Have I misunderstood the relationship between the economy and the living condition of lower and middle-class?
So during covid pandemic, a big issue that I kept hearing about in the news and on the Journal podcast was that the economy is hot which is bad and causes interest rate spikes from the Fed if you are in the U.S. or Bank of Canada if you are in Canada.
tbh, I never fully understood that. we live in a consumerism, materialistic and capitalist society. i thought that people buying non-stop was what corporations and American govt valued, hence why we are hit with ads everywhere we go. and yet it was somehow a bad thing and was causing economic issues?
so I looked into it and came across a reddit post that basically explained it in simplistic terms like this:
the iPhone costs 1,000$. now, if not many people can afford the iPhone cause it's out of budget, what that implies is that not many people have 1,000$ which means that 1,000$ is hard to get which raised the value of the dollar, which is good for the economy.
If a lot of people can afford the iPhone, it means lots of people can afford to spend 1,000$ which means it's not as unique position to be in anymore, to have 1,000$ in spending money which apparently makes it worth less, cause more people have access to such funds.
Moreover, besides lowering the value of the dollar, more people being able to afford the iPhone is apparently also not a tenable situation cause apparently supply for iPhones could not meet the demand if it's suddenly now in so much more demand, so the value of the dollar going lowering is not only bad for the economy, but also has an effect on supply-chain issues.
Now, if I understand correctly, during covid and shortly after, the stimulus checks were given to people, both middle and lower class. the stimulus checks allowed for lower class to be able to afford more basic necessities from what I heard. This also however, also caused middle class people to be able to afford both more basic necessities and also to spend on luxuries (gonna continue with my current example of the iPhone). So the lower and middle class people having more spending power to be able to afford their necessities and maybe splurge a bit on luxuries causes the value of the dollar to go down cause now things are more affordable to people. and the value of the dollar going down causes wall street/the fed to freak the fuck out. and this causes them to raise interest rates, which has a domino effect of causing unemployment which obv leads to less people having spending power which causes a dampening effect on how much people are buying which brings the value of the dollar back up and the Fed is happy again.
I know I have probably oversimplified some parts cause I am not an economics person and God forbid the Journal podcast actually do their job and breakdown how the economy is screwing people so most of what I know comes from online research and what I can glean from the news but is anything I said incorrect?
cause if what I said is correct, that means that whenever the government keeps saying "the economy is fine" in response to people saying the times are tough, I get confused how that's a counterargument from the govt and not actually a subtle confirmation that times are tough for people. cause what it actually means is "the value of the dollar is fine, but the people are hurting cause that is needed for the dollar to be fine"?
Inflation in most cases is quite regressive, since it favors asset holders over wage earners. Low interest rates is also a double-edged sword. Though it makes it easier to buy a house, it also pushes up rents and is a boon to private equity looking to buy up and undercut small and medium-sized businesses. Inflation in general is a fairly complex and broad concept that should be made more specific whenever possible. Upward pressure in prices due to rising wages is a different type of inflation from major supply shock inflation. The goal of economic advisors was to avoid having the dollar be worth significantly less across the board, which would have certainly hurt the working and middle class hard.
All the macro economic indicators are indeed saying "things got better in the last 5 years" but people are indeed saying "times are tough especially in the last 5 years."
Both can be true. And while the government is mostly trying to screw with lower income folks, it's not primarily through inflation or by fudging the numbers.
Real income is mostly up globally and in the USA. Which means most people should be able to buy more stuff now than 5 years ago, regardless of inflation. But the macro economic indicators aren't perfect.
The poorest 20% of Americans were given cash in 2020 & 2021, which caused inflation to shoot through the roof. So if you ask most Americans if they feel better off than four years ago, then if they had the same basic job back then as now, the answer is probably no. No more free money, and higher prices means you are worse off. The free money is long gone. The high prices remain. The cash infusion was temporary, and inflation is the gift that keeps on giving. Or taking. Whatever.
In general, wages also went up, and they went up faster than inflation. But people tend to blame 5% inflation on the government, and credit themselves with earning that 6% pay raise. Over five years prices of everything went up 20%, and prices of staples went up more, so when you are paying 50% more than what you were at the grocery store five years ago, you sure feel worse off.
