At the beginning of the 20th century, the U.S. Government claimed that the FED would help neutralize the damage from economic cycles and inflation by removing the ability of the “rich and powerful” to control the country’s financial capital at the expense of the “poor”. This was a delusion, if not an outright lie, and 50 years later it is clear – it has worked out exactly the opposite. The FED’s policies have caused the emergence of a stable low social class, demonstrating the Cotillion effect in action, where all the benefits of cheap money accrue to the upper social strata.
How, very simply. The FED, through a virtually administrative determination of the rate of the value of money, facilitated the transfer of wealth from American households to econmic agents close to the public resource, mainly through a hidden inflation tax. This process deprived countless American households of the ability to save, save and get rich, as their savings and purchasing power lost value without mind-boggling credit consumption.
For more than two decades of the 21st century, the FED has kept interest rates “administratively” low to finance government spending. In 2020, that spending reached exceptionally high levels and then the FED decided to take extraordinary measures, creating trillions of dollars and accordingly effectively devaluing the currency.
Thus began an unprecedented distortion of wealth redistribution that continues and expands to the present day and which contributes to social and political polarization in the U.S. while generating geopolitical tensions.
The runaway inflation of the past two years has only exacerbated the distortion of the price signals that buyers must pass on to sellers. With grocery prices rising 21% from January 2021, the cost of owning a home has doubled on average over the same period. But we have to remember – it’s still the same house!
Such a process is an illustration of the depreciation of money, namely the main catalyst and indicator of asset value. Housing then becomes a much better means of saving than money or productive assets, even if the real value of the house has not improved.
Household incomes have risen substantially over the past three years, but has their purchasing power increased? As we can see – not at all. Purchasing power has actually declined: you have rising incomes, but you can’t buy an adequate amount of goods, services, or assets with them. This is the price for the forced increase of money in the economy relative to production.
By 2024, incomes are not sufficient to ensure the same standard of living and quality of life, and they are definitely not enough to think about homeownership or other assets with a long return on investment. Speculative interest dominates and this is logical: if you live in an environment of constant inflation and depreciation of money, you shrink your investment and consumption horizons. This is true for households and producers alike.
Middle-income Americans can afford to own a median-priced home in only a few of the nation’s largest cities. In many cities, the cost of ownership on average exceeds wages, a major component of median household income.
Moreover, as prices continue to rise households can save and save less and this makes it harder to save for a sufficient down payment. But even by the time people reach their goal and are ready to buy a house, housing prices are rising again and consumers are once again trapped in a perpetual race with the government: more money and fewer options.
It is necessary to remember the axiom: inflation constantly, although sometimes imperceptibly, reduces the real value of savings. This is an obvious economic law, which says that your purchasing power decreases when the gap in the value of money grows over the value of your production and consumption possibilities. You end up with less than you are able to produce and consume. This gap is covered by the credit that the government creates, and you are caught in a squirrel wheel.
As a result, countless citizens have become permanent renters, and nearly an entire generation of young people have descended from the standard of living their parents had. The Cotillion effect has manifested itself in its entirety: cheap money sucks out the wealth of the population in favor of the social and corporate groups that have direct access to getting that money first. Thus a gulf is created between those who already own capital and assets, particularly real estate, and the rest of the population, who can only possess such assets by taking on significant debt, as is the case with rents and mortgages.
Many homeowners today cannot afford to buy another home like this one. As I noted above, mortgage payments are up 100% relative to the beginning of 2021. If you look at two families with the same income, the one that bought a home three years ago gets a significant advantage over the other family trying to do so today.
The government has created trillions of dollars in federal budget deficits by pumping credit into the economy, thereby continually widening the gap between what you can do and what you want, but encouraging you to satisfy your wants today with credit that will burden you even more tomorrow. In this way a permanent underclass and social group of “perpetual debt” is created, effectively matching Mansur Olson’s “sedentary bandit” strategy.
This does nothing to narrow the inequality gap, but more sadly, it creates enormous social and geopolitical risks, the manifestations of which we see today. Finally, it changes democratic institutions in a bad way, generating a wave of political populism and political stratification. All of these processes are taking place today not only in the U.S., but also in the global world.
Free society and free market economy have approached a state of crisis, if not a state of deadlock, giving birth to global erosions, which are accompanied by intensification and expansion of regional conflicts, growth of social and political tensions.
However, this is not a problem of freedom and the market. It is the result of non-stop state expansionism and short-sighted public consent to it, when the principle “after us, though the flood” becomes a determinant of economic and social behavior.
Atavistic and degradation tendencies of the global society clearly demonstrate a shift to the biological bases of group behavior – the desire of the “pack” for minimum responsibility, maximum security and the possibility to avoid critical choices.
To agree or not to agree with this is your individual, but inevitable choice.
