Clogging Up the Economy

By most accounts, as the season turned from winter to spring in 2013, economic recovery was ready to bloom.  The economy’s fields had been tilled and planted with care…housing was finally on the upswing.  Plus, the Federal Reserve was sprinkling its monetary fertigation at an EZ flow rate of $85 billion per month.

Everyone just knew the next big economic growth would appear at any moment.  In fact, if you skipped a blink, you could already see it.  What’s more, you could almost taste the forthcoming fruits of an abundant and bountiful summer harvest.

The stock market, that forward looking animal, was already investing borrowed capital and counting the unearned returns that would surely be generated by future profits.  New highs were being hit nearly every day.  Suckers were even buying stocks again.

How couldn’t they?  Suckers always buy high and sell low.  New all-time highs were the perfect carrot to bait them back in at just the imperfect moment.

Then, just when everyone least expected it, something rather displeasing happened.  Economic wheat rust appeared last Friday like grade school head lice.  There was no stopping it.  Here are the particulars…

Labor Department Number Crunching

“Employers added a disappointing 88,000 jobs in March after adding 268,000 jobs in February,” reported the USA Today, “confirming fears of a hiring slowdown that economists say could persist for several months.  The number of new jobs is fewer than half what economists had forecast and the lowest since last June.”

Somewhere around 100,000 jobs are needed each month to keep up with population growth.  Oddly, even though just 88,000 jobs were created in March, the unemployment rate fell from 7.7 percent to 7.6 percent.  The reason for this, though it’s not a good reason at all, is because 496,000 Americans left the labor force.

According to the number crunchers at the Labor Department, unemployed people who give up searching for a job are no longer considered part of the labor force.  They are disappeared from the unemployment rate calculations.  If the nearly half million Americans who gave up looking for jobs were included, the unemployment rate would have risen to 7.9 percent in March.

Worth noting, the labor participation rate is down to 63.3 percent…its lowest rate since March 1979.  This means 36.7 percent of working-age adults are neither working nor looking for work.  But they still exist…

So what are they doing?  Some have opted for early retirement.  Others have returned to school.  Many more, after exhausting unemployment benefits, have shifted their dependence to disability checks.

Clogging Up the Economy

What gives?  Wasn’t all the money printing supposed to solve everything?  That’s what the kibitzers at the Federal Reserve said, at least.

You know the theory…  All the fresh funny money would stimulate demand, which would induce businesses to higher to meet this demand, and, before long, the economy would be growing like gangbusters.  So what’s going on?

Unfortunately, inflating the money base doesn’t create real wealth.  Real wealth creation, contrary to what a central banker tells you, comes from saving and investment.  This takes time, discipline, and hard work.  Creating money from nothing and loaning it to the banks for practically free merely distorts what and where investments should be directed.

Moreover, it induces risk takers to borrow money to pursue opportunities that, without Fed intervention – in the form of artificially low interest rates – wouldn’t be profitable at all.  These enterprises, like Research in Motion and American Airlines, are ongoing disasters.

When it comes down to it, the whole economy has been clogged up by the Fed’s abundance of cheap credit.  Businesses that should have failed are still operating…though they are not growing.  They are not adding to their payrolls.  They are subsisting.

Quite frankly, it doesn’t ultimately matter how much the Fed inflates the stock market – are we headed to DOW 20,000? – they can’t do a lick for the real economy.  In fact, their policies of mass money inflation are encumbering it.  The latest jobs report is but one more confirmation.

Sincerely,

MN Gordon
for Economic Prism

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