And the one thing inflation doesn't measure is quality of life. If your parents could afford a three bedroom house back in their day, and you can barely afford a converted closet today, inflation only measures how much more you pay for your closet versus your parents paid for the three bedroom house. It doesn't measure that your quality of life is worse off by a factor of ten, it just measures that you are paying three times more for a closet than your parents paid for a house but in relative terms. The reverse is also true. If your parents couldn't afford a super computer back in the day, but you carry one in your pants today, inflation makes no judgement about the incrase in the quality of life.
Housing costs comprise an increasingly significant portion of expense for lower income folks, and we all know that people are paying much more for much less, especially in the last few years. You just need to look at the case shiller index adjusted for inflation or the insane growth in rent over the last four years to suspect that the quality of life for people not well off has probably has drastically fallen from 2020. There are more households than houses, so there are more people squeezed into the same house.
The reason the economy is doing fine is largely because wealth inequality has been increasing significantly. It is doing fine for the well off. Tax cuts, rules changes and deregulation primarily benefit the ultra wealthy. Inflation, which is simply described as too much money chasing too few things, can impact both consumables, and assets. Stocks, land & housing are all up at nose bleed levels. Anyone lucky enough to own a lot of these things is feeling really quite well off right now. This is how the government is screwing most people. The government, the news media, even the courts have all been captured by the wealthy minority, and the wealthy minority are bending these democratic pillars to benefit the billionaires.
This is how the government is screwing you. Not through inflation, which is dangerous for the billionaires, but through taking all the productivity gains that used to go to the middle class, and giving it to the rich, so that the middle class is almost non existant. It is so crazy, that at the moment the incoming American government is a bunch of billionaires. These are billionaires who have repeatedly screwed over the little guy to enrich themselves. Yet half the country thinks that these billionaires are going to somehow make America greater for the poors. I think people are going to be really angry when they see billionaires do what billionaires do, which is mostly just focused on becoming trillionaires.
Edit: I think you might be confusing the strength of the dollar with inflation and interest rates. They are related, but distinct concepts. In general I think most wealthy benefit the most when things are consistently predictable.
The issue with an overheated economy is that at some point aggregate demand approaches or exceeds the maximum possible supply for a given economy. Since aggregate demand is higher than the physical possible output of an economy, it must come down, and that usually comes down with a crash.
The housing crisis is an example of overheating in a specific market - in this case, housing.
The fed can use interest rates to add "friction" to the economy.
It's like driving a car - you want to move forward (grow the economy), but you can't let your speed get out of control or you'll hit another car, you need to apply breaks to slow things down (increasing interest rates).
One thing to clarify is that it behooves no one, poor, rich, or in-between, to be in an overheated, or recessive economy. Increasing interest rates is neither inherently screwing anyone over.
The caveat I'd throw out is that raising interest rates generally helps people whom have tangible assets, while it hurts people whom are indebted.
And at the end of the day, once someone has enough wealth they're abstracted from the harsh realities of economic downturns.
Well, it's complicated. Equities, for instance, generally go down in value when interest rates go up. If the government is offering you a juicy 5% with virtually no risk, why buy a risky stock?
In terms of personal finance, most large debts these days are fixed rate in the US.
Those going check to check, or not making it, are often bouncing between loans though.
I get that but it also feels a bit rich for a system that is constantly priming us to buy-buy-buy can't actually handle it if consumers follow the messaging we are getting 24 hours a day.
Missed a word?
and you are stating that the whole spiel about the value of the dollar going down purely cause more people can afford necessities isn't actually true, it's just purely about whether or not the supply can meet the demand?
Currency and government are just tools trying to handle reality. Like all tools, they are not perfect. Unlike many tools, they are HELLISHLY hard to actually test and iterate on, and thus progress.
The issue is that everyone seems to think there's a solution to economies. You're looking at one of the best answers we've got after centuries of society. It is faaaar from perfect, but it is also still much much better than how things could be.
Does it? Like everything in the world, it's just something that has nuance to it. And the system can handle it - like brakes for a car, monetary policy is one of the levers the government has to drive the economy. The fed increased interest rates, inflation went down, now interest rates are going back down.
