The U.S. rise in inflation levels and the loss of purchasing powers.

De Koning, Kees (2022): The U.S. rise in inflation levels and the loss of purchasing powers.

Abstract

Who, in the U.S., is ultimately responsible for servicing government debt levels? They are the individual households, directly and indirectly through the ownership of companies.

The number of households increased from 116.01 million as per the end of 2007 to 129.93 million per the end of 2021.

The U.S. government debt per household increased from $53,617 per household as at the end of 2007 to $94,444 as per the end of 2021. With a 2021 median household income of $67.463, the U.S. government debt per household is now 1.4 times the median annual household income level over 2021.

All central banks aim to stabilise prices when price levels go up. The usual response is to increase interest base rates. It is likely that the Fed will further increase its interest rate levels this year. The option of even more Quantitative Easing is not a very attractive one as the source of repayment of government debts will ultimately have to come from higher taxes on households.

U.S. households will bear the brunt of such upward interest rate changes as and when the Fed adjusts its interest rates due to the expected further rise in consumer goods prices. Increases in interest rates are aimed to slow down demand levels to lower inflation pressures. U.S. households are and will be confronted with rising prices, higher taxes and consequently a reduced level of purchasing powers.

There are four variables that play a major role in the economic adjustment processes: two are related to current disposable income and tax levels while the other two are linked to savings for pensions and savings in home equity. Conversion of wealth into income levels is rarely a straightforward process.

A new approach might need to be considered: “Using existing home equity levels as a generator for economic growth.” Such approach would be an asset-based approach.

This approach can be called the bottom-up approach: Quantitative Easing Home Equity (QEHE). It starts with each household individually and the level of purchasing powers they require. To allow households to use some of their home equity at 0% interest rate could provide the U.S. economy with just the boost it needs. It could be a freedom of choice method for households within a macro economic program.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation and Recession; Federal Reserve options; Cash from Home Equity
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination

References

1. U.S. Historical debt outstanding: https://fiscaldata.treasury.gov/datasets/historical-debt-outstanding/historical-debt-outstanding

2. U.S. level of owners’ equity in real estate level: https://fred.stlouisfed.org/series/OEHRENWBSHNO

3. U.S. Pension Savings: https://www.oecd.org/publications/oecd-pensions-at-a-glance-19991363.htm

4. Kees De Koning; MPRA Paper 111827 about economic growth, employment levels, Home equity in the U.S.: MPRA_paper_111827.pdf

5. Federal Reserve; Median House Prices in the U.S., https://fred.stlouisfed.org/series/MSPUS

1. Federal Reserve; Voluntary Equity Release. https://www.federalreserve.gov/econres/notes/feds-notes/how-much-does-home-equity-extraction-matter-for-spending-202005

2. Federal Reserve; Home Ownership levels. https://fred.stlouisfed.org/series/RHORUSQ156N

3. Federal Reserve; Home Ownership Level in the U.S. https://fred.stlouisfed.org/series/OEHRENWBSHONE,January 10,2022

4. Federal Reserve of Cleveland; Realized Inflation to February 2022 https://fredblog.stlouisfed.org/2022/03/the-meaning-and-mechanics-of-inflation- shocks/?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=fredblog

10. Kees De Koning; the laws of unintended consequences. The Laws of Unintended Consequences© Kees De Koning, MPRA paper 92839 19th March 2019

11. U.S Government debt levels; U.S. Office of Management and Budget and Federal Reserve Bank of St.Louis, Federal Debt: Total Public Debt as Percent of Gross Domestic Product [GFDEGDQ188S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GFDEGDQ188S, May 7, 2022.