Loss of Purchasing Power: Gregor Weekly Macro Note

• Gregor Macdonald
• January 16th, 2010

I don’t believe the loss of purchasing power can be properly cited as an example of deflation. But I’m open minded. And I look forward with some amusement to see if the deflationist blogosphere can come up with such an argument. Until then my view of Friday’s wage data was echoed nicely today in the Washington Post by AP writer Martin Crutsinger. Consumers Are Squeezed as Inflation Outpaces Wages is precisely the position I took, upon learning Friday that real wages fell by 1.6% over the past year. Yes, inflation by some measures appears tame. But wages fell faster. The culprit? Medical care and education to some extent. But most of the damage was done by our old friend: energy costs.

If we go back to some of the late Summer MacroTwits shows that I hosted last year, and also to some of the essays I wrote on this site at that time, readers/viewers may recall that I began to talk about a permanently smaller economy, and the loss of future wage growth. I put up some pictures of large, stately homes in the finer suburbs of Boston and I asked the following question: how will the housing stock of US homes in the 600K and above range be supported in the years ahead, when the robust partnership profits, capital gains profits, option/equity profits and other capital appreciation profits that benefited a wide swath of the US economy for 30 years go away? My answer then, as now, is that this class of real estate is simply too large and too numerous across the various metro areas of the US to be supported by the new normal economy. Indeed, just as so many predicted, this is the class of real estate now under the most pressure as it receives little of the government’s triple-pronged aid, and as large incomes fall. 10% now of wealthier homeowners are delinquent on their mortgages, and that is merely one of several data points that portray the trend.

I still respect the position of the deflationists. In housing and in credit we continue to see a deflation that can only be called massive. Also, seen from a broader standpoint, does it really matter which name we use to describe a decline in overall societal wealth or living standards? That said, there has been in the past 10 years no deflation whatsoever, by any measure. Wages and purchasing power have not increased. They have decreased. Moreover, it’s now more clear that the incursion of so much debt into the private sector over the past twenty years was a way to compensate for the loss of purchasing power. Compared to 10 or 20 years ago, our currency buys less of just about everything. Including houses. Even the old argument that claimed our asset wealth compensated for this purchasing power decline–that too fallen away. You can understand therefore…(this article continues for subscribers through the membership gateway, on the right side of this page)

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