Since the financial crisis, the government of the UK and the Bank of England have jumped through hoops and twirled around in extraordinary gyrations to bail out one of the largest financial centers in the world, the uniquely powerful and at once unaccountable speck of land, the City of London, an incorporated area within London known as the Square Mile; or rather bail out its financial institutions, its way of doing business, and its bonuses; and along the way, bail out banks further afield.
Done in the now classic way. Key ingredient: the Bank of England printed enormous amounts of money, repressed interest rates, and stirred up inflation, which hit 5% in 2011. But somebody had to pay for it: savers and workers. It demolished real wages and purchasing power of the people who make up the rest of the country.
This chart by FactSet shows how average hourly earnings growth (blue line, in percent, seasonally adjusted, year-over-year) has been relentlessly below CPI (yellow line, in percent, year-over-year). It’s the process of pauperization by inflation:
By comparison, here is how American workers fared after the Fed began to bail out the banks, insurance companies, and myriad corporate giants, including Warren Buffett’s financial empire, not only with temporary measures to keep them from toppling, but also with long-term – or perhaps infinite – “solutions,” namely QE and ZIRP.
This chart by FactSet shows the results: growth in average hourly earnings (in percent, year-over-year, seasonally adjusted, blue line) bumped along around 2% since late 2009. Only when CPI (in percent, year-over-year, yellow line) was less than 2% did workers come out ahead. The rest of the time, too bad.
Here is what happened: workers benefited from rising real incomes during the three quarters of deflation in 2009 – which probably was responsible for firing up moribund consumer spending. But it didn’t last long. In 2010 and 2011, a burst of inflation took it all away again.
It’s only during periods of low inflation or actual deflation that modern American workers get real wage increases. Turns out, slight deflation every now and then – to make up for the costs of inflation – is good for workers!
But there is another huge group of people that has been taken to the cleaners: savers.