The former is just an overly specific example of the latter. Stimulus programs drive demand. Having excess funds is one way that manifests.
It's also more that the productive capability of economy takes time to grow. Demand can spike much faster than supply can grow. So demand growth is good, but it needs to be within the range at which supply can be built.
I'd offer a slight shift in perspective here: the "buy-buy-buy" does have an element of trying to get consumers to spend money that they maybe they can't or shouldn't, but it's also an attempt to already have consumer's attention when they make (or are forced to make) the decision to buy something.
Returning to your iPhone example: you drop your phone and find yourself in a spot where you need to buy a new one. If you already know about the iPhone and have been told about its awesome features, the hope of advertising is that your choice is made easier by what you've been shown.
If you posit that the consumer pool already exists for any given product and will continue to exist (e.g., people keep dropping their phones) so long as a product doesn't get wholly replaced (e.g., buggy whips when cars replaced horse-and-carriage conveyances), then advertising ("buy-buy-buy") can be taken more as attention-seeking than an indicator of an incorrect system signal. If the river of money is there, advertising is trying to divert the flow to certain companies.
Don't take capitalism/marketing literally. They are selling a dream, in the same way that premium brands rely on selling you a look, even though those leggings absolutely don't fit you they way they fit the model. Luxury brands do the same thing, offering you glimpses of cars and handbags you can't afford, but their parent company also owns a premium brand that you can afford one day ... with financing.
They are selling you a dream in the same way that house ownership is a part of the modern American dream (and in many cases a western dream). Absolutely no one in the west is trying to build a house for every available pair (or throuple) of adults. The system can't handle handle that many homes and it can't handle people not moving (also can't handle the population not growing, which is why China is in a panic). A big part of the real estate market is predicated on market churn: people buying a home and then selling it to buy something somewhere else. There must always be new buyers in order to put upward pressure on housing prices in order to justify profits.
Imagine buying a house with your partner that has a 5% mortgage rate and then after 5 years wanting to sell it and move somewhere you've been offered a higher-paying job. You and your partner now want to at least break-even on the house. How much is the house worth? Presumably it's worth 100% of what you paid, plus the 5% interest rate over the time you've lived there, and maybe the value of improvements you've made to the house. If the area is popular, then you add a premium. Housing prices go up without anything more complicated than some simple math and the expectation that no one loses money. After all, the money is coming from the people moving up, sponsored by "the banks." Right? So no one loses. I might post more on this in a future comment.
Well, except for everybody who can't afford to live the dream they've been sold. And we wonder why everyone is depressed.
Marketing needs to die.
Edit: To be clear: I don't think you necessarily disagree, just why that particular thinking about the harms is wrong.
I should've added an /s there. Sorry. I was being facetious.
Don't forget that the Fed isn't trying to stop or reverse inflation, they just want to slow it down. What's dangerous is runaway inflation which basically eradicates purchasing power because the value of the dollar changes faster than we can compensate, which would disproportionately screw over those with lower income. Change your $1000 iPhone to a $15 potato and you see what I mean. If you just raise wages to compensate for that, you're adding to the problem, not fixing it.
But I can't say I'm well versed in this stuff either so take my words with a grain of salt.
that much has become clear to me tbh. it's why I am not entirely in fair of strikes and unions. I love the middle class and think they're getting screwed from all sides but from what I can tell, they think the problem is that people at the bottom are not making enough money, which if fair, but it seems the real sustainable way to fix that is to put a max to what a CEO can make first so there's more to go around but try proposing that in a capitalist society without getting called a radical socialist marxist communist (or whatever other buzzword a fiscal conservative would throw at me)
then again, maybe I am wrong, also not well-versed :shrug:
CEOs are easy targets for all sorts of reasons so they're often flogged by public opinion but they're really just symptoms of larger systems. Taxing CEOs more is a good idea but it's a drop in the bucket compared to the taxes that aren't being paid by multinational corporations and big private equity firms. To say nothing of public money going the other way in the form of billions in subsidies in some industries. Billions more in government contracts for industries that have grown purely to exploit same. The money to make massive changes in people's quality of life is there, it's just political suicide to go after it.
