Wages and Inflation, what is coming?
Wages and Inflation, what is coming?
Pressure on wages is pushed by prices around us, the necessity to survive and the overall feeling of fairness for the worker. Prices of products are driven by labor needed in their production, distribution, and sale so theoretically in order for capital to return above the range of inflation it cannot re-distribute the share it needs to self-replicate in this or that business industry.
We see minimum wage laws passed that slowly boost the theoretical income of people in Seatle, New York, Los Angeles, and other places while simultaneously all the services and goods are running in increases parallel to those competing to outrun one another. This is particularly noticeable in food prices as they rapidly jump upward even though the real wages for workers haven’t budged for a very long time. Seems strange if you think about logistics and distribution prices falling, energy prices imploding, but products that you need have really jumped up in price. Ergo if your wage went from $9 to $12 dollars an hour but the price of beef went from $3 to $6 a pound you are now officially 33% poorer, yes that is right you could afford 3 lbs of beef but now only 2 lbs. Right now I suspect we have something like wage compression between education groups and minimum wage since high paid jobs are being shed left and right. Then there is salary compression when people within the same industry either boost or lower salary expectations for the group as adjustments are taken with new hires or systems being changed to arrest salary growth or cost to employers.Why? I have lots of question why and these are all speculation but interesting to provide thought paradigms.
A) If one looks at the graph and notices the price decline in housing on the graph one has to imagine the amount of losses accumulated during those years and on the bank loan books. Perhaps 3 to 5 trillion in losses just on housing mortgages, since one could take the three years during the price going negative take the three to five years before and assume some percentage of all those housing loans went under the current cost and did not recover. I repeat did not recover. If you have a cumulative 15% fall in prices while other things like wages and food keep going up the difference each year and the lost interest on that difference all sums up. The banks know very well that if housing sales taper out their liquidity concerns resume. I simply assume that between 3-5 trillion a year mortgages with some percentage going badly due to silly standards for years before the crash and during, say 10%. 8 years at 400 billion loses a year straight line is around 3.2 trillion plus or minus interest, opportunity cost, recoveries, etc.
B) The problem with good prices going down and globally we can see producer price indexes going down in China and other places is that this is destruction of capital at work. Far more serious than the housing mentioned above. If your producing nails and your machine was worth 1 million dollars and your nails brought you 10% return with a payback of say 5 years if you suffer a devaluation like the one China is attempting to have right now your return goes down if your financed in a foreign currency. Ergo you devalue by 20% and your return goes to 8% with payback going to 7 years or longer. The problem is if you devalue too much and payback goes out long enough it will be worth it for someone else to employ NEW technology to make you completely obsolete. Which is what I suspect is happening. More dangerous than housing in the sense that this is capital and working capital and at a tipping point the business manager can yank out working capital and recycle the machine because that would yield the best possible result for keeping some sort of capital to redeploy elsewhere. Notice if that happens all those workers employed in that industry go unemployed.
C)The tremendous flows of hot cash from businesses generating it globally are swimming into places like the housing market and elsewhere. If goods prices implode and wages follow it in the future the likelihood of capital adjustment globally becomes more likely and B will crunch out industry with new plants and new technology where it was thought to be unproductive before. What we do not see is the destruction of underlying capital and how that is progressing. Net effect of loans and bonds that will never be paid back and the banks that are holding them for returns that never materialize globally, equity capital in various monetary systems we know is going to implode and take the depositors money with it.
Food for thought is always good.
Be well and happy.
graph cite:https://research.stlouisfed.org/fred2/series/CPIAUCSL/, January 14, 2016