There is a clear relationship between periods of rising prices for essential items and negative real rates. Such a policy undermines the dollar as a store of value. As a result, investors seek alternatives such as gold, oil and agricultural land (see The High Cost Of Free Money). Boiled down, the impact for low earners is an abnormal rise of the Walmart CPI vs the US CPI. Put another way, negative real rates amounts to the Fed imposing a regressive tax on the poor although it lacks the authority to collect taxes.
The chart below shows the impact of this effective tax hike on household incomes. The actual income of the low income group varies more when measured against the price of necessities rather than the broad CPI.
Looking back, it is clear that America’s working poor did pretty well between 1982 and 2000, and had a bad time in the ensuing period, when real interest rates have, for the most part, been negative.
Next, consider the “acceleration phenomenon”, which we have often used to explain the non-linear dynamics of consumption. We have mostly used this tool to show spending in developing economies experiencing real income growth. Sadly, we now apply the method to the US under reversed conditions. The framework begins with the observation that the propensity to spend on certain goods does not rise smoothly with income, but moves in steps: households just above a certain income threshold are much more likely to buy say, a car, than households just below it; hence the notion of “acceleration”. Our thesis is that significant sections of the US population have stopped consuming certain bigger ticket items. For illustration, the chart below shows the likely impact of a 25% fall in average incomes.
The economic impact
The chart below shows a worrying relationship between the standard of living, as measured by the Walmart CPI, and US recessions.
Going back to 1970 each time the lower income group of Americans experienced a fall in their standard of living for two years or more, the period ended with a recession. This is the inevitable arithmetical outcome from pursuing policies which crimp the incomes of that population cohort most inclined to spend what they earn. At a moral level, I would also question the validity of a system that no longer allows its weakest members to get by. This is why I contend that the post-2010
