The Impact of Inflation and Interest Rates on the Wealth Gap

OPINION. Inflation and the historic rise in interest rates over the past 18 months are bringing to the fore an age-old friction between the “rich” and the “poor” in our economy.

Unsurprisingly, the wealthy are doing well in the face of rising prices for consumer goods and avoiding the consequences of high interest rates while the middle class and those in a precarious financial situation see their power to purchases decrease, their savings evaporate, access to housing becomes more difficult and their indebtedness increases.

By overcoming the sometimes primary animosity that such a situation can arouse towards the wealthiest, how do we explain, at least partially, that the poor or the middle class always “pay the price” disproportionately for economic, fiscal and financial fluctuations? ?

Could it be that a fundamentally different conceptualization plays a role in this distinction between “rich” and “poor”?

I specify that I use the terms “rich” and “poor” without negative or contemptuous connotations, but because on a daily basis, these terms are those most used and, therefore, everyone understands their meaning and nuances. who are part of it without necessarily attaching a moral judgment to it.

An asset for one and a consumption tool for the other

Beyond an analysis of the class struggle between the working classes and the bourgeois class, one having only its labor to offer and the other holding the means of production, an observation emerges within our economy financialized contemporary in terms of the very conceptualization of the very nature of “money”.

This conceptual difference can be summed up as follows: for the more fortunate, money is an asset that must be invested, while for the less fortunate, money is a means of consumption.

For the vast majority of those who earn their salt, the income derived from their manual or intellectual labor is the source of their subsistence, which enables them to buy groceries, pay the rent or the mortgage and offer a few moments of pleasure, outings, entertainment and prepare for their retirement.

In other words, money represents a means of affording a certain standard of living.

Conversely, for the wealthy, money is not just a source of sustenance, but an asset that depreciates most of the time through inflation and therefore needs to be placed in different asset classes and means of production to preserve its value, its purchasing power and, consequently, to make it bear fruit.

To do this, the wealthiest have access to wealth management firms (heritage that the poor or the middle class do not usually have), taking advantage of the latter’s expertise to ensure that these investments grow term while their day-to-day activities can focus on professional and commercial activities.

While the consumer perceives his wealth as stemming from his possessions of goods which very often depreciate, such as a car in particular, the dominant economic class uses its capital to acquire assets for which the value should increase over time, while acquiring means of economic output.

Capital as leverage

The wealthiest can therefore grow their wealth in several ways simultaneously. The first, potentially passive if they do not manage their investments themselves, is carried out by investing their capital on the financial markets or by acquiring companies. The second takes place through their business and market activities that flow from the entrepreneurial assets they actively manage.

The accumulation of wealth is therefore done by leverage for the wealthy class, maximizing the expertise and the means of production of others, while for the worker or the white collar, the growth of his assets is linear, incremental , one “paycheque” at a time.

Debt: a lever for some, a burden for others

The relationship with debt, this fundamental aspect of our economic system when we understand that all creation of money emanates from it, also explains the gap between social classes.

For workers, debts — from studies, credit cards, mortgages, in particular — are widely perceived as a burden, that of having to repay creditors while eating into the monthly budget.

For the wealthy, debt is a tool to deploy and acquire means of production such as the construction of factories, real estate, any business, which will, with a bit of luck, generate an income greater than the cost of interest and borrowed capital.

Moreover, the favored class can be a borrower in the mentioned framework and a lender simultaneously. After all, the most important financial market on the planet is in bonds, where governments and corporations offer investors to lend them money in exchange for payment of interest charges.

It’s not that all debt is bad for the worker or the white collar. A student loan which will provide a qualification promising a substantially higher income over time and over a 40-year career is well worth the initial cost to the employee and to the community itself through the taxes collected over this period, for example.

But fundamentally, the assumption of debt psychologically affects these two social classes in a radically opposite way.

For the wealthy, debt is a way to reduce investment risk while offering the potential to become richer and expand their productive capacity.

For the latter, the debt is an advance (at a cost) on their still hypothetical future income due to their limited financial means at the present time, while constituting a psychological burden to bear on a daily basis.

A call to clarity

Some will interpret this text as a primary denunciation of the capital class, that of the “rich” or a simplistic critique of the current political-economic system and they will be mistaken.

This is rather a plea for a certain collective lucidity in matters of personal and even public finances. This can only be achieved by allowing a healthier and above all realistic conception of the workings of “money”, which would be beneficial to the working and middle classes above all.

We are going through a troubled economic era in many ways, especially when it comes to money and the fluctuating value of it. The prevailing discourse is not always in tune with the high volatility that the next few years and decades are likely to hold for us.

Our economic universe is changing at the speed of light, from a national industrial production economy in the 19th and 20th centuries to a globalized and digital knowledge economy in the 21st. Besides, our century has only just begun.

To this rapid and uncertain evolution, we can add the rise of geopolitical tensions, the application of unprecedented monetary policy theories by central banks around the world and the enormous fiscal pressure applied by a rapidly aging world population.

In such a context, it seems irresponsible to believe that the next 50 years will resemble the last 50. Advice and concepts vis-à-vis money and economic well-being cannot therefore be the same.

Not putting the cards on the table at this precise moment would be a way to conceptually further disadvantage current workers and taxpayers as well as the generation to come in a world that is becoming more financially complex, while the better off will get away with it. -same…