Debt Serfdom Is Not Prosperity

Today’s news that US home prices in December were up 6.1% on a Y/Y basis is just one more reminder of why the Fed’s pro-inflation policies are so insidious. In essence, they set up a running battle between asset prices and wages, and the former wins hands down.

For avoidance of doubt, here is the long view on the matter. We have indexed the median sales price of homes in America and the average hourly wage to their values as of Q1 1970. That was the eve of Nixon’s plunge into pure fiat money at Camp David in August 1971, and all the resulting monetary excesses and metastases since then.

The data leaves no room for doubt. Home prices today stand at 18.2X their Q1 1970 value while average hourly wages are at only 8.7X their value of 54 years ago.

Expressed in more practical terms, the median home sales price of $23,900 in Q1 1970 represented 7,113 hours of work at the average hourly wage. Assuming a standard 2,000 hour work year, wage workers had to toil 3.6 years to pay for a median-priced home.

With the passage of time, of course, the Fed’s pro-inflation policies have done far more to goose asset prices than wages. Thus, at the time of Greenspan’s arrival at the Fed after Q2 1987 it required 11,350 hours to purchase a median home, which figure had risen to  12,138 hours by Q1 2012 when the Fed made its 2.00% inflation target official. And after still another decade of inflationary monetary policy, it now stands at just under 15,000 hours.

In a word, today’s median home price of $435,400 requires 7.5 standard work years at the average hourly wage to purchase, meaning that workers now toil well more than twice as long as they did in 1970 to afford the dream of home-ownership.

Index of Median Home Price Versus Average Hourly Wage, 1970 to 2023

So the question recurs. Why in the world would our esteemed central bankers wish to impoverish America’s workers by doubling the working hours needed to buy a median priced home? And, yes, the above assault on the middle class is a monetary phenomena: It was not caused by home builders monopolizing the price of new houses or shortages of land, lumber, paint or construction labor over that half-century period.

To the contrary, when the Fed inflates the monetary system the resulting ill-effects work through the financial markets and real economy unevenly. Prices including those for labor and assets do not move in lockstep because foreign competition holds down some prices and wages, while falling real interest rates and higher valuation multiples inherently cause asset prices to rise disproportionately.

Thus, the reference rate for all asset prices—the 10-year UST note—fell drastically in real terms during the last four decades of that period. Real rates above 5% during the 1980s fell to the 2-5% range during the Greenspan era, and then further plunged to zero or below owing to the even more egregious money-printing policies of his successors.