By now even most Americans that are not football fans have heard of the New England Patriots and the DeflateGate scandal. Maybe it’s the water here in New England, but I’m wondering if I’ve identified DeflateGate II and it has nothing to do with football. This is a little bit of a departure from my usual fare, but I’ve been pondering some of the articles I’ve read recently about income inequality as well as another issue that troubles me. Namely, how is it mathematically possible for today’s middle or even upper-middle income family to adequately save up to buy a home, set aside money for retirement and put their kids through college?
Wage growth at all but the highest income levels has stagnated for years. Thanks to steady inflation of everything else, by the time you take out taxes, essential costs for food, shelter and clothing, as well as all kinds of insurance, a vehicle and modern telecommunications necessities, there is precious little if anything left. Add in the impact of student loans or other debt, and many families find themselves digging a financial hole long before they have a chance to dig a foundation on a starter home, much less save for retirement or college.
Economists and central bankers in particular, are deathly afraid of the “D word”. But is it possible that some deflation would possibly be a good thing? Central banks around the world have taken extraordinary and extreme measures to promote inflation. They lowered interest rates to zero. Then they began repeated cycles of quantitative easing, buying bonds which drives down the yields of those securities in many cases to less than zero. Now in many cases you don’t receive interest, you pay for the privilege of someone borrowing your money. It’s truly absurd.
What has all this frenzy of paper-pushing accomplished? For most of the world nothing, except to drive greater and greater amounts of financial wealth into the hands of fewer and fewer people at the top of the food chain. The central banks fear deflation because they say that it can get out of control, resulting in a “deflationary spiral” which they equate to a death spiral. Educated in the classic world of economics of the 1980’s, I took this as gospel as well. Until I started to think, what if we had a mild dose of deflation? If prices come down, the 80-90% of people who essentially live hand to mouth can afford more “stuff”. If people want to buy more “stuff”, it will take more goods and services to deliver that stuff meaning companies need to create more jobs, which in theory should eventually create wage inflation, universally seen as a good thing within reasonable limits.
The Federal Reserve is worried that if rich people’s toys are worth less, they might not feel rich and stop spending. This is known as the wealth effect. But making 5% of the country feel richer doesn’t seem to have accomplished much other than make that 5% wealthier, at least on paper. Maybe if they raised rates a little, which would likely decrease the value of stocks, bonds and real estate, it would cause deflation, which would increase demand, which would create more jobs and ultimately reduce wealth inequality. Just a thought. Or am I just being a barbarian at the DeflateGate?