The stock market continues to be very volatile. This last week, the Dow had it’s largest drop in three months, dropping 6.9% in one day. Economic news continues to be grim. I thought a lot this week on what would be the best way to communicate what is really going on in the economy. How bad are things really? I came up with something new, and I think you are going to find it really shocking. So in this video I will be showing you what I call a HACH analysis. WATCH NOW!
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VIDEO SUMMARY
I think a lot of people are looking at the current recession incorrectly. A lot of people are blaming the recession on COVID-19, but I believe the economic problems are more systemic and have been building up for a very long time.
Something economists have talked about for a while is that wages are stagnant in the US. You have probably seen a chart like this one, which shows wages versus the purchasing power adjusted for inflation. What this shows is that wages have been flat in the US for a very long time. People are not making more money.
But just by looking at this chart, it is hard to understand what this really means for people’s lives. I think the best way to understand this is through something I call HACH analysis. Now you will not hear about this in business school, because I just came up with it for this video. So what is HACH analysis? HACH is an acronym for typical major purchases. HACH stands for:
- Housing
- Auto
- College
- Healthcare
The point of looking at these four areas, is you are trying to understand people’s options in life. When people are going through their lives and making financial decisions, these are four areas that really drive people’s choices.
The first step is to look at people’s wages. I pulled median household income from the US census bureau from 1967 to today. Now that we understand income, we want to look at the four HACH expenses against this income. I am going to quickly put up my assumptions and data sources so you can see how I did my calculations. I looked at each are to see what percentage of income would be spent on each expense every year, based on the change in prices.
First, I looked at housing. I pulled the median sales price of houses data from the Federal Reserve Bank. Based on the sales prices, we can make some broad assumptions on home mortgage rates to determine the size of people’s mortgage payments. Using the 2020, US median home price of $327,100, and assuming a 30 year mortgage at 3% interest, we can calculate a typical monthly housing payment back to 1967. The point here is not to be exact, but to understand the impact of inflation and changes in price.
Second, I looked at autos. I pulled the average light vehicle price in Jan 2020 from Kelley Blue Book as $37,851.00. Assuming a 5 year loan at 5% interest, gives a typical monthly payment of $714.30. We have very good CPI metrics for autos, so you can calculate the equivalent purchasing price back to 1967.
Third, I looked at college. I pulled the annual cost of a four year college from the National Center for Education Statistics. Assuming a 10 year loan at 5% interest, gives a typical monthly payment of $1,128.24. Again, we have very good CPI metrics for education, so you can calculate the equivalent purchasing price back to 1967.
Healthcare is a little more tricky, because the way we pay for health insurance today is vastly different than in the 70s. But we can make some broad generalizations based on the cost of healthcare, which we do have good CPI metrics on. Generally, the cost of health insurance should mirror the overall cost of healthcare. Looking at data from the Kaiser Family Fund, the annual cost of family health insurance premiums is $20,576, and large employers typically pay 71% of family coverage. This would mean a monthly payment of $497.25. Based on CPI metrics for healthcare costs, you can calculate the equivalent purchasing price back to 1967.
Now that we have evaluated the data in each of the four areas of the HACH analysis, we can put it all together in one chart. You will notice that this looks very similar to the chart I showed earlier from the professional economists. It is essentially showing the same thing. While wages have stayed stagnant, expenses in these four major areas have experienced massive inflation. These are four areas that account for very large purchases that really impact people’s lives.
The inflation numbers in these areas are huge. If we look at the prices as a percentage of income, you really start to understand the impact of this change. Here is a table of the percentage of household income the purchase would take, as an average within each decade. In 1970, housing, auto, college, and healthcare together only took up 11% of the household income. So you could buy each of those four items and still have 89% of your income to spend on something else. By 2020, these four items would take 76% of the household income. The remaining 24% would be available for other things like utilities and food.
