I’m going to present some data about the US economy. I’m going to let them speak for themselves, as much as possible. This is because almost everybody believes what they believe because they believe it, rather than as the result of sober analysis. So I’ll present the data along with a few questions about them. If I interpret them, at least 50% of my readers will be very upset. So rather than risk reader wrath I’ll let them make of the data what they will. All the charts below can be viewed in a larger size by clicking on them.
First here is the productivity of the US worker since 1950. As you can see worker productivity has steadily increased. What should happen to prices as productivity increases?
Next is household income. The increase in household income is a small fraction of the increase in productivity.
Over the last 40 years the consumer price index (a variable that drastically underestimates the actual cost of living) has increased three fold. Let’s accept it as face value. It’s clear that the average American’s income has not kept pace with the supply of money, the true measure of inflation (see below).
Federal tax revenue is displayed in the next graph. They are up more than seven times since 1980. Whatever the government is doing with these funds is not reflected in household income.
M2 is on the next chart. M2 is a measure of money supply that includes cash and checking deposits (M1) as well as near money. “Near money” in M2 includes savings deposits, money market mutual funds and other time deposits, which are less liquid and not as suitable as exchange mediums but which can be quickly converted into cash or checking deposits. The amount of money available has more than tripled over the past two decades. The federal government has a monopoly on the creation of money. So how did it create this money and where did it go? Not to the average household.
A hint of this new money’s destination is on the last chart. Over the past 30 years the S&P 500 index is up more than ten times. The two down blips are the dot-com bust and the great recession. So now you should have enough information to explain why the rich are getting richer and the poor poorer. As is apparent these changes are independent of which party controls the White House or the Congress. It also explains why so many people are dissatisfied with the way things are going, though almost all of them can’t fix the origin of their discomfort.
So where has the money gone? The answer is provided, at least in part, by The Cantillon Effect. Look it up.