Saturday, May 9, 2009

An interesting chart: destruction of wealth

Here is an interesting set of charts I came across in doing some work recently. All are for the US and all showing some very disturbing long run trends:

First chart: US CPITwo things are worth noticing here:
  1. The absolutely scary rate of inflation since the end of WWII through today, and
  2. The absolutely scary length of deflationary periods.
It is worth focusing in a bit more depth on the second point (the first one being obvious to all).

In general, there were 3 periods of persistent deflation since 1774. These are plotted in the chart below.
Guess what - all three lasted more than 14 years before bottoming out and two managed to last 29 and 32 years. Scary stuff, if you believe deflation is bad.
Now, consider the real cost of unskilled labour over time. Chart below plots the time series since 1774, showing that starting with the late stages of the Great Depression on through roughly early 1970s the real (CPI-deflated) cost of unskilled labour was rising at an unprecedented rate. This cost peaked in the early 1980s and fell into the early 1990s. Ironically, as President Clinton battled the harbinger of the 'Giant Sucking Sound from the South' - Ross Perot - in US Presidential elections, the unskilled labourers of America were about to get a boost in their wages. The cost of unskilled labour has risen since 1994 through 2003 - just as the US economy was evolving skills-intensive sectors (IT and finance) and expanding trade with Mexico. Irony has it - the period of active low-skilled jobs creation of 2003-2007 (construction boom) saw real wages of the same fall!

Looking at the raw (nominal) cost of unskilled labour, there is a clear pattern of correlation between the wages of the lowest earners and the CPI. Chart below illustrates. Again, really dramatic stuff is the rate of rise in the nominal cost of labour that takes place from the late 1960s through today.
Scatter plot below shows the same in more detail. There are 2 clear periods in the US history in the relationship between inflation and unskilled labourers real wages. The first period - 1774 through roughly 1969/1970 is the period of a positive relationship, with real wages rising at a faster rate than CPI. Of course, this is the age of industrial might of the US. Post 1970, the relationship is that of a gently declining real unskilled wages relative to CPI.
What about other measures of purchasing power? Taking the value of the standardized consumer bundle of goods, chart below plots the dollar cost of purchasing such a basket alongside the CPI. There is a close relationship between the two series, but in general, the value of consumer bundle underlies the CPI. Convergence of the two series is achieved in 1967-1972, to be broken down following the oil shocks of the 1970s, and then again since 2004.

The following chart highlights long-term trends in the co-movements between the cost of unskilled labour and the cost of the consumption bundle. As with real unskilled labour wages vs CPI, there are broadly speaking two distinct periods in the relationship between the wages and consumption costs. In the period prior to 1970 increases in wages outpaced the rise in the cost of consumer basket. Since 1970, however, the relationship reversed, with wages rising, while the cost of consumer basket falling.Hence, overall, although real wages have declined in the recent years, the average consumption basket cost has declined faster than the unskilled labour costs. This implies that while wage disparity between the skilled and unskilled labourers (the driver of the CPI) might have risen, the unskilled labourers are still better off today than ever before, thanks to the WalMart effect of driving down the cost of the average consumption bundle.

The chart below plots the awesome power of value destruction in the US dollar purchasing power.

These charts present an interesting evolution of the US economy, from my point of view. They also suggest that:
  1. The current deflationary period might last much longer than many of us, including myself, anticipate, although there is an added component to the above equation - the role of the exchange rates. Should dollar appreciate from its currently relatively low levels, the international dimension of the US deflation will be erased.
  2. The inflationary trend - measured either as a function of CPI, or a function of PPP, is unlikely to reverse from its long-run upward trend.

1 comment:

Goldigger said...

- An Administration (butt... O what?)

The Super-Secret Bilderburg Group orders USDollar Destruction in Spain?
Ask our trusted Treasury Secretary & Builderburg attendee Mr. Gueithner!
(Regardless: Whether the global elitist bankers did or not... It's WorKing)


A Well Planned & FED Global Crisis leading US to USDollar Destruction?
How quick can Uncle Bernie's printing press destroy All USDebt/Savings?

Check the USD Index: It's falling "off the cliff" since Gueithner'$ back... <80? ...

Last ONE$ OUT are Rotten AIG'$? GOT GOLD? All the BRIC's & IRAN do...