Clearly, we hit a hot spot with last week's piece. So much so, that I kept digging. I came up with more questions than answers but in asking those questions I came up with some data points and open ended questions worth pondering. We'll look at the push and pull relationship between public and private spending and their combined effect on inflation. Then, we'll finish with the spark of wage inflation struck by the competition between governmental subsidy programs versus rising wages in entry level retail positions.
Inflation is simply a case of demand outpacing supply. The domestic economy can be broken in half between governmental and consumer spending. The sum of their spending is the total demand for our economy. A balanced economy would include a total supply equal to the total demand. Government spending, through a myriad of programs has increased significantly since the financial meltdown and helped to makeup for the large consumer spending decline during the last recession as you can see on the chart below.
|Inflation takes place when both the government and its citizens are competing for the same goods. A balanced governmental approach increases its spending when the consumer is weak as it did through the economic crisis.|
The argument is that inflation is being created at the bottom end of the economy. It genuinely appears to boil down to the government's ability to sustain a citizen's quality life versus the desire and opportunity to provide ones self with the same quality of life through an entry level or service position. Wage inflation is taking place between the government and the lower rung retail and service industries. Basically, the government subsidy programs have increased the comfort factor to compete with minimally working for a living. Look at the next chart of government spending.
|The exponential growth in government subsidy and welfare programs.|
Keeping in mind that this is primarily a financial blog, lets look at some supporting documentation beginning with the labor participation rate.
It has been 40 years since such a small percentage of the population was gainfully employed.
Does anyone remember the economy of the 1970's fondly?
Fewer people are working because the government has raised the marginal comfort level. Which is beginning to show up as wage inflation according to Jiwad Mian in his recent post.
"It is getting more difficult to attract and retain labor. The tighter labor market has led Walmart, the nation’s largest private employer, to increase wages for 500,000 of its most poorly paid workers. The company plans to spend about $1 billion a year to raise the pay of all employees (1.3 million) to at least $9 an hour, and to at least $10 an hour by next February. I believe Walmart’s bold initiative will lead to higher wages being set for entry-level jobs throughout the retail sector, a trend that may impact over 15 million people."
The economic implication here lies in the increased disposable income among those less likely to save or invest but instead will most likely use it to leverage themselves even deeper into the revolving credit hole as rates finally begin to rise. Frankly, the people running the economy, the top 1% of the top 1% are counting on this to pay forward the shortfall of what I feel is still a slowing economy. Look at the last chart as we take a look at the consumer credit scenario.
|U.S. consumers are increasing their short-term unsecured debt at the expense of mortgage debt which possesses intrinsic value.|
The final point to be made is that it appears as though the economists are suggesting that wage growth at the bottom end of the spectrum will equate to increased spending which will allow the government to decrease its own spending while maintaining the economy's current trajectory. I disagree with the premise that this is sustainable. I agree that the wage increases at the lower levels of the economy will increase the velocity of money on a small level. (Remember M2?) This won't represent enough total dollars to budge the needle on M2 at the national level. And let's face it, nothing measures inflation like the velocity of money.
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