So you're really asking about how the Federal Reserve's balance sheet works, what is the difference between monetary liquidity measures like quantitative easing and balance sheet normalization/reduction (quantitative tightening), and their relationship to inflation, the stock market, and the spending power of the consumer.
The links above explain some of how those things are connected and what the Fed does to manage policy set by Congress and the Executive branch as well as expectations of the market set by equity markets and borrowers in addition to managing employment and consumer financial security. The relationship of all that to consumer spending power is a controversial one full of mysticism and bias.
Here's kind of a short-ish summary I hope I can cook up decently:
Banks have to have a certain amount of bonds on their books in order to offset riskier assets. This is a policy that investment banks and commercial banks set for themselves to show that they're responsible. The best-looking bonds are bonds sold by institutions that are high quality (AAA-rated, for instance) and these could be corporations, national governments, or municipalities. Domestic banks usually desire to buy a certain proportion of bonds in their own country and in particular bonds from their nation's treasury. In the case of the US, part of the Fed's QE has been to buy Treasury bonds and mortgage-backed securities.
(Edit: hopefully I've clarified this paragraph somewhat and made a correction) Naturally, this increases the demand in treasury bonds during QE periods, which you would think would always decrease their yield. But it doesn't always, because there are other economic factors at play, such as high inflation, which means that buying bonds at the moment isn't even a good deal compared to buying other securities and investments (why buy something with a 4% ROI when you could buy NVDA and get 100%?). But in order to prop up the economy the Fed might be buying a bunch of bonds in order to give liquidity to the market, which translates into very real money circulating. This depreciates the dollar in real terms, but might not have an appreciable impact on equity markets if this liquidity is desperately needed (good news, so line goes up). So the equity markets go up and the dollar index goes down. Bond sales decrease, driving their yields up, because money is flowing into stocks and not bonds based on good news. But now banks have to cover the risk they've just invested in, so they'll do anything to buy bonds to offset that. And bond yields just went up, so they buy a bunch. Except that the Fed also recently bought a bunch of bonds, so why are so many banks buying bonds, the market is going up, and bond yields are increasing again along with the Prime Rate? "Supply and demand" tells you that yields should go up when more money is going into the stock market. Right? But it's always, always more complicated than "supply and demand" and the correlation between gains in the equity markets and lower sales/yields in the bond market are not causal.
(As an aside, even professionals don't know how recent QE affected the bond market and opinions vary widely, and by economic policy bias, as to how QE even impacts equity markets.)
Adding another layer of complication, the dollar index is what the dollar is valued at compared to a basket of other currencies. So it's not just USD to Euro or USD to JPY. It's an assortment. But the values of those currencies are appreciating and depreciating as well, so everything is in flux. Add on to that currency speculation, bond sales, and fiscal policy adjustments that change consumer spending practices (can you afford to take the vacation you were planning or are you taking a vacation at all?) and it's a complex system.
All of this impacts consumer spending power, along with wages and wage growth relative to inflation. However if consumers are only buying locally, then they are significantly insulated from the impact of currency valuations and foreign exchange fluctuations -- right now 1 Euro gets you US$1.03. Four months ago 1 Euro got you ~$1.10. So if you are European and visited the US 4 months ago, your money went further. If you visited now, your money wouldn't go as far.
Getting back around to phones, it would be cheaper for Europeans to buy a phone in the US because of spending power. In some ways this hurts businesses that would rather make things in USD and sell them at Euro prices, because then those businesses get the benefit of exchanging Euros into dollars at a beneficial exchange rate. Consumers aren't impacted by this as much, but the economy is. So if the "economy is doing fine," and a lot of times those things are part of a larger self-fulfilling prophecy. So is the economy doing fine? Yes, and we really, truly avoided a recession that would've hurt so many people. But are consumers okay? Absolutely not. Prices have gone up and companies are making more money. Real wages are lagging behind inflation.
The equity market is disconnected from the essential needs of the lowest-earners. Don't let them trick you into thinking that the equity market applies as equally to low-income and lower-middle income people as it does to people who already have their basic needs met.