| Housing | Auto | College | Healthcare | Total | |
| 1970 | 2% | 6% | 1% | 1% | 11% |
| 1980 | 7% | 10% | 3% | 2% | 21% |
| 1990 | 12% | 13% | 6% | 4% | 34% |
| 2000 | 14% | 14% | 10% | 5% | 44% |
| 2010 | 21% | 15% | 18% | 8% | 62% |
| 2020 | 28% | 15% | 23% | 10% | 76% |
What this HACH analysis is showing is something very nuanced. This does not represent what people are actually spending their money on. This is just prices in the market. No one is spending 76% of their income on these four items. What I am representing in this analysis are people’s choices in life. In 1970, you could easily choose to have these four things: Housing, Auto, College, and Healthcare. That is not true today. People have to make tradeoff decisions. People are deciding whether to buy medicine or have a roof over their head. People are deciding whether to go to college or buy a house and start a family. You cannot afford to do everything. This shows how difficult life in the US has become over the last five decades. People who started their careers in the 70s and are retiring now, have very different life choices than people starting their careers today.
My point is that the economic problems today are not just from the pandemic. These are problems that have been building for a very long time. People often use these charts to attack the Federal Reserve as the cause of inflation. But you have to be careful with that argument because inflation is much more complicated than that. The HACH analysis only looks at four specific sectors of the economy that have experienced massive inflation. But there are also other sectors where prices continue to go down. The price for computers have gone down dramatically. Clothing prices have gone down. Furniture has gone down. Basically anything that can be outsourced outside of the US, prices have gone down.
So when you look at this chart. The problems with this chart are not driven by inflation. It is driven by globalization. The HACH expenses are all areas that cannot be outsourced outside of the US, and so prices are increasing. However, jobs can be outsourced, which is keeping wages stagnant. It is not possible for the Federal Reserve to increase inflation fast enough, because the jobs will just continue to leave overseas.
What is the solution? This seems like a pretty impossible problem. I believe the solution is actually pretty simple. The solution not only solves our current economic crisis with COVID-19, but the larger long-term fundamental issues with the economy. The solution is space jobs. This is a solution I talk about all the time on this channel. It works for a number of reasons.
- Space jobs cannot be exported. All space manufacturing is protected under ITAR regulations (which stands for International Traffic in Arms Regulations). This means that all space manufacturing has to happen inside the United States.
- Space jobs are good, high paying, aerospace jobs, most of which can be done from home during this pandemic. These are the types of jobs that raise household incomes. All you have to do to fix this chart is to raise the income.
- We currently have the technology to make this all possible.
This is a photo of a top secret space plane called the X-37. It is hard to get a good image of this. This photo is from military.com. This is a space plane the US is using today. The government has the construction drawings. Why aren’t we building a whole fleet of these things? Why aren’t we building spaceport infrastructure in every state in the United States? We could create millions of high paying space jobs that will not be exported.
The fourth reason this is such a good approach, is that it is an area of strategic competitive advantage for the US. This is building up a brand new industry where other countries have a hard time competing. This is also a way for the US to increase manufacturing and start producing things again.
I know a lot of you will be critical, and think this is science fiction and a fantasy. But it is not that crazy. The Federal Reserve during this crisis increased the US balance sheet to $7T. That is an increase of $2.8T since this crisis began. Most of this was to inject liquidity into the market by giving people more debt. Instead of investing all that money in bad debt, what if we gave American’s space jobs at $100,000 each. That would create 28 Million new jobs. That’s almost the same number of jobs have lost so far this recession, at a much higher salary.
These are just ballpark numbers. The exact numbers are not important here. The point of the HACH analysis is to show you that any investment in any number of space jobs will have a huge impact in improving people’s lives in this economy today. The way out of this crisis is not more debt in the system. It is allowing Americans to work their way out of the crisis, and build a new industry in the process.
Before you call me crazy, if you know your business history you will realize that we have done something very similar before. During the Great Depression the US formed something called the Civilian Conservation Corp (CCC). This program provided jobs for the unemployed during the Great Depression over a period of nine years. These jobs were focused on building state and national parks across the country that we enjoy today. I think it is time to do something similar to the temporary CCC program, but instead of building national parks, let’s create space jobs. The infrastructure needed will take some government investment, but as we already see in the space industry today, with a little bit of government investment, private companies will then follow and continue to grow the space industry. In short, the state of the economy is pretty bad. But it isn’t anywhere we haven’t been before. There are solutions, and the US can work their way out of this.
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.