Tobold's Blog
Thursday, December 05, 2024
 
Greedflation, Cheapflation, and the Vibecession

What does it mean to say that an economy is "good" or "bad"? The problem here are that you can use different economic indicators, and come up with different results. Did you hear that the German economy is struggling? Well, yesterday the German main stock index, DAX, broke a record of 20,000 for the first time in history. Is that economy "good" or "bad"? And how about the US economy, where very different views of how good or bad the economy is had a massive impact on the election results?

Economies are large and complex systems. You can in various ways look at smaller parts of them, and for example divide an economy in different groups. It is obvious that a high on the stock market is good for people who own a lot of shares, but a lot less helpful for other people who don't own any shares. One big impact on economies over the last 4 years was inflation, and I would argue that it hit different groups in very different ways.

Imagine you own a company and in an environment of general inflation you need to set the prices for the goods you produce. You could raise prices by less than what the inflation of your input costs are, but then your profits would go down. You could try to keep exactly the same profit margin. Or you could say that if you are raising prices anyway, better to raise them by more than the cost, so your profits increase, and you have some more time before you need to raise prices again. The general observation over the last few years, visible by publicly traded companies having to state their profits, is that most companies went for increasing prices over costs, increasing their profit margins. Some people call that greedflation, although greed is probably only part of that business decision.

In any case, if a lot of companies increase their profit margins, these companies and the stock market can very well have a rather positive outlook on the economy. While for the other side, the consumers for who the wages rose more slowly than inflation, the economy in the very same situation looks rather bad. This time we also observed that cheaper goods had higher price increases than expensive goods, which obviously hits low- to medium-income households even harder. That has been called cheapflation, although others use the same term for the effect if a company lowers quality instead of raising prices.

There are also psychological factors at work. If you have both a 10% salary increase and a 10% increase in grocery prices, it still feels bad, although mathematically you aren't any worse off. Grocery prices are more visible, and while people feel they "deserved" that salary increase, rising prices in the supermarket feel more like a hardship, an external, unfair pressure. All of these factors together resulted in a vibecession, a situation where, real or imagined, people feel that the economy is bad, even if most economic indicators are saying it is good.

The fundamental problem is that much of this is a zero sum game: Consumers, and especially American consumers, tend to spend close to 100% of their income. There is very little saving, and while some people spend more than they earn, that reaches an obvious limit when your credit card is maxed out. If companies raise prices more than they raise wages, the wage-earners soon have to buy less. Thus, when corrected for inflation, GDP drops. To have GDP growth, wages need to rise faster than prices. Shifting money from the poor to the rich is bad for the economy, because rich people save more, and thus spend less of the money than the poor people would have.

Funnily enough, I live in the country which over the last 4 years had the fewest problems with people being unhappy about inflation: Belgium. In Belgium both salaries and pensions are automatically inflation-adjusted. That doesn't make employers very happy, because whenever they raise prices, the wages they have to pay automatically rise in tandem. But as a result the Gini coefficient, a measure of income inequality, in Belgium is just 26, which is extremely low, while the USA has it at 41, on the high end of the scale. Belgium also is the 3rd highest country in median wealth per adult, beating the USA by $250,000 to $108,000. Low inequality over a long time leads to more people with money in the bank, and lower social unrest. You might not like living here if you are part of the population that actually profits from inequality, but for the rest of us it is rather nice here.

- posted by Tobold @ 6:30 AM Permanent Link
Comments:
This is an interesting and complex topic. For me personally despite increased costs I'm doing fairly well compared to other Millenials my age. I'm earning a salary that puts me right at the Median for folks my age. I have a generous amount of disposable income each month. My retirement funds have boomed in the past few years with my current Rate of Return for 2024 being at 25.29% which is incredible. My retirement calculator is for the first time in my life saying I am on pace to retire comfortably at 65.

Yet I have coworkers who earn more than me who constantly complain about how bad the economy is. They all own houses, some of them purchased in the last 5 years. Some of them just purchased shiny new fully loaded pickup trucks us Americans love so much and then complain about high gas prices. Those that voted for Trump all say the economy was the number 1 reason.

By all accounts my coworkers and I are all doing just fine yet pretty much everyone here would say the economy is bad. I know this is all anecdotal but there is a real disconnect between the reality of people's situations and how they perceive things to be.
# posted by Blogger Bigeye : 5/12/24 17:34
 
It's easier for homogeneous countries to be happier since a lot of unrest happens because the "us vs them" mentality. I take it that you used Wikipedia for the median wealth per adult, and on that page the EU as a whole is less per adult than the US, That seems like a better comparison since that takes increased diversity, geography, and culture into account. I don't think that there's ever been a time in the US where this country as a whole has been happy. To me it just seems that is the reality of how the US developed into a country and that history seems to continue to define our future.
# posted by Blogger Janous : 5/12/24 21:08
 
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