On the surface, recent wage increases across both the private and public sectors seem like a positive development for workers and the broader economy. Increases like the 62% raise for International Longshoremen’s Association (ILA) workers have made headlines, sparking optimism that higher wages will improve living standards. But this narrative misses a crucial point: these wage hikes are not a reflection of economic strength, but a reaction to mounting economic pressures. The rising cost of living, fueled by inflation and an explosion in the M2 money supply, is forcing wages upward, but those increases are only papering over the cracks in an economy where purchasing power is rapidly eroding and the dollar is losing value.
Instead of signaling good times, these wage hikes are a symptom of deeper problems. When wages rise in response to inflation rather than productivity, it sets off a vicious cycle: higher wages, driven by inflation, further contribute to price increases, fueling inflation even more. In this way, recent wage increases, far from being a solution, are becoming part of the problem, exacerbating the very pressures that are driving the economy toward further devaluation.
M2 and the Erosion of Purchasing Power
To understand why wage increases are not as beneficial as they seem, we first need to look at the M2 money supply—the total amount of money circulating in the economy. Since 2020, the M2 supply has ballooned as the Federal Reserve injected massive amounts of liquidity into the system to stave off economic collapse during the COVID-19 pandemic. This influx of money was intended to keep businesses and consumers afloat, but the side effect has been a staggering increase in the money supply, now standing at over $21 trillion.
The problem with this is that more dollars in circulation don’t necessarily equate to more goods and services being produced. When there’s too much money chasing too few goods, inflation takes hold. This is exactly what we’ve seen over the past few years, with inflation peaking at over 9% in 2022 and continuing to erode purchasing power. The more money that’s printed without a corresponding increase in economic output, the less each dollar is worth.
The rapid expansion of M2 has inflated prices across the board—everything from groceries to housing has become more expensive, making it harder for the average American to make ends meet. The recent wage increases we’re seeing are not a sign of economic prosperity, but a desperate attempt to keep up with the rising cost of living. Higher wages, in this context, are not leading the economy—they are following it, scrambling to keep pace with an environment of escalating prices and a devalued dollar.
Inflation: The Culprit Behind Wage Hikes
When we talk about inflation, we are really talking about the steady decline in the value of money. As prices rise, the purchasing power of each dollar falls, and consumers need more dollars to buy the same goods and services. Inflation has hit American households hard, with housing, food, and energy costs all rising dramatically over the past two years. This has forced employers to raise wages, not out of generosity, but out of necessity. Workers simply cannot afford to live on pre-inflation wages, so businesses are compelled to pay more to retain employees.
Take the 62% wage increase for ILA workers as an example. This substantial hike reflects not a booming industry but the intense pressure the workforce is under due to inflation. The cost of living in port cities has skyrocketed, and without significant wage increases, workers would be unable to afford basic necessities. This is not a story of economic growth, but of economic survival.
Wage increases like this are happening across multiple sectors of the economy, but they’re not solving the problem. In fact, they are part of a broader cycle that is contributing to more inflation. When businesses raise wages, they often have to pass those costs on to consumers in the form of higher prices. This, in turn, pushes inflation higher, further eroding the value of those newly raised wages. It’s a vicious circle, and one that’s proving difficult to break.
The Rotting Dollar: How M2 and Inflation Devalue the Economy
The broader consequence of this inflationary cycle is the devaluation of the U.S. dollar. As more money floods into the economy through M2 and inflation continues to rise, the dollar’s purchasing power weakens. The U.S. dollar, long seen as a safe and stable currency, is slowly but steadily losing its value, both domestically and internationally.
What does this mean in practical terms? For one, it means that imported goods become more expensive, as the dollar no longer buys as much on the global market. It also means that consumers are spending more of their income on essentials like housing and food, leaving less money for discretionary spending. This has a ripple effect on the economy as a whole: with less disposable income, consumer spending—the engine of the U.S. economy—slows down.
In addition, the weakening dollar undermines the global confidence in the U.S. currency. The dollar is the world’s reserve currency, held by central banks around the globe as a store of value. But as inflation erodes the dollar’s worth, other nations may begin to question its reliability, leading to a decline in demand for the U.S. dollar internationally. This could further weaken the currency and accelerate its devaluation.
The combination of a ballooning M2 money supply, rising inflation, and wage increases is contributing to a weaker economic foundation. While it might look like wages are growing, those gains are illusory when set against the backdrop of higher prices and a devalued dollar. The economic reality is that wage increases, driven by inflation, are masking deeper structural issues.
Wages: A Reaction, Not a Solution
It’s important to understand that these wage increases are a reaction to economic conditions, not a sign of economic health. When wages rise because of inflation, it’s a symptom of a larger problem—one that’s rooted in the erosion of purchasing power and the devaluation of the dollar. Instead of driving the economy forward, these wage hikes are part of a feedback loop that’s contributing to higher costs of living, more inflation, and ultimately, further devaluation of the currency.
For example, while the ILA workers and other sectors might be celebrating their wage increases, the reality is that these higher wages will likely be offset by higher costs in the near future. Rent, groceries, healthcare—everything is becoming more expensive, which means that the purchasing power of those new wages will be diminished. What looks like a pay raise today will feel like a pay cut tomorrow as inflation continues to rise.
This pattern is playing out across the economy. Employers, faced with the rising cost of goods and the need to retain employees, are hiking wages. But because those wage hikes are not tied to productivity gains or economic growth, they are simply fueling more inflation. This creates a scenario where everyone is getting paid more, but everyone is also spending more, and in the end, the gains are wiped out by rising costs.
The Federal Reserve’s Dilemma: Controlling Inflation Without Killing Growth
The Federal Reserve is caught in a difficult position. Its mandate is to control inflation while supporting economic growth, but these goals are increasingly at odds. To combat inflation, the Fed has been raising interest rates, which makes borrowing more expensive and is supposed to cool down economic activity. However, these rate hikes also risk slowing down growth too much, potentially leading to a recession.
On the other hand, if the Fed keeps interest rates too low, inflation could spiral even further out of control, leading to more devaluation of the dollar and eroding purchasing power. The challenge is finding a balance between these competing forces, but the current situation is making that balance increasingly difficult to achieve.
In this context, wage increases are like a band-aid on a much larger wound. They may provide short-term relief for workers, but they do nothing to address the root causes of inflation and devaluation. In fact, by contributing to higher costs, they may even make the problem worse.
A Warning Sign, Not a Sign of Strength
The recent wave of wage increases, including the 62% raise for ILA workers, should not be seen as a sign that the economy is thriving. Rather, it’s a reaction to the pressures of inflation and devaluation. Higher wages, while seemingly beneficial in the short term, are part of a broader cycle that is weakening the U.S. dollar, eroding purchasing power, and fueling further inflation.
As the M2 money supply remains bloated and inflation continues to outpace wage gains, the dollar is losing value both domestically and internationally. The end result is an economy where higher wages are offset by rising costs, and workers are no better off than they were before.
In future posts, we will explore the long-term consequences of this cycle and examine what can be done to mitigate the damage. For now, it’s clear that wage increases are not the cure for the economy’s ailments—they are merely a symptom of a deeper, more troubling problem.
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