Blowing Gas

Things sure do change.  Several years ago the personnel working the freeway off ramps in Long Beach, California, were immigrants from Mexico.  They were selling oranges and roses to working stiffs on the way home from their cubicle jobs.

These days you’ll find recent college graduates, who haven’t broken into the professional world, strumming guitars for pocket change.  Obviously, it’s plain bad luck to graduate from college, with a bunch of student loan debt, at the very moment a 60 year economic expansion runs out of gas.  But if the economy sputters long enough, people will take to doing strange and dangerous things for money.

About a decade ago, while visiting several in laws – and outlaws – in Mexico City, we witnessed some remarkable street corner performances.  While at a stop light, for example, one shirtless lunatic wandered out in front of the car with broken glass wrapped in a towel.  He then quickly laid the towel and the broken glass on the asphalt street and rolled around on it.

Another popular freak show street performance, particularly at night, was the fireball blower.  For this stunt, the wildly fellow would take a swig of a flammable liquid, then hold a lit match up to his mouth and blow an enormous fireball into the air.  Best as we can recall, these shocking stunts fetched about 10 Mexican pesos…or about $1 U.S. dollar.

Not bad, if there are no decent paying jobs and you have an empty stomach.

Statistical Stunts

Here in the United States the jobs numbers are improving.  Last week the Bureau of Labor Statistics reported that 146,000 jobs were added in November, and the unemployment rate fell to 7.7 percent.  But with a scratch below the surface these numbers are not as positive as they first appear.

About 150,000 new jobs need to be created each month just to keep pace with population growth.  So, on balance, the unemployment rate should have stayed the same.  But it didn’t.

Somehow the unemployment rate fell from 7.9 percent to 7.7 percent.  Of course, this doesn’t make much sense to anyone of sound mind and clear thoughts.  Nonetheless, government statisticians were able to show a declining unemployment rate.  Here’s how…

In short, the BLS just disappears people from the unemployment numbers each month, even if they haven’t found a job.  In fact, last month, according to the government, 350,000 workers left the labor force.  If these workers had been included in the BLS report for November, the economy would have lost 204,000 jobs…rather than adding 146,000.

Clearly, the jobs report is nothing more than mere propaganda these days.  It doesn’t jive with realty.  That’s why the Federal Reserve’s finding it necessary to blow more monetary gas into an economy and financial system that already has too much of it.

Blowing Gas

On Wednesday, once again, the Federal Reserve confirmed it’s a gas blowing pyromaniac.  Following two days of meetings, Fed Chairman Ben Bernanke announced the FOMC was going all in.  If you can believe it, they’re commencing QE4.  Here are the particulars…

“QE4 is here,” proclaimed Forbes.  “Only a few months after announcing what had been dubbed QE3, an open-ended $40 billion a month program to buy up mortgage backed securities (MBS), the FOMC decided to extend its asset purchases in 2013 as Operation Twist expires.

“The Fed will therefore accelerate its rate of balance sheet expansion, easing monetary conditions further.  While Operation Twist had been sterilized, which means the Fed sold assets at the same rate as it was gobbling them up, the new program will consist purely of Treasury purchases.  Combined with QE3, the Fed will be taking $85 billion in bonds, both Treasuries and MBS, out of the market.”

By our back of the napkin calculation, $85 billion per month amounts to over $1 trillion per year.  For perspective, from the creation of the Fed, about 100-years ago, until mid-2008, about $900 billion was added to Fed’s balance sheet.  Since then, the Fed’s boosted its balance sheet by about $2 trillion dollars.

Now, with QE4, the Fed will add over $1 trillion per year to its balance sheet for as long as it can get away with it.  But where will the Fed get $1 trillion to buy government debt from?

You know the answer by now.  They’ll just create it out of thin air…poof!

Alas, at this point the economy and financial system are dependent on ever larger money supply expansions just to practically stand still; GDP growth is currently at about 2 percent annually.  The government also needs the easy credit, so it can borrow money on the cheap to pay for entitlements.  Just a slight pause in the rate of money supply growth and the whole house of cards will collapse.

Unquestionably, the Fed will continue blowing gas into the system.  They won’t stop.  They’ll keep blowing more and more gas until the whole thing blows up in a giant fireball.

It should be quite a show.

Sincerely,

MN Gordon
for Economic Prism

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