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The occlusion of lower middle and lower income family purchasing power under quantitative easing - summary note

Hector McNeill1

Since 1975, the Real Incomes Approach has explained that the Aggregate Demand Model of the macoeconomy used as the basis for Keynesian, Monetarism and Supply Side Economics (KMS) constantly drain the purchasing power of the currency. The short term impact is instability which manifests itself in winners, losers and those who apparently remain unaffected by policy. But the long term impacts are increasingly apparent in the erosion in purchasing power.

This effect is most marked in the case of lower middle incomes and low income families, thereby exacerbating inequality.

With the operation of quantitative easing since the 2008 crisis, vast amounts of evidence has accumulated that confirms this statement.

With the advent of BREXIT it is regrettable that the government has not seen fit to order the discussion on options to point out the real dangers of some options such as the so-called "no deal option".

On of the characteristics of the Aggregate Demand Model (ADM) macroeconomic model is that policies based on this cause a constant devaluation of the currency and the purchasing power of disposable incomes. In the Real Incomes Approach this is known as occlusion of purchasing power.

The chart shown below to the left shows negative impact of Quantitative Easing (lower interest rates and increased money volumes, through bank issued debt which has resulted in the reduction in purchasing power of money in general and has impacted the ability of families to purchase their needs based on disposable incomes.

  Lower middle disposable - £13,750 - £21,000  
  Lower disposable - £11,000 - £13,750  
There are two disposable income bands between 75% of the average disposable income of £27,500 and 55% of disposable income or lower middle income group and in particular low income families with less than 55%. There are three disposable income/purchasing power frontier lines. These lines represent lower middle income disposable incomes set at 75% of average disposable income and 55% (dark grey lines) and low income segment between 55% and 45% (light grey line). This lower band represent level where income is becoming too low for current prices of essential items.

The sloping lines for 2005, 2020, 2015, 2020 and 2025 represent the progress of purchasing power occulsion based on current disposable incomes and the decline in monetary purchasing power. As can be seen these lines fall over time to occlude first of all the lowest incomes and then, progressively, higher level incomes. Where an occlusion line crosses a disposable income line, that disposable income group faces the impossibility of maintaining their current consumption levels. These occulsion lines have declined by at least 15% today since 2005. But currently the rate of occlusion is accelerating as inflation picks up and the likely decline between 2020 and 2025 will be around 10%.

Occlusion has the effect of reducing the ability of families to purchase their basic needs up to th point where disposable incomes are no longer sufficient for survival. Vain attempts to maintain standard of living by using debt (such as credit cards and short term loans) only accelerates the rate of occlusion and such families tend to transition to a need to receive social programme provisions and use of food banks to survive.

The standard KMS solution to rising prices is to raise interest rates but with the levels of debt which today exceeed the situation in 2007, this could precipitate another financial crisis on a larger scale than 2008 and at a time when the British economy is in a more precarious state. As can be observed the state of marginalization of the lower disposable income segment is already almost absolute making increasing demands on social relief. The lower middle disposable income group will be in a similar situation just beyond 2025, around 2026 or 2027 creating significant difficulties for those currently with disposable incomes of between £13,000- and £20,000 per annum.

Unfortunately the government has not acted to take measures to stem this impact of quantitative easing and in fact have compounded these trends as a result of the cutting back on pubic services invesment. The privatization scheme options under the funding initiatives and public private partnerships (PPP), introduced over the last 20 years, have, in general, not improved public service productivity but have contributed to inflation and poor services. It is apparent that the evaluation of BREXIT options has not been adequate in terms of scope and options identification to explain the need to preclude a no-deal BREXIT because this would only exacerbate the situation for over half of UK families.

Real Incomes Programme  SEEL-Systems Engineering Economics Lab