2011 April 10 Sunday
Food And Energy Inflation Hits Poor Hardest
Economist Mark Thoma draws attention to a Cleveland Fed study on household income and food and energy expenditures by income quintile.
Households in the top 20 percent of the income distribution spend 11.6 percent of total expenditures on food and energy, which adds up to 7.9 percent of disposable income. For the bottom 20 percent these shares rise to 20.4 percent of expenditures and a whopping 44.1 percent of after-tax income!
The poor obviously are hit much harder by food and and oil price rises. This result illustrates a more general point: We do not all experience the same rate of inflation. People with chronic illnesses experience a much higher inflation rate due to the higher rate of inflation for medical services and drugs. People who live in an apartment in a moderate climate and who walk to work experience much less energy price inflation than the average.
But you might be wondering how people could have much higher expenditures than they have after-tax income. Several reasons:
For those astutely wondering why food and energy expenditures are a larger fraction of total expenditures than of total income for the bottom 20 percent, there is a much higher fraction of households in this quintile which may be using savings and credit markets to consume above their annual income. Likely categories are the unemployed, business owners with temporary losses, students living on loans, and retirees drawing down their nest eggs.
I'd like to see the same analysis for working age people who are not in school. In particular, how do the chronically poor people spend their money? Since the incomes of median working age males have already been trending downward for decades the food and energy price inflation have got to be hitting them very hard.
It strikes me that the people who we refer to as the "middle class" are not really the people in the middle. In America the popular image of the middle class are home owners who fairly comfortable. They work hard and have decent living standards. But it is hard to look at the median working age males income trend and conclude that the median is still the "middle class" as we come to understand it. Demographic trends with growing fractions of economically lower performing black and Hispanic populations will only only widen the gap between the "middle class" and the median.
The Bank of Japan answered why commodity prices (including food) are rising:
While the strong increase in commodity prices has been driven by global economic growth propelled by emerging economies, speculative investment flows into commodity markets have amplified the intensity of the price surge. The dynamics of global commodity prices has been changing as well, in accordance with the growing presence of financial investors in commodity markets. The entry of new financial investors has paved the way for the “financialization of commodities”. Consequently, global commodity markets have become more sensitive to portfolio rebalancing by financial investors, which has made commodity markets more correlated with other asset markets, including major equity markets. Furthermore, globally accommodative monetary conditions have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and driving more investment flows into financialized commodity markets.”
Note the term, "financial investors" has been used multiple times. Our markets no longer are real capitalism, where we trade our goods and services. Instead we have the invisible hand of middle men i.e. the financiers moving the market in a direction they want it to go. This is pariah capitalism, which if left unfettered has the potential to allow fascism or communism to sneak in the back door. The people will claim capitalism failed, when in reality, the money system failed.
Here is a good link showing how Goldman rigged the wheat futures market, driving up the price of wheat when supply was at an all time high:
If you have high blood pressure, please don't read the link.
The money path for financialization is as follows. Government deficit spends into Granny's bank account. Actually, the Gov can spend into anybody who has a bank account. When the deficit spend money arrives at the bank, Granny doesn't spend it all right away. The extra money in Granny's account did not originate as a bank loan.
I will deviate here to remind the reader, that money orginates in two places. 1) As government created money from the treasury, which can be digital dollars, or it can be cash and coins. 2) When you take out a bank loan, you create new "credit" money.
OK, back to the the first paragraph. When the extra money is available in Granny's account, the banker says "Hey - this is extra money to our banking system and it didn't originate as a loan. Therefore, it must be reserves. The banker puts Granny's extra money on the overnight market, which drives rates DOWN (due to extra supply and low demand). That is why deficit spend money from the treasury causes LOW interest rates. In order to keep interest rates from collaping to zero, the FED buys up extra reserve dollars through open market operations. In effect, the FED offers the banker a bond (more debt to us) for granny's money. The banker has a choice, keep Granny's money and have higher reserves than he needs, or grab the bond, and earn some interest income. It's a no brainer, he sell's Granny's money to the FED, that is why there are ALWAYS buyers for bonds, because the extra money is already there. When Granny does want all of her money, the FED or Treasury does a reverse repo or reserve fill.
