Lowering Real Wages | Increasing Debt

In our recent article ‘Aviation: Making Ends Meet’, we shared some insights on the idea that while wages have been increasing they have been increasing at a slower pace than inflation. This inevitably causes real wages to be negative. For example, if the consumer price index is approximately 8% year over year, and individuals are seeing pay increases of approximately 4% year over year. In real terms, this means that individuals have been taking a pay cut of 4%. Meaning, that individuals have actually gotten a pay cut of 4% over the same period.

The above relationship is very important to understand as it’s not readily seen in individuals’ paychecks. In fact, inflation is so insidious, that when individuals receive pay increases without accounting for inflation they may feel good about the pay increase because they have not factored in the negative effects of inflation. The average person does not truly understand how to account for inflation as it relates to wages or even sales of goods and services in a small or micro-enterprise. Therefore, individuals are lulled into a false sense of security with pay increases when in fact in real terms they are actually receiving pay cuts. Making it very difficult to maintain previous standards of living and leading individuals to take on more hours at their current jobs or take on more jobs. We discuss this phenomenon in more detail in our article ‘Aviation: Jobs Jobs Jobs!’.

In this week’s full article we want to share some thoughts on the relationship between constantly lowering real wages for individuals and an increase in their debt levels. As always, we know the usual question. “What does this have to do with aviation?”“ This has more to do with aviation than the average person might believe. First, individuals and businesses operating in the aviation space are not immune from other wider economic factors, and therefore, lower real wages for aviation professionals will not only have an effect on the individuals themselves but the industry as a whole. Second, the spinoff effects of lower real wages on the industry could mean that individuals are unable to make ends meet and be forced to work long hours or multiple jobs. Third, the consumers within the aviation industry will ultimately not have enough money to consume the goods and services within the industry, therefore, causing an economic crisis for the industry. Fourth, and possibly most important. The aviation industry is one of the most fragile industries economically, is most vulnerable to an economic shock, and is most adversely affected by negative economic events.

For further readings please see also: ‘3 Ways Aviation Businesses Are Coping With Inflation’, ‘The Aviation Industry and Economic Uncertainties’, ‘Inflation: Higher costs and their effects on Flight Schools’, ‘High Interest Rates/Cost of Borrowing and Their Effects on Aviation Businesses’,’Debt: Its effects on the Aviation Industry’, ‘Economic Crisis and the Aviation Industry’, ‘Inflation and Aviation’, ‘How The Aviation Industry Needs To Look At Inflation’, ‘The Aviation Industry Must Not Mistake A Recession’, ‘Understanding Recessions’, ‘Understanding Inflation’, ‘Money and Recessions.’, ‘Breaking Down Inflation.’ , ‘Inflation: Here we go again…’, ‘Aviation: Jobs Jobs Jobs!’, ‘Aviation: Making Ends Meet’, and ‘Why is it More Expensive to Give Thanks?

As interest rates rise on everything from mortgages to car loans to Treasurys, interest is also rising on credit card debt. That’s not exactly great news, as so many indicators point to a recession—and the worsening job situation that comes with it—on the horizon. Many Americans may soon find themselves with more debt and higher interest rates, all while real wages are falling.

Earlier this month, Bankrate.com reported that the average credit card interest rate has climbed to 19.04 percent. That’s a thirty-year high and the highest rate since 1991, when the rate hit 19.00 percent. That can mean real financial trouble for ordinary households, but it’s what we should expect in the wake of the Federal Reserve’s policy shift to finally allow interest rates to drift upward this year after more than a decade of quantitative easing and ultralow interest rates. Over the past year, the Fed has increased the target federal funds rate from 0.25 percent to 4.00 percent. NBC reports on how this affects credit card debt:

Increasing the federal funds rate cranks up what’s known as the prime rate. That’s the interest rate banks charge their most creditworthy customers. Currently, it is 7%. The final annual percentage rate for a credit card is determined by the prime rate plus a bank’s margin for lending to a given customer.

The new average is a substantial increase from the 16.3% average rate for credit cards at the beginning of the year. According to Bankrate, if you carry a $5,000 balance on a credit card—which is the current national average—making just the minimum payment each month at that rate would cost $5,517 in interest over 185 months, or about 15 years. At today’s 19.04% rate, you would pay $6,546.

The Fed also reported that “the strength in credit card demand and access coincided with the record growth in credit card balances over the past year.” In its third-quarter report on household debt, the Fed further noted, “Credit card balances saw a $38 billion increase since the second quarter, a 15% year-over-year increase” and “the largest in more than 20 years.”

Consumers apparently expect to be spending more with credit cards in the near future as well, as many are applying for even more consumer credit. According to a new report released by the New York Federal Reserve on Monday, Americans are pursuing less mortgage and auto debt, but continue to turn to credit cards:

The application rate for credit cards remained robust during 2022, reaching 27.1% in October 2022, above its October 2021 level of 26.5% and its pre-pandemic reading of 26.3% in February 2020. The average application rate for credit cards for 2022 overall was 26.7%, 3.6 percentage points higher than the average rate for 2021.

