Can Anyone Really Live On $81.76 Per Month?

April 4, 2012

Let me tell you how rare divorce used to be.  I was born in 1956 and at two years old my parents were divorced.  My dad was awarded custody of me and subsequently moved in with his parents.  By default, his mother and two sisters pretty much became my "mothers."  Now, this wasn't as bad an arrangement as it may seem.  My four cousins and I were raised as five brothers and sisters and between them and my aunts and uncles it was what I believe to be the best childhood anyone could ever experience.

Anyway, getting back to my point about how rare divorce used to be, as I said I was born in 1956 and began high school in 1970.  The first time I met another kid whose parents were divorced was when I was a freshman in high school.  How times change!

In 1969 my grandfather had a stroke and due to the necessity of providing him with full-time care, my grandmother retired as a seamstress.  Her 1969 pension, after 40-years with the American Garment Workers Union, was $81.76 per month.  An acceptable income in 1969.  But the problem was that when she died in 1993 her monthly pension check was still $81.76.  That, ladies and gentleman, is what is known as living on a fixed income.  Retiring with a pension that provides cost of living adjustments, no matter how small, is not.

The concept of ever rising prices is not an historical norm.  Did you realize that wholesale prices in 1946 were identical to what they were in 1770?  Our economy used to go from one inflationary boom to a deflationary bust, and repeat that cycle over and over again (see chart on right).  But beginning in 1946 something changed.  What was it that brought about our experience of a consistent inflationary cycle?  In short, it was World War II.

Today people are worried about the size of our national debt, and rightly so.  In the past 30-years our national debt has grown from 40% of our GDP to a whopping 80% of GDP.  As alarming as that is, be aware that it is nothing compared to what resulted from WWII.

WWII was won at an enormous cost—in lives and property to be sure, but also in money.  By the end of the war our national debt stood at a seemingly insurmountable  level of 126% of GDP (that's more than half again as much as it is today).   Read almost any editorial comment from the mid to late 40's and you will see the belief that a total collapse of the American economy was inevitable from that debt load.  And yet we know from history that no collapse occurred.  Quite the contrary, history teaches us that by the end of the 1960's the U.S. government would actually be operating in a three year budget surplus (1969, 1970 & 1971).  So what happened?

Well, a number of things (such as the G.I. Bill) happened during those years to help our economy.  But something in particular occurred that bought the United States the time it needed to work its way out of that deficit.  Whether by ingenious plan or merely happenstance, we will never know.  Regardless, and with no inside information to confirm this, I am growingly convinced that U.S. Federal Reserve's plan for the United States to work its way out of its current fiscal hole is to implement a repeat of that post WWII period.  Here is what happened:

Beginning in 1947 the U.S. Federal Reserve enacted a policy of  both substantially and continually expanding the money supply while simultaneously forcing interest rates to unreasonably low levels.  This should already be sounding familiar.

An endless cycle of inflation?  This was unheard of at the time (see chart on page one).  "Lunacy!" was the cry in a May, 1947 editorial from the New York Times.  "The Fed will turn America into a third world economy while bankrupting the people who, though they will try valiantly, will not be able to keep up with ever higher prices!  And if prices are going up at a higher rate than one can earn on their savings, who will ever save?"

So from 1946 through 1969 the average interest rate the United States paid on its debt was less than the average rate of inflation.  When prices and wages rise at a higher rate than what is being paid on the debt (and so of course the subsequent taxes collected on said prices and wages), eventually those inflated incomes bring about tax revenues that exceed the debt.  And a number that seems quite high eventually looks low.  Much like my grandmother's monthly pension was initially adequate and eventually appeared sparse.

On March 8th Federal Reserve Board Chairman Ben Bernanke told members of congress that he believed that 20 to 30 years from now the current policies of the Fed would be looked upon as a success.  Those comments drew the ire of Republicans and Democrats alike, and many in congress were repugnant that he would be talking of 20 to 30 years when the U.S. is experiencing a crisis now.

Of course, many would consider it one of the great displays of chutzpah for congress to rebuke the Federal Reserve chairman for not acting immediately to solve a perceived crisis.  And who could argue if one did? 

When Chairman Bernanke spoke about the possibility of inflation remaining above interest rates for 20 to 30 years a light went on in my brain.  I recalled how in graduate school professor Klaus Flitner taught me about that post WWII experience .  And I thought to myself, "Whether by design, destiny or chance that policy worked before.  Could Chairman Bernanke's plan actually be 'The Grand Design' once again?  And if so, would it work as well now?"

Just as I would tell the author of that 1947  New York Times editorial, be careful of predicting imminent Armageddon.  People have been predicting it for thousands of years and no one has been right on that yet.  Who will be  right this time?  Only time will tell!

Ph.D. (economics)
Registered Principal-RJFS

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