The Big
Squeeze
Charlie Earl
Someday in
the not too distant future the middle class in the United States will consist
of one family…. the sole household at the median point. I know… it sounds
bizarre. Consider that our present rate of inflation is artificially low
because of FED suppression of interest rates and government growth and costs
are accelerating faster than inflation, and you’ll understand that the real
wealth and purchasing power of the typical person and/or household is
shrinking. Also…if interest rate caps are removed (either through policy or
insolvency), the pressure from government on the private sector will increase
geometrically because the carrying costs of government debt will balloon
astronomically.
Most
Americans will be caught in a python-like squeeze between rising costs and a
shrinking economy. As costs climb, businesses will be forced to reduce staff
numbers or hours for their workers. Throughout history businesses have faced
ebbs and flows in their fortunes. In agricultural societies a bad crop season
could lead to difficult years for the merchants who served the community.
Innovation can be a cause of economic disruption as a new technology replaces
an outdated one. There were probably many buggy-whip craftsmen who lost their
jobs as the automobile became common place. Those disruptions were usually
short-term in nature because natural disasters don’t last forever, and job
opportunities become available when new industries are formed. Centralized
economies are a different matter.
Generally governments
are not capable of quick responses. The red tape and bureaucratic processes
tend to limit response time. For example….many people are still waiting for
some type of disaster relief following the destruction by “Sandy.” So…when
economic conditions approach perilous danger points, governments dither and
dabble before ultimately settling for responses that have proven to be
inadequate…. or even harmful. Government intervention distorts markets and the
natural supply/demand dynamic. When the government intervenes in the market
false values are created, and government’s tendency is to manipulate the
commodities or activities that are most vital for thriving commerce.
One of the
great advantages for those who possess true economic wealth is the array of
options or choices available to them. For those who stand on the threshold of
poverty, however, the choices are more limited. The middle class and the poor
must first secure their food and shelter before using whatever amount remains
for choosing. The wealthy, on the other hand, have more dollars available for
making choices after their basic needs have been met. So…government policies
that are intended to “do good” most often harm those for whom they were
intended to help by altering markets and values. While the poor may receive
government stipends and others benefit from subsidies, the distortion of the
markets often raises the real costs of the basic goods. Thus the government
confiscates taxes from the people to provide the basics for the poor while
raising the costs for all because of its ill-advised market interventions. The
value of the services for the poor are diminished and the costs for the
taxpayers are higher because of government intervention and it’s 30%
administrative and carrying costs.
As more
people slide into poverty and near-poverty because of worsening economic
conditions (government policies), the strain increases on the treasury and
deficits accrue. The Fed prints (digitally transfers) more money to ensure cash
flow, but the value of each respective dollar is lower than the one that preceded
it. When the asset base for wealth grows more slowly than the number of dollars
that are printed, the value of each dollar is less. Its purchasing power is
diluted, and those who have limited funds dedicated to acquiring basic
necessities are severely damaged. Thus the squeeze occurs. Costs rise and the
value of money decreases, and those whom the government claims to help are hurt
the most. Government rhetoric and the consequences of government policies are
rarely in sync.
Charlie Earl
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