The Insanity Of Pushing Inflation Higher When Wages Can’t Rise

Wednesday, September 6, 2017
By Paul Martin

by Charles Hugh Smith via OfTwoMinds blog,
ZeroHedge.comSep 6, 2017

In an economy in which wages for 95% of households are stagnant for structural reasons, pushing inflation higher is destabilizing.

The official policy goal of the Federal Reserve and other central banks is to generate 3% inflation annually. Put another way: the central banks want to lower the purchasing power of their currencies by 33% every decade.

In other words, those with fixed incomes that don’t keep pace with inflation will have lost a third of their income after a decade of central bank-engineered inflation.

There is a core structural problem with engineering 3% annual inflation. Those whose income doesn’t keep pace are gradually impoverished, while those who can notch gains above 3% gradually garner the lion’s share of the national income and wealth.

As I showed in Why We’re Doomed: Stagnant Wages, wages for the bottom 95% have not kept pace with official inflation (never mind real-world inflation rates for those exposed to real price increases in big-ticket items such as college tuition and healthcare insurance).

Most households are losing ground as their inflation-adjusted (i.e. real) incomes stagnate or decline.

As I’ve discussed in numerous posts, the stagnation of wages is structural, the result of multiple mutually reinforcing dynamics. These include (but are not limited to) globalized wage arbitrage (everyone in tradable sectors is competing with workers around the world); an abundance/ oversupply of labor globally; the digital industrial revolution’s tendency to concentrate rewards in the top tier of workers; the soaring costs of labor overhead (healthcare insurance, etc.) that diverts cash that could have gone to wage increases to cartels, and the dominance of credit-capital over labor.

In an economy in which wages for 95% of households are stagnant for structural reasons, pushing inflation higher is destabilizing. The only possible output of pushing inflation higher while wages for the vast majority are stagnating is increasing wealth-income inequality–precisely what’s happened over the past decade of Federal Reserve policy.

The stagnation of wages isn’t supposed to happen in conventional economics. Once unemployment drops to the 5% range, full employment is supposed to push wages higher as employers are forced to compete for productive workers.

Alas, conventional economics is incapable of grasping the fluid dynamics of labor, automation, capital, globalization and cost structures dominated by monopolies and cartels in the 4th (digital) industrial revolution.

In sector after sector, employers can’t afford to pay more wages as labor overhead costs march ever higher while prices are held down by competition and oversupply. In other sectors, the rigors and supply, demand, stagnant sales and productivity push employers to automate whatever can be automated, and push tasks that were once performed by employees onto customers.

So why are central banks obsessed with pushing inflation higher? The conventional answer is that a debt-fueled economy requires inflation to reduce the debtors’ future obligations by enabling them to pay their debts with constantly inflating currency.

This same dynamic enables the central state to pay its obligations (social security, interest on the national debt, etc.) with “cheaper” currency. After a decade of 3% inflation, a $100 debt is effectively reduced to $67 by the magic of inflation. If wages rise by 3%, the worker who earned $100 at the start of the decade will be earning $133 by the end of the decade, giving the worker 33% more cash to service debts.

The government benefits from inflation in another way: incomes pushed higher by inflation push wage earners into higher tax brackets, and their higher incomes generate higher taxes.

The Rest…HERE

Leave a Reply

Join the Revolution - Enter Any Donation Amount Below to Revolution Radio!