You earn more than your parents, maybe even significantly more. But somehow the life they’ve built for themselves – the house, the retirement account, the feeling of getting ahead – seems further away than ever before. You’re not imagining it. Something is actually broken.
The standard explanations don’t work: greedy corporations, price gouging, too little government spending or too much foreign competition. Politicians go through these answers depending on which party they belong to and which villains are currently doing well in the polls. But here’s the problem: Housing, health care and college became unaffordable long before the recent spike in inflation made headlines. Whatever is happening has been happening for decades. Blaming last year’s supply chain won’t explain a thirty-year trend.
To understand why bigger paychecks feel like less money, you have to look at the monetary system itself — particularly the institution that almost no politician wants to talk honestly about: the Federal Reserve.
When the Fed expands the money supply and keeps interest rates artificially low, borrowing becomes cheap. That sounds pleasant. The catch is that new money doesn’t drive up all prices at the same time. It penetrates the economy through banks, credit markets, and government spending channels, driving up the prices of assets—stocks, real estate, investment portfolios—long before it ever shows up in your wages. The people who already own these assets become richer. Everyone else watches the finish line move.
Artificially low interest rates do more than just raise prices. They distort economic signals. Interest rates are intended to coordinate saving and investing by reflecting the population’s willingness to postpone consumption. When central bankers push interest rates below market levels, they create the illusion that there is more real savings than there actually is. Companies, consumers and governments are responding by taking on debt and pursuing projects that appear sustainable only because credit is unusually cheap. The result is an economy increasingly based on leverage rather than true capital formation.
Imagine a young worker, perhaps yourself or someone you know. She gets a raise every few years. On paper, she’s doing well – she earns more than her parents did at her age. But the home her parents bought on a single income now requires a down payment that will take a decade to salvage. The college degree that should be their ticket actually costs three times as much as it did a generation ago. Her retirement account, if she has one, is competing with a market that has been systematically inflated by years of easy money. She doesn’t fall behind because she does something wrong. It falls behind because the scale is constantly changing.
This is the quiet cruelty of monetary inflation: it redistributes wealth without ever manifesting itself as a tax. There is no item for “purchasing power erosion” on your payslip. Nobody votes on it. This happens little by little in the background while politicians hold press conferences about how strong the economy is.
And politicians love this arrangement, which is a big reason it continues. Artificially low interest rates make it convenient for Washington to borrow money it doesn’t have. Deficits that would have worried previous generations are easily financed, at least in the short term. The government can spend today and leave the bill to the future – diluted by the accumulation of debt and a steadily weakening dollar. The benefits are immediate and visible. The costs are diffuse, delayed and so invisible that no one can be held directly responsible.
This is not a left or right issue. Both parties participated enthusiastically. Spending priorities vary; There is no appetite for deficit financing. What varies by administration is the explanation for why your dollars aren’t going as far as they used to. What remains constant is that the Federal Reserve is accommodating the entire agreement.
However, this does not mean that wages do not play a role or that other factors do not influence prices at the margins. That’s what they do. But they can’t explain why houses, stocks and other assets have risen so much faster than incomes for so long. The more important story is decades of monetary expansion and artificially cheapened credit. As newly created money flowed into financial markets and asset prices, workers found themselves in a race against a moving target. Their paychecks grew, but the assets needed to build long-term wealth grew even faster.
The homeownership rate for Americans under 35 is near historic lows. The proportion of young adults living with their parents is near historic highs. Retirement provision for average earners is dangerously inadequate. These are not the results of a thriving economy – they are the results of an economy in which financial gains disproportionately accrue to those who already own assets, while the costs of acquiring those assets continue to rise for everyone else.
Americans are not failing because they were suddenly less disciplined or less productive than previous generations. They are navigating a system that increasingly rewards ownership of assets while making those assets more difficult to acquire.
Until the Federal Reserve’s role in this process receives due scrutiny, the public debate will continue to look for symptoms rather than causes. Bigger paychecks will always feel smaller. And a new generation will continue to wonder why doing everything right still doesn’t feel like enough.
https://mises.org/power-market/why-your-bigger-paycheck-feels-less-money
