Folks living in rural communities have become increasingly vocal about the deterioration of their way of life. Understandably so.
Flyover states are often overlooked by policies crafted to support economically dominant coastal regions. Meanwhile, they’ve watched globalization pass them by as jobs were replaced by machines or overseas workers. They blame city elites, immigrants and foreigners for their misfortunes, and gravitate to those who promise a return to the ‘good old days’.
Politicians have long used this to their advantage by misdirecting fear and anger to scapegoats, as opposed to the true source. Cheap labor didn’t steal American jobs – corporate executives drove the decision to dismantle labour power, automate and offshore. All in pursuit of higher profits, funneled to executives and shareholders. Old fashioned corporate greed, one might say.
Really though, this isn’t new. The urban-rural divide has long existed in many forms. Put aside blame and ethics, and you’re left with a rural population passed over for generations.
The following chart illustrates this.
In the early 1900s, the standard of living in America was rapidly improving as new technology was introduced. However, the experience wasn’t evenly distributed. Infrastructure – water pipes, electrical wires, gas lines – is easiest and cheapest to build in dense areas. Consequently, dense urban cities were the first to benefit from essential modern conveniences like flushing toilets.
Of course, rural populations understandably took this inequality as representative of America’s priorities. The characterization of urban favouritism has since passed down for generations and continues to this day.
Data Source: “The Rise and Fall of American Growth”, Robert J. Gordon.
Statistics Canada recently released some data measuring changes to household incomes, expenditures, savings rates, assets and liabilities during the pandemic.
I decided to create a few graphs to illustrate their findings.
Before we get to the graphs, here are some of Stats Canada’s key findings:
Disposable income declined for most households in the fourth quarter of 2020, with the largest losses for the lowest-income earners (-10.2%).
Despite declines in disposable income in the fourth quarter, all households recorded higher income in 2020 compared with 2019.
In 2020, the lowest-income earners saw their net worth grow more than that of other households. These gains were driven by larger increases in real estate assets that outpaced increases in mortgage debt.
Lower-income households reduced their non-mortgage debt by more than other households, also contributing to their higher gains in net worth in 2020.
Household incomes rose for all income brackets during the pandemic:
As you might expect, spending declined:
This allowed many Canadians to save more. Note, however, those in lower income quintiles still have negative savings rates:
Higher incomes, less spending and greater savings helped propel net worth. Of course, Canadians’ net worth also got a big boost from rising real estate and financial asset values:
Finally, Canadians are exiting this pandemic in a better financial position than when they entered:
Inflation is a hot topic right now. Understandably so, as prices for a range of commodities (lumber, copper, etc.) have risen substantially over the past several months.
Chart: Google Search Trends for ‘Inflation’ in the United States
Raw materials price pressures are now showing up in consumer prices with CPI rising 4.2% year over year ending April 2021. This level of CPI has not been seen since the early days of the 2008 global financial crisis.
However, it is becoming increasingly clear that this inflationary burst is temporary. The conditions simply don’t exist to support long term inflation, like that seen during the 1970s.
There are several reasons.
1) Milton Friedman once said that “inflation is always and everywhere a monetary phenomenon”. I’d argue that he is only half right. Central banks can increase the money supply all they want, but to have an inflationary effect the velocity of money must remain stable or rise. Real world experience clearly shows that money velocity is not constant and tends to have an inverse relationship with the level of a country’s indebtedness. And as you all know, we are drowning in debt right now.
It is becoming increasingly clear that this inflationary burst is temporary. The conditions simply don’t exist to support long term inflation, like that seen during the 1970s.
The relationship between indebtedness and money velocity is clear in the following chart. As the level of indebtedness of the US economy started to significantly rise in 2008, money velocity declined. Ultimately, money velocity plummeted to new lows during the Covid-19 crisis and has yet to recover, despite an improving economy.
Effectively, what this means is that new money entering the system (generally to fund new debt) is simply tucked away, mitigating any inflationary effects of monetary expansion.
This phenomenon is also illustrated by the declining marginal economic benefit created by new debt. The economic impact of additional debt today is much lower than it was in decades past. Therefore much more money needs to enter the economic system to have the same impacts it did in the past. Of course, more new money means more debt. By now you’ve probably noticed this is a vicious cycle.
2) The current inflationary pulse was triggered by the partial paralysis of the global supply chain. Exports out of low-cost producing countries grinded to a halt, forcing Western countries to purchase from more expensive domestic suppliers or compete over dwindling supply.
As vaccines are delivered the mechanisms for global trade – offshore manufacturing + shipping – can resume. Imports into the US are already back to pre-pandemic peaks and it’s only a matter of time until renewed competition from cheaper sources pushes prices down.
3) Labour productivity tends to rise coming out of recessions. Higher productivity offsets higher wages, thus putting a cap on unit labour costs that can flow into prices. I believe this phenomenon will be even stronger as we exit the pandemic.
The nearly immediate and widespread adoption of new software and methods of working have compressed a decade’s worth of productivity gains into the present. Not only that, but companies that maintain a remote workforce can benefit from labour cost arbitrage across geographic regions. Over the long run, both of these advances will keep a lid on unit labour costs. This is disinflationary.
4) Population growth in the US continues to be very weak and will be for the foreseeable future. 20-something year olds simply can’t afford to have kids. Or they are choosing not to bring new people into the world for ethical reasons.
The point is that forward demand driven by new consumers entering their prime spending years continues to decline. When demand declines prices fall.
While nobody can predict the future, one can use data and hard evidence to create a guide. Evidence suggests that those calling for a shift in the economic regime – from disinflationary to inflationary – could be wrong. I believe, as a diversified investor, it is important to prepare for the possibility that the pundits are wrong.
While I won’t know if I’m right or wrong until some point in the future, it appears that the bond market might agree with my thesis, as the yield on the 10yr has flatlined since March 2021.
