We doubt we’ll win a Nobel prize for this, not even in the category of ‘Political Crackpottery’ or ‘Fed Follies’. But, perhaps posthumously, it will merit a footnote in the still unwritten ‘Cynics’ Guide to Political Philosophy’.
For here, we explain why and how corrupt elites tend to devour the middle classes who support them. Alert readers may notice some wrong turns and dead ends. Don’t worry about them; we are exploring new territory, as yet, unmapped.
We’ve seen several things already: Government is run by a small-ish elite. They use it to transfer power and wealth from the middle class to themselves.
Why the middle class? Because that’s where the money is. The rich tend to be firmly ensconced among the elite themselves…or have ways to protect what they’ve got. And the poor have nothing to take. That leaves the great multitudes in the middle, like lambs at a wolves’ picnic.
But if the elite depend on the middle class, why would they want to sacrifice it? That is our focus for today.
Let us begin with an update. Houses are where the middle class keeps the bulk of its wealth. And here’s Vitaliy Katsenelson:
‘Let me just give you a couple numbers. If you bought a house in 2019, or even in 2021, it would’ve cost you roughly $420,000. The interest rate was 3%, so it would’ve cost you roughly $15,000 a year in mortgage payments.
‘When rates go up from 3% to 7.6%, as they are today, now the mortgage payment goes up to $30,000. What’s important to understand is that the median American household makes about $75,000 a year, or about $60,000 after tax, roughly. So in other words, when interest rates were 3%, it used to consume 25% of someone’s income. Today it would consume, if you were to buy a house at today’s prices, at these interest rates, it would consume half of someone’s income.
‘Housing today is unaffordable. What has to happen is that, for the housing market to return to the prices and the affordability of 2019, of 2020, of 2021, they basically have to decline something like 30 or 40%.’
And it’s likely to get worse. From MarketWatch: ‘Fed’s Bullard says benchmark interest rate in 5%-7% range may be needed to bring inflation down’:
‘The Federal Reserve’s benchmark interest rate may need to rise as high as 7% to put downward pressure on inflation, said St. Louis Fed President James Bullard on Thursday.
‘“To attain a sufficiently restrictive level, the policy rate will need to be increased further,” Bullard said.’
Hook, line, and sinker
You could dismiss the financial news as normal market chop. But there’s more to the story — deep currents beneath the surface that carry you along like a leaf on a river, no matter what you think or what you want.
We have seen that the destruction of the middle class comes about…even though it doesn’t seem to make sense. The Fed did lower rates to absurd levels, luring people into overpriced houses at underpriced mortgage rates. And then, the Fed increased rates so that millions of middle-class families would have difficulty making their mortgage payments.
The federal government spent far more money than it could raise through honest taxation…and relied on inflation (by issuing more printing press money) to make the difference.
So did the feds make the middle class dependent on mortgage tax breaks as well as low, Fanny-backed mortgage loans, student loans (and forgiveness!), stimmy cheques, PPP loans during the COVID hysteria, and much, much more.
And now, their intellects dulled by Facebook and TV and trained by the government to expect something-for-nothing, 63% of Americans ‘strongly support’ direct payments from the feds to fight inflation. Yes, they are ready to fight this fire with buckets of kerosene!
Inflation is transparently harmful to the wealth-producing sector of our society. That is, it is particularly harmful to the middle class. The common man sells his time. And inflation devalues time. Lenders won’t wait…shopkeepers won’t wait…employees won’t wait — everyone needs to hurry to make and spend his money as fast as possible. There are no long-term payouts.
Long-term capital investments are abandoned. Money is not put on deposit, where it will ‘grow over time’. Lines form at gas stations, welfare agencies, and bakeries. Time is wasted, and tomorrow disappears as the struggle to survive becomes a daily routine.
Real wages fall. And along with them fall middle-class standards of living. And soon, the middle class vanishes. A few claw their way up among the rich. Most sink among the poor — desperate for another handout from the feds. That is what happened in Ancient Rome, leading to the collapse of the Empire in the 5th century. And it is a story we’ve seen over and over since then. The money goes. The middle class goes. And then the whole country goes down the drain.
Enemy of the State
But if inflation is so harmful, why does it exist? The simplest explanation is that squeezing the middle classes is subject to the law of declining returns too. As more and more wealth and power are taken, the middle classes put up more and more of a fight. Politicians who promise ‘read my lips…no new taxes’…and then increase taxes, as George Bush the Elder did…are cast aside.
Borrowing, too, has a negative feedback loop. As the feds borrow more, they drive up interest rates…increasing their own costs and crippling the economy they depend on for tax revenue.
What does that leave? How, then, can the elite keep the flow of money and power headed their way? Inflation. As long as they can get away with paying their bills in ‘printing press money’, it is a painless way to keep the jig up.
The Trump team set the record during the COVID Hysteria. In a 12-month period, it ‘printed’ and disbursed new money at the fastest rate in history.
But there’s more to this than a simple fiscal ‘mistake’ or even a calculated rip-off. There’s another, deeper and more sinister aspect to it. In order to impose their own will…the elite must reject the wisdom of the dead…and overcome the natural reluctance of the middle classes. The ‘common man’ wants to live in his own house, not in a high-rise collective. He prefers his own car to public transportation. He distrusts the experts, depending instead on his own ‘common sense’. And he expects common decency from his fellow man, not special pronouns or race-based exceptions.
The elite organisers of the Davos Conference tell him that in the future, ‘you will own nothing, and you will be happy’. But he doesn’t buy it.
So he will have to be destroyed.
More to come…
For The Daily Reckoning Australia