Buying power drops

In economics, buying power is calculated with the following equation:

Buying power equals nominal income divided by inflation times a hundred

If your salary increases two percent, inflation increases three percent, your buying power changes from 100 to 102 / 103 x 100 = 99, e.g. it drops one percent.

Dutch state officials from the CBS tells us: ‘buying power is raising slower than expected. Initial expectations of +1,5% increase in buying power for 2019 have now been lowered to +1,2%.

Smells like baloney.

When I was a kid, it was not uncommon among my friends to be part of a three-children family, whose father worked full-time and mother part-time. Every year they would go on a skiing holiday for a week. Now that my friends and I start families of our own, according to the CBS, we should be able to afford even more annual skiing holidays, as they claim that buying power has increased every year for the past forty years, with the exception of a small period during the minority mortgage meltdown.

If one crunches the numbers, and I have done so, the Dutch government makes the outrageous claim that buying power has increased 56 percent since 1985. So families with three children should nowadays be able to afford 10 days of skiing holiday!

Nonsense.

The truth is the exact opposite: among millennials, only couples without kids can afford luxury holidays, and even they can only afford a couple of days of annual skiing. Stuff has gotten expensive.

How expensive? Well, these same state officials also tell us that inflation has been around two percent each year, specifically +1,7% last year. If you crunch their numbers, prizes have officially increased 89 percent since 1985. Only doubled in thirtyfive years? Not too bad, no? Unfortunately, also utter nonsense. For instance, back in 2000 when the Euro replaced the Dutch Guilder, the exchange rate for the Euro was set at 220% the value of a Guilder. This means that, according to official statistics, a euro should be worth 160% of a guilder these days, but it is blatantly obvious that these days a euro gets you less than a guilder got you twenty years ago.

The nail in the coffin for the 89% percent statistic is the real estate market: estimates vary, but it is not uncommon to find housing prices which have increased more than a thousand percent since 1985, e.g. a house that used to sell for 90.000 guilders now sells for 400.000 euros. Considering houses are pretty much the biggest purchase you make, to claim that inflation flatlines at two percent is a bald-faced lie.

Now, perhaps the real estate market is not representative of the entire market. I’ll grant that in between immigration and the government stopping people from building new houses, it is no wonder that real estate prizes have skyrocketed.

Jim tells me the Big Mac index is, relatively speaking, the best inflation index we have. The Big Mac index tells us prizes have inflated an average of +3% a year, or +170% since 1985. Ah, now that seems more believable.

But let us first take a look at where the government’s numbers lead us: what nominal income do we supposedly enjoy? Well, with a buying power increase of 56%, an inflation of 89%, that can only happen if millennials have experienced a nominal income increase of +195%. Hooly batman lies. Please point me to the millennial who makes three times as much as his parent. Anyone? Bueller?

Here’s what I think is a more realistic take: Big Mac inflation numbers seem about right. Three percent a year. Now, how much have incomes increased? I’d say… Two percent a year. Generously. Then, calculating buying power since 1985 gives us 192 / 270 x 100 = 65%. So I’d estimate buying power has dropped 35% since 1985.

That sounds about right. Perhaps a bit conservative, but about right. Five days of skiing with two kids. People can pull that off.

Of course the scary thing is that the decrease in buying power grows exponentially, not linear, which is to say that if prices increase with the same percentage each year, they are actually increasing more every year. Inflation stacks. See graph below, which shows linear increase (which we do not have) versus exponential increase (which we do have).

So, to make a long story short: on the current trajectory, our economic future looks bleak.

All this is of course completely in line with the reactionary analysis of the West, but this does not make it any less depressing.

10 Comments

  1. KFM is a helluva drug. Guaranteed that some economist somewhere can make these numbers add up with enough GDP deflators and price-averaging and applied cryptohedonics. (I made that last one up – or did I?)

    Everything we call “economics” today is lies upon lies. 100 years of compound interest on faulty assumptions, flimsy rationalizations and ridiculous equations. We’re getting poorer, and aside from a few billionaires, even the elite are getting poorer.

  2. Hey, cheer up. There is a bright side to economic impoverishment. It might topple the present order, like it did in the UDSSR. Although, I admit, we need a lot more impoverishment before the powers that be are in trouble

  3. It’s tricky, because different product groups went differently. Just focusing on what one needs for children, real estate got brutally expensive, children’s clothes seem to have gotten a bit cheaper, and toys got much cheaper. While a good childhood is not about having cubic meters of Chinese plastic crap, my inner child still likes looking at what water guns Toys’R’Us has even in the under <€10 range. Far cooler than what I used to have.

    Travel got stratified. Budget airlines, hostels allowed young people to explore cities on the cheap. But checking in a family to the top class ski hotel in Schladming, the Royer, is something like €500 a night.

    If real estate was affordable, the rest would more or less balance out, I think.

    1. Eating out or getting drinks has gotten expensive
      Travel (especially holidays) have gotten expensive
      Cities are expensive
      House renovation has gotten expensive (although this forces you to do the renovation on your own which I personally enjoy)

      1. I’d say that, too, got stratified. The “cool” bars with music and pretty women in the inner city vs. the basic bars in the outer city with 50 years old bricklayers. The “cool” restaurants in the inner city vs. basic eateries in the outer city. Budget airlines have great deals. While travelling by train is just stupid – costs more than fuel in my car, despite all the government subsidies, makes no sense at all.

        I always do house renov directly with workers, cash more or less under the table. It might have gotten more expensive but since 100% of it goes to a working man, I don’t really mind. Modern materials and tools got easier to use for the DIY types like you. Once I was helping someone to lay an YTONG wall, it was surprisingly easy. Better than brick.

        1. Yes basic living is still OK. I guess part of me is scared that the floor will drop beneath me any moment, but you are right.

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