Since interest rates are low, people borrow money and speculate with it. The speculate through the new financial vehicles, allowing food and commodities to drive up. Also, unlike in Monopoly, bankers can also spend their cash trying to make profits.
In a balance sheet recession, like we have now, the best thing to do is spend direct into labor, not the @#% banks. By spending into labor, then labor can buy down their upside down loans, and unfreeze the credit mechanism. The real problem is the housing bubble collapsed, and people are underwater, which in turn freezes up loan activity for most people.
But, I don't have a lot of hope for our Government and most of our economists, they seem to be clueless. By spending into banks, plenty of money leaks out, and doesn't serve the needed function of buying down the underwater loans in the housing market.
The "poor" buy too much junk food and spend money on cars.
James Bowery's link still goes to a scam site. Are you really ok with this?
http://jimbowery.blogspot.com/ should be http://jimbowery.blogspot.com/
I wonder if this is why there has been so much male-bashing by the media and the demoralization of boys starting at a young age. Males have to be psychologically beat down or there is a risk they will rise up in a rather aggressive fashion if they ever realize how badly they've been screwed and if they feel morally entitled to seek justice. Right now the facts of their economic demise has been hidden from public view. And males, especially white males, have internalized a certain message: You have no right to complain about anything.
Sorry, I was slow. My guess is Jim wasn't doing that intentionally. But I added an additional filter to block out the misspelled URL and even fixed his comment above so it no longer mentions it.
You had a mix of right and wrong URLs in your comments of recent months. I see how this can happen with different browsers on different PCs with different auto-fill-in local cookies. I had to go over both Para and Future and fix all those comments. The blog software's search/replace function can find things on Search that it does not find on Search/Replace.
I wonder if this is why there has been so much male-bashing by the media and the demoralization of boys starting at a young age. Males have to be psychologically beat down or there is a risk they will rise up in a rather aggressive fashion if they ever realize how badly they've been screwed and if they feel morally entitled to seek justice. Right now the facts of their economic demise has been hidden from public view. And males, especially white males, have internalized a certain message: You have no right to complain about anything.-
If/when the SHTF goes down and libs/colored people/gubbmint, etc... are looking for help, white men will not show up. I certainly don't plan to do so. I'll just watch the show (from a distance) and look after my own kind.
RX, that webofdebt.com article is very confused. GS and other banks are merely acting as middlemen for retail folks who want to invest in commodities: this is why they can go long in the market without taking on the risk. (This of course is bad if there is a bubble, but it is quite beneficial if the expected price rise is due to real-world factors, since it buys us time for mitigation.) "Rolling over contracts" is mentioned as if it was a foolproof operation, which it isn't: for instance, rollover losses are why the USO commodity fund has shown such dismal performance, despite recently rising oil prices.
In fact, the rise in food prices is mostly a consequence of high energy costs and government subsidies for biofuels, which divert food and arable land towards energy production. (Food would still be more expensive if there were no biofuel subsidies, due to high energy cost: but these massively compound the problem.)
Just looking at food and energy expenses without taking other factors into consideration can give a misleading picture of the effects of inflation on the poor. Of course higher prices disproportionately burden those who spend a higher percentage of their income on the necessities of life. But one also needs to consider the fact that most of those in the bottom income quintile are net debtors, and inflation benefits them to the extent it makes it possible for them to pay back their debts in cheaper dollars. There may also be other countervailing factors, such as indexing of transfer payments, or minimum wage increases, which could offset the increases in prices of food and energy.
Data from the Census Bureau on share of aggregate income by quintile, when compared to data on inflation, suggest that, over long periods of time, the income share of the poorest 20% is positively correlated with inflation while the income share of the richest 20% is negatively correlated with inflation, and the correlations are statistically significant. That is, periods of high inflation (such as the 1970s) tend to coincide with periods when the richest 20% are losing income share and the poorest 20% are gaining income share. Conversely, the long period of relatively low inflation beginning in the early 1980s, known as the Great Moderation, coincides with a persistent decline in the income share of the bottom quintile, and with strong growth in the income share of the top quintile.
Andy fair enough. However, I tend to think there are long-term structural cycles that require stepping back to see. It's possible we went through a period of inflation and disinflation in the 70s and then the 80s that was a part of one long structural cycle. The impact on wages/incomes of the poorest 20% could just be a coincidental factor during that time period.