Category: Economy

Endless articles are written about the middle class. They claim that it is disappearing. This has been a rally cry for about 40 years. Whenever I read such an article, a few questions immediately come to my mind.
How do you define middle class?
Where is the evidence that it is disappearing?
Why is this a bad thing?
Classes do not exist in nature. They are constructs of the mind. Any author that talks about any economic class must define those terms. The word “poor” today had a different meaning a 100 years ago. The poor, today in the western world, have cars, cellphones and AC units. A 100 years ago the poor were drinking puddle water. That is because capitalism has created an enormous amount of wealth over the past 100 years. Now we understand that the word “class” is relative to a time and place. Any author that writes an article about the end of times due to the disappearing middle class must define this word. If he does not define it, you should ignore him.
Most articles use household income or some variation of it. They post a chart of it declining since the 1970’s and tell you its the end of the world. There is a major problem with household income statistics in general. The number of people per American household has declined over the years. When you compare household incomes from a year when there were 6 people per household with a later year when there were 4 people per household, you are comparing two different things. Let us say income per person increased 25%. This mean that 4 people are now making the same income as 5 people made earlier in time. But not as much as 6 people made. So household income will actually show a decline, when in fact per capita it has risen.
Let us pick on the pew research center. Click here to read their article. They define classes by using household income which is size adjusted. Below they print a graph showing the trends of the years.

So the middle class lost 9% since 1971 according to them. The upper class grew 5% and the lower class grew 4%.  If the upper class grew more than the lower class is this bad? Why? I can also play with their parameters to show a different story. For instance, see this chart showing the middle class is moving to the upper class.

The middle class is not the basis for any civilization. Think about the Pareto distribution (the 80/20 rule). A very small percentage of people are the true innovators and entrepreneurs. They are the great builders. Such names as Henry Ford, Jeff Bezos, Sam Walton come to mind. They are always a small percentage of any civilization. These individuals have made the middle class (however you define that word) better off. There are more gadgets. Living conditions are far better. There are more medical breakthroughs.
The word middle class is a buzz word. It invokes a lot of emotions in people. Politicians use it to get the masses all riled up. I suggest you consider the three questions above whenever you hear the word middle class.

The velocity of money is frequently cited to pooh-pooh those of us warning about price inflation. They post this chart from the Federal Reserve.

This goes back to Irving Fisher’s formula MV=PT, where M is representative of the amount of money, V is the velocity, P is price and T is transactions.
First off, the idea that money “circulates” is a misnomer. Money is exchanged. It changes ownership just like any other good or service.
Whenever you look at a statistic or a fact you must use logic. Facts are meaningless without logic or a philosophy to interpret what you are looking at. So we look to the Federal Reserve website to see the explanation for this number and what it means. This is how they actual calculate the number.

Calculated as the ratio of quarterly nominal GDP to the quarterly average of M2 money stock.

So they take GDP and divided it by the money supply. Both the GDP and the money supply are measured in dollars. Therefore what we get is a ratio, which has no units. They than give an explanation about what this ratio means, which directly contradicts how they calculate the published number.

The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. The frequency of currency exchange can be used to determine the velocity of a given component of the money supply, providing some insight into whether consumers and businesses are saving or spending their money.

So how they actually calculate the velocity of money is a ratio (GDP/Money Supply) with no units . The worded definition they give is “the number of times one dollar is spent to buy goods and service per unit time”. The worded definition they give is in no way related to how they calculate it. One is unit less and the other is dollar spent per unit time. When any analysis comments on the velocity of money they always speak of it as “the number of times one dollar is spent to buy goods and service per unit time”.
Taking the GDP and dividing it by the money stock is meaningless. It tells you absolutely nothing. When people talk about the velocity of money, I suspect what they really mean is the demand to hold cash balances. If a person knew his cash was going to depreciate very fast, he would not want to hold it in his checking account for very long for fear that tomorrow it could buy significantly less goods. We see this behavior in countries experiencing hyperinflation. On payday the person goes out and spends his money right away before it becomes worthless.