The Middle Class Squeeze

Rich, middle or poor... inflation comes for us all

(Source: Getty Images)

Bill Bonner, reckoning today from Dublin, Ireland...

Our point this week: inflation is not beaten. And it won’t be beaten without pain. No pain, no gain. The rich need to lose as their assets fall in value. The poor need to lose as the feds’ ‘transfer’ schemes become unaffordable.  

Today, we look at what happens to the middle class. In preview, it gets the hardest of all. And then, when it comes time to take up arms against inflation, no one wants to enlist.

Economically, we’d all be better off if the Fed would allow borrowers and lenders to set interest rates, rather than do it as a policy decision. We’d be better off, too, if the Fed were abolished…gold were reinstated…and inflation disappeared. But politically, it is unlikely. And as long as politics controls the future of the dollar…its direction will be down.

But let’s look more closely.   

Before we go further, though…a personal update.

Baby Watch

We’ve been staying here in Dublin; on ‘baby watch.’ A daughter-in-law was scheduled to give birth this weekend. Grandad and grandmother were called upon to provide back-up. That’s what grandparents do.

But last night, our ‘baby watch,’ got called to active duty. Mother and father rushed to the hospital; the grandparents rushed over to stay with the toddler.  

Uh oh. It’s been so long since we played this role, we’ve forgotten how to do it. We worried that the toddler – when he realized that his parents were nowhere to be found – would not be in the mood for substitutes.

But all’s well. Late at night, the baby “came to the light,” as the Spanish put it. A cute little girl. Father returned to the house…(by then the 3-year-old had fallen asleep)…and the grandparents could go back to their digs and fall into a contented sleep of their own.

So, let us return to finance…

The falling prices we see now do not mean that the Fed’s higher interest rates and ‘QT’ program are working. Even after more than a year of ‘normalization,’ the Fed’s key rate is still nearly 2 percentage points (200 basis points) below the level of ‘sticky inflation’ (CPI less food and energy). 

Repo Man Calling

While the month-to-month numbers change, the underlying reality is that the cost of living has gone up. Big borrowers – banks, hedge funds, pension funds – can still borrow at absurdly low rates. But for ‘normal’ people, the interest charged on credit card balances is 24%. Over the last two years the cost of food-at-home is up nearly 20%. Home utilities, oil and gas, are up 21% and 26% respectively.  

The cost of owning a car has gone up so substantially that Bloomberg reports that the ‘repo man’ is back on the job…and foreclosures on houses, too, are up 22% in the first quarter.

Breitbart adds:     

All U.S. consumers are financially worse off now than last year …

The financial well-being scores by annual household income dropped across all income levels in 2023. 

• Income <$50k (-0.86)

• Income $50k-$99K (-0.59)

• Income $100k+ (-2.45)

• All adults (-0.27)

All of these are signs of growing ‘pain’ in the middle class. Here’s the latest, from Fox News:

Home prices see biggest annual drop in over a decade: Report

Prices in Boise, Idaho, had the biggest drop in March compared to other US metros 

This comes as pending home sales fell to their lowest level since the start of the pandemic in part because elevated mortgage rates diminished demand and a lack of homes for sale limited purchases, Redfin reported. 

An Impossible Fight

House prices were inflated by the Fed’s ultra-low interest rates. Take away the low rates and you also deflate the housing market. Who owns houses? The middle class.

The poor get handouts from the government (transfer payments). The rich have their coupons and dividends. But the middle class has to work for its money. And the real crunch for the middle class comes when the job market darkens. Come the recession and the unemployment rate goes up.  

And there you have why it becomes almost impossible to win a fight against inflation.

The deciders want to protect their assets.  

The groundlings have become dependent on government ‘transfer’ payments.  

And the middle class, trapped between the housing market and the job market, feels the pain most intensely. It cannot bear to think of the long term. It joins the rich and the poor, demanding an end – not to inflation – but to the fight against it.  

Where does this lead? You already know, don’t you? It starts with an “A”…its wines are rich, but its people are poor.

More to come…     

Regards,

Bill Bonner