The monthly letter from Sprott:
How does the US achieve a sustained recovery if “the 99%” continues to suffer perpetual decline in real income?
By: Eric Sprott & David BakerOther than some obligatory arrests for disorderly conduct, the Occupy Wall Street movement celebrated its one year anniversary this past September with little fanfare. While the movement seems to have lost momentum, at least temporarily, it did succeed in showcasing the growing sense of unease felt among a large segment of the US population – a group the Occupy movement shrewdly referred to as “the 99%”. The 99% means different things to different people, but to us, the 99% represents the US consumer. It represents the majority of Americans who are neither wealthy nor impoverished and whose spending power makes up approximately 71% of the US economy. It is the purchasing power of this massive, amorphous group that drives the US economy forward. The problem, however, is that four years into a so-called recovery, this group is still being financially squeezed from every possible angle, making it very difficult for them to maintain their standard of living, let alone increase their levels of consumption.
One of the central themes that arose out of the Occupy movement was the growing sense of unease among the average American citizen with regard to growing imbalances in wealth within the US. The rich are getting richer while the poor get poorer. That feeling is entirely legitimate. According to the US Census Bureau, in 2011 the median income of US households, adjusted for inflation, fell to $50,054. This is 4.9% below its 2009 level, and 8.9% below its all-time peak of $54,932 in 1999.1 This is not encouraging data. It implies that the average American household is almost 9% poorer today than it was thirteen years ago.
The Census Bureau data is even more troubling if one acknowledges that the Consumer Price Index (CPI) inflation rate it uses to adjust annual income doesn’t properly account for food, energy or healthcare prices – all key inputs to the average US consumer, and all items that have gone up considerably in price over the last decade, particularly since the advent of quantitative easing. Under current CPI, the items pertaining to food, fuel and healthcare only make up 28% of the total basket.2 The average US family, however, especially among the 99%, is spending far more on these three items as a percentage of their total income. Figure 1 below compares the average price of gasoline and select food items in 1999, when the average household made $54,932 in real terms (inflation adjusted), versus 2012, when the average household made just over $50,000 in the same relative dollars. As can be seen, the increase in food and energy has grossly outpaced the official CPI inflation rate, which conveniently dropped or shifted many of the food and energy components back in the 1990’s. If the Census Bureau used a more appropriate measure of inflation to compare the median household income in 1999 to today, it would result in an even lower annual income number, implying an even worse decline in real wealth over that time period.
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The monthly letter from Sprott: