75.

Wonder what that 175K house cost 30-40 years ago?

hateslawns said...

Aesop said:

"For reference, 6 90% silver quarters now would be worth $21.

We don't need higher wages; we just need honest money."

6 quarters = $30.37 as of 6/10/2021.

Rule of thumb with pre-1965 US coins: Spot price X face value X .715 = Value