Even before the credit collapse and financial crisis of 2008, I’ve expected that the long-term economic health of the American family would suffer. Lousy economic investment – houses, anyone? – and the insanely short-sighted habit of shipping higher-value American jobs overseas so that the manufacturing base is "hollowed out" were key drivers in the premise. When Congress passed TARP in 2008 and the Federal Reserve commenced with its initial round of Quantitative Easing, it was apparent that the government would address the long-term debt issue by trying to devalue the dollar via inflation instead of actually working to manage the budget. The logic was inescapable but the only question was the timeframe.
Now we’ve got a glimpse of what’s coming as data confirms that English household income has fallen since 2008. As discouraging as things appear to be in the US, you can take a little comfort in knowing that England’s economy is even more screwed up and the personal level wave is hitting there before it really begins to commence here. The Bank of England has likewise been acting to devalue the English currency and that is now taking off as the most recently reported English inflation rate is about 4.4% per year, ahead of the American inflation rate, which unfortunately is hard to gauge since the government doesn’t consider food or fuel as part of the core CPI.
The English incomes have been struck from two primary sides. First, the increasing inflation rate means that – absent offsetting nominal wage gains – the English Pound will be able to purchase that much less than before. Second, the exceptionally low interest rates mean that the money being saved is actually losing value and so eliminating the entire notion of savings. If you lose money by saving, why save for the future? A lesser factor for the English is simply that there economy has an even smaller manufacturing base than we do, so what they can produce that the world will want is minimal.
Here’s the problem – for them and for us – as we move forward. As rates remain low and so discourage savings, and price increases really do take hold, then people will develop an inflationary mindset. The effect of such thinking is an unwillingness to save or plan for the future as people spend themselves into financial destitution. As Aesop would describe it, the grasshoppers will overwhelm the ants and devour everything so that nothing is left for the future. The long-term impact for the country of such a mindset is, to put it mildly, horrible.