Most Americans alive today have not experienced the devastation of rampant inflation. To be sure, there has been substantial asset inflation over the past 10 years, but it’s been more than 40 years since the U.S has seen significant Consumer Price Index (CPI) inflation.
Even if you haven’t felt the hit at the grocery store or gas station consider the following. If you’ve fought and scrimped to save $50,000 over your lifetime, your nest egg has lost $2,000 in buying power in just seven months thanks to inflation.
WORKING THROUGH INFLATION
There are about 10 million U.S. job openings, but only 8.6 million people looking for work. We added more than 900,000 jobs in July. Dr John Rutledge, CNBC commentator and investment strategist, reminded me last night that Americans have put $2.5 trillion dollars into savings over the course of this pandemic. https://drjohnrutledge.com This money is a direct result of stimulus payments. Until this money gets spent, there will not be much motivation for many out-of-work Americans to apply for jobs. As a result, wages will increase to compete for fewer workers. This creates a phenomenon known as income inflation!
About 71% of Americans have had at least one dose of the vaccine. GDP was up 6.5% in the second quarter, while spending is up 11.8% year over year. Our economy is red hot and the knuckleheads running it are throwing gasoline on it.
I am not looking for a political fight by stating the obvious. Both parties just passed a bi-partisan bill to stimulate an economy that does not need assistance. There is not much difference between a tax-and-spend Democrat and a borrow-and-spend Republican.
In any case, the parties’ behaviors are increasingly shaping a story that could result in devastating inflation.
A CLASS SYSTEM REDEFINED
Unfortunately, our country will struggle to pay the bill inflation brings. We also must consider that Social Security, Medicare, Supplemental Security Income, the Children’s Health Insurance Program, the Supplemental Nutrition Assistance Program, civil-service retirement, and military pensions all are inflation-protected programs – and rightly so. The challenge is 169 million Americans – more than 50% of the population – are now on some sort of entitlement program with automatic escalators for inflation.
These entitlement programs magnify government debt and inflation problems. Paying the price for inflation and the debt will mostly fall on the backs of the less than 50% of Americans who are not protected by inflation-adjusted entitlement programs.
In the past we have used words like rich, middle class and poor to define economic strata. Maybe it’s time to redefine these categorizations as the rich, entitled and unentitled? Unfortunately – but understandably – the unentitled are looking to join the growing entitled class. It is the new middle class, but it’s not good for capitalism or democracy.
The unentitled poor, middle class and business owners are the people who will suffer the most from rent, gas and food price hikes. They won’t have entitlement programs or physical assets to help them keep up. Those who are trying to get ahead through savings or building a business will get hammered.
This brings us back to our government not paying the bill. We cannot afford to raise interest rates much to offset inflation. However, if interest rates are not raised, the dollar gets devalued. It’s a truly new frontier for Americans and the global economy – one we all have a stake in as individual consumers and workers, and as collective citizens who may have to front the money for this inflation bill.
What are your thoughts on this topic? Leave a comment down below, we’d love to know your thoughts!
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ABOUT THE AUTHOR:
David Frosh is a Partner in Santa Ana, Calif.-based Fidelity Bancorp Funding (FBF). FBF is one of the Western U.S.’s leading providers of mortgage brokerage and bridge lending services.