Over the last several years, 90% of all household income has remained stagnant or has declined while inflation has climbed at a fast pace – and continues to rise. If we adjust for (probably understated) official inflation, the median household income has fallen 8% in the past five years. (Income, Poverty and Health Insurance Coverage in the United States: 2011 According to the Census Bureau, “In 2011, real median household income was 8.1 percent lower than in 2007.”) Unfortunately, this benefits no one but the banks. Inflation is “good” for borrowers, but only if their income rises while their debts remain fixed. Let me explain how.
The Conventional View
If inflation causes all prices and incomes to double, inflation hasn’t changed anything: it still takes the same number of hours of work to buy the household’s groceries.
If the purchasing power of an hour of labor hasn’t changed; whether the hour is converted into $1 or $1 million, that money buys the same quantity of goods and services as it did before the inflation. But then, when income rises and debts remain fixed – suddenly the household can pay off their debts in short order. So, how is inflation good for the banks? Inflation benefits the banks simply that it enables the household to make its debt payments and borrow more. Banks make their money when they originate the loan. The illusion of having a higher income encourages households to borrow more; this is how inflation greatly benefits banks.
A Look At Deflation
We’ve been brainwashed into believing deflation is bad; we haven’t thought it out for ourselves. Take computers for example: we can buy more memory and computer power every year with less money. The cost of computers has deflated for decades. If this is good when it comes to computers, why does it suddenly become bad when applied to everything else? Adjusted for inflation, the median income for the lower 90% of U.S. wage earners (138 million people) has been flat since 1970–forty years. Only the top 10% (14 million people) actually gained income, and only the top 5% gained significantly (+90%). The only way 90% of the populace can buy more goods and services is with deflation.
Consequences of Inflation & Deflation
With 4% inflation, households are poorer, as they can buy fewer goods and services, and those producing goods and services see their market shrink by 20%. Inflation is a disaster for everyone but the banks. Banks don’t want households to be able to afford more goods and services–they want them to have to borrow more money to buy more goods and services because issuing more loans is how banks make huge profits. And, speaking of huge profits, three Canadian banks reported record income for the 3rd quarter of 2012. Royal Bank (RBC) reported net income of 2.24 billion Canadian dollars (US$2.26 billion), an increase of 73%. TD Canada Trust (TD) had an increase of 14% – earning C$1.70 billion, up from C$1.49 billion. And CIBC’s net income rose 42% to C$841 million. Looking back at the median income for most wage earners, this lends credence to our analysis.
If you want to do something for the poor and middle class, encourage deflation. Tell us what you think!
Mary Cunningham would never claim to be a financial expert but has worked in the area of finance with personal taxes for over 15 years. Those personal taxes included all personal aspects, rental property and small businesses. She will be offering some Canadian insight to this venture but she came to live in Canada by way of Kentucky.