The Real Cost Of Achieving Growth With Central Bank Policy

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Central Banks around the globe have experimented with a myriad of different policy tools over the last 7 years, with the explicit goal of reigniting global growth to prior 2007 levels. Central Banks figured if they could reverse falling asset prices and deflation, by creating inflation via Quantitative Easing (QE) they would be able to re inflate asset prices and kick start growth.

However since the global economy slowed down in 2007 and reversed course, crashing in 2008 and 2009, growth hasn’t been quite the same. In fact the recovery from the 2008 recession has been the weakest in history.

By flooding the world with trillions of dollars in liquidity and creating money out of thin air, by printing digital money or QE and dispersing it through the banking system, the Central Banks have been able to create the illusion that the global economy is growing and things are back on track.

Yes the S&P 500 is just off all time record highs in price, and yes real estate prices around the globe have either recovered most, or all of the losses prior to the 2008 crash. Better still real estate markets in some  countries like in Canada and Australia have surpassed their previous highs . Wages have also been rising steadily for the last 5 years after falling from 2008 to 2011. Yet for the average person it doesn’t feel like we are better off with higher levels of standard of living. More importantly we cant seem to pin point the exact reason why.

The Hidden Tax


The actual reason why the recovery from 2008 crisis has been so sluggish, with the weakest on record is because real household incomes adjusted for inflation have gone nowhere. In fact real household wages are down 1.1% in the last 16 years. This is evident even though nominal wages have actually grown by just over 40% since the year 2000. (See chart below Titled: Median Household Income in the 21st Century)

Inflation is sometimes referred to as a hidden tax, because you don’t seem to notice it as much on a day to day, quarterly or annual basis. Yet inflation over a 5 or 10 year period or longer can be really easy to spot when you take a look and compares prices over longer periods for goods, services and assets like food, rent, education and real estate.

Click chart for source –
Since real wages adjusted for inflation has not increased in 16 years, yet the level of private debt has grown dramatically over the same period, the share of wealth by the bottom 90% of US households has actually been declining. (See chart Titled: Distribution of wealth in the US since 1917)

The reason for the decline is because the bottom 90% have used debt to fund increasing consumption on their home and living expenses, since their real wages have stagnated. In comparison the top 0.1% have steadily been increasing household wealth as they have been able to utilize debt and higher equity / capital levels to take further advantage of rising asset prices over time.

Click chart for source –
Lastly to further illustrate the real cost of inflation, and how it can be subtly hidden from most people. Take a look at the chart below of the S&P 500 which has been adjusted for inflation.

If you take a look at the current level on the right hand side of the chart you will notice its only just above the price level from the year 1999 / 2000 level.

The second interesting point is that the last bull market that occurred between 2001 – 2007 did not reach the prior 1999 – 2000 level when adjusted for inflation, even though the nominal price chart for the S&P 500 recovered to the same level as 1999 – 2000.

Inflation Adjusted – 40+ year S&P 500. Click chart for source –
Some Things Cant Be Manufactured

So after experimenting with so many different policies and trillions of dollars in QE, Central Banks have achieved the outcome they have desperately tried to create, inflation and an artificial type of manufactured growth. Artificial because when you factor or adjust for inflation, you realize that there isn’t a whole lot of real growth to be shared around.



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