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June 01, 2007 at 04:00 AM
Not long ago, telling someone they looked like a million dollars was a compliment. Say it now and they might rush to schedule an emergency medical check-up.
A million dollars is not what it used to be. This is what a friend recently sold a two-bedroom apartment in Manhattan for, which he bought for under $270,000 in 1993. Even a billion dollars is not a big deal anymore. Corporate takeovers of this size, all cash, no longer make the headlines.
Definition of Inflation
One definition of inflation is the loss of the value of money. Surely, you need a lot more of it to be called a fortune. This year, for the first time ever, only individuals with a net worth of over $1 billion made the Forbes list of 400 richest Americans. In 1982, when it was first compiled, you could squeak in with a mere $200 million in today’s dollars, while the list was headed by a guy with just $4 billion. Today’s richest man, Bill Gates, is worth $56 billion, a 14-fold increase after inflation.
The accelerating loss of the value of money is best seen from the outside. Since 2000, the U.S. dollar has lost 7 percent on the real effective exchange rate. Over the same period, China’s foreign currency reserves — mostly dollars — have grown from $150 billion to over $1 trillion.
Another definition of inflation is more money chasing a set quantity of goods and services. This is certainly true of goods and services consumed by the upper middle class. If you send your kids to prestigious schools, drive a luxury car, collect art, dress in expensive boutiques, take vacations abroad, eat out in quality restaurants or have wine with dinner, you have seen your bills rise at double-digit rates, not the benign 3 percent that the government has been reporting.
On the other hand, if you live in the world of Wal-Mart and sub-prime mortgages, you may have seen not just stable prices but outright price declines. Families from the lower-middle class down can now afford more goods and services, and a far greater variety, than only a decade ago. Their buck now goes a lot farther as almost all generic goods have become cheaper.
Consumers in this category still face inflation — for example, gasoline prices more than doubled since 2000, while rents have also increased — but their inflation has certainly remained moderate, matching or even trailing the official CPI.
Class-Based Inflation
Plenty of studies and data sets show that the rich are getting richer and far more numerous than ever, while the poor are running hard to stay in place, with the attendant thinning out of the middle-income brackets. The divergent trend in inflation for different social classes is perhaps the most dramatic sign of this process in socio-economic terms.
That a class-based rate of inflation can be discussed at all is significant. In the earlier postwar decades, a very broad income spectrum of Americans shopped at Sears and Montgomery Ward — even though they tended to buy different things. Today, the Wal-Mart crowd and the boutique crowd no longer mix on the cash register line.
As they acquire greater assets and attain higher incomes, upper-middle-class consumers face runaway inflation. Meanwhile, limited income gains for the lower middle class and the poor have created intense competition for the consumer dollar, feeding a drive toward greater production efficiency and a shift to cheaper production venues. Wal-Mart has staked out the lower rung of the consumer segment by relentlessly pressuring its suppliers to cut prices. This model now dominates mass-market retail.
The official rate of inflation is calculated using the basket of generic goods and services, while higher inflation at the top goes unreported. Low reported consumer price inflation has allowed the Federal Reserve to move cautiously in raising its interest rates, despite strong economic growth since 2003.