Should we be worried about this? Fed economists would tell you no. They assume that Americans have a huge savings stockpile that they can use to pay down debt or to avoid default. Yet this casual attitude toward mounting debt appears less and less warranted every day. With the job market softening, real wages falling, and interest rates rising, increasing debt can’t so easily be waved off.

A Free Money Surge Followed by Plummeting Savings Rates

After all, back in 2021, consumers were indeed using their stimulus checks to pay off credit card debt. They were saving more than they had in decades. Plus, as the Fed further pushed down interest rates, consumers were refinancing home loans at even cheaper rates than they already had. Yet, as the new spike in credit card debt shows, those days are over. Moreover, now that the stimulus checks have dried up, the savings rate has plummeted to the lowest level we’ve seen since 2008.

It appears that the savings stockpile has not yet been totally depleted, but we’re already well on the way there. Some analysts estimate that consumers have about nine to twelve months left of that savings cushion.

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But this may prove to be optimistic, depending on at least three factors: whether real wages continue to fall, whether job losses mount quickly, and whether interest rates continue to rise.

Falling Wages, Job Losses, and Rising Interest Rates

First, there’s the problem of real wages. As we’ve seen, price inflation has been exceeding wage growth, and ordinary Americans (on average) have seen their real wages fall for nineteen months in a row. That won’t exactly help expand workers’ savings.

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Second, it can no longer be said there is an economy-wide worker shortage. Certainly, there do still appear to be worker shortages in retail and food services. But in real estate and tech, every week now brings multiple announcements of new layoffs in tech, real estate, and construction firms. In recent weeks, Facebook, Amazon, and Twitter announced tens of thousands of layoffs. Google announced ten thousand layoffs today, and Fidelity National Information Services announced thousands more. Real estate sales platform Redfin has recently closed its home-flipping business and cut more than eight hundred employees.

From real estate to tech to the crypto economy, we can expect more layoffs and losses as easy money tightens up.

And finally, the issue of rising interest rates, in addition to bringing job losses in the larger economy, will accelerate the burden that new credit card debt places on consumers. This will lead to rising delinquencies and tightening budgets overall. Some observers have suggested that credit card debt is no big deal right now because total credit card debt—even with the current surge over last year’s totals—is not significantly above the longer-term trend. That would be fairly compelling reasoning were it not for the fact that these mounting debts are also happening alongside one of the fastest increases in interest rates we’ve seen in decades. Thanks to the Fed’s getting so far behind the curve on price inflation, we’re in the midst of the fastest upswing in interest rates since at least the 1980s. Yet over the past forty years, debt has risen alongside ongoing declines in interest rates. Now that process is going in reverse, and interest rates have rapidly returned to 2007 levels. If the current upward trend in interest rates continues, this could mean a sizable increase in the debt burden on ordinary households.

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All of this would be made worse, of course, by a further slide into recessionary territory. Up until this month’s election, both the Fed and the administration repeatedly denied that a recession is coming or is already here. This was in spite of two quarters in a row of declining economic growth, which economists have generally labeled a recession. But even if the first half of 2022 ends up not being labeled a recession, the data now strongly points toward a recession in 2023. The yield curve has inverted, global trade is softening, advertisers are pulling back, and real estate prices are sliding toward decline.

Recession Almost Guaranteed

Indeed, now, with the election safely over, even some Fed economists are starting to admit a recession is in the works. Eric Rosengren earlier this month admitted that a recession is likely, although he was careful to call it a “mild” recession. This is highly significant because the role of Fed economists is to generally be cheerleaders and to never speak of recessions until they are undeniable. After all, then Fed chair Ben Bernanke denied a recession was in the works as late as the first quarter of 2008. That was months after the recession had already started. The Fed always underplays recession risk, so it is remarkable that Rosengren is admitting any sort of recession is likely. Meanwhile, the administration now admits the boom days are over, but is now insisting that a soft landing is possible and that there will merely be a slowing of economic growth.

Yet, for all the positive talk, Americans are piling on more debt just as real wages are falling, job losses are mounting, and debt costs are rising. For all this, we can thank the economists and technocrats at the Federal Reserve for years of malinvestments and an economy of zombie companies and fragile household budgets built on a shaky foundation of easy money and debt. It didn’t have to be this way, but the regime is addicted to easy money, and the Fed is more than happy to oblige. Now we have to deal with the inevitable bust that comes after the artificial and unnecessary inflationary boom.


This article was originally published in the Mises Wire  on Nov 22 2022, with the title “After Years of “Stimulus” Come Surging Debt and Falling Wages”. The views expressed are the author’s, and do not constitute an endorsement by or necessarily represent the views of On Aviation™ or its affiliates.



Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute. Send him your article submissions for the Mises Wire and Power and Market, but read article guidelines first. Ryan has a bachelor’s degree in economics and a master’s degree in public policy and international relations from the University of Colorado. He was a housing economist for the State of Colorado. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

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