Disgraceful and Insulting

New discoveries were made on the economic front last week.  The Labor Department reported that 163,000 jobs were added in July.  Yet even with the new jobs, the unemployment rate rose to 8.3 percent.

“We’ve still got too many folks out there who are looking for work,” said President Obama.  Fortunately, for those folks who are looking for work, Obama has a solution: pizza and roads.

No kidding.  According to Obama, pizza and roads are the solution to the economic problem.  At least that’s what he explained to the good people of Ohio last week.  If you don’t believe us, you can witness the lecture here.

Who knows?  Perhaps President Obama is right.  Maybe pizza and roads do grow the economy.

However, there is an important distinction to make.  In particular, where the money comes from to buy the pizza and pay for the roads.  Does it come from an economy funded by savings and investments in capital markets?  Or does it come from an economy funded by debt based government stimulus?

Time and Hard Work vs. Quick and Easy

Unfortunately, Obama doesn’t care to comprehend the difference.  He wants a quick boost in GDP and a fabricated drop in the unemployment rate so he can get reelected.  It doesn’t matter to him that when this is temporarily realized by adding to the government debt, it borrows from the future to buy things that cannot be afforded today.

In other words, debt based economic stimulus steals the returns of future productivity.  It restrains future generations to pay off the debts of their fathers.   Remember, too much debt is how we got into this mess to begin with.  Adding more of it will not get us out of it.

Real economic growth takes time.  In addition to that, it takes hard work and discipline.  But no one marking their efforts by a four year election cycle likes time and hard work.  They want quick and easy results.

Moreover, even with time and hard work, real economic growth takes capital markets that reward savers.  Yet thanks to the heavy handed intervention by the Federal Reserve, today’s capital markets don’t reward saver; they rob savers.

The Federal Reserve has fixed the price of money that the big banks can borrow from each other at practically zero.  On top of that they’ve monkeyed with the yields of government debt by creating money from nothing and loaning it to the Treasury.  Last we checked the 10-Year Treasury Note was yielding about 1.56 percent.

Disgraceful and Insulting

Markets distorted to these extremes by policy makers shred the wealth of savers and the fixed income returns of retirees.  Eventually savers lose the motivation to set money aside.  What’s more, in time, retirees must consume their capital until they run out of money and live their final twilight years in abject poverty.

The mathematics of today’s situation are really quite simple…

According to the Bureau of Labor Statistics, the inflation rate, as measured by the consumer price index, is increasing by 1.7 percent annually.  If you’ve paid bills or bought food recently you know this is nothing more than government propaganda.  Plus, in addition to the average person’s real world experience, there’s hard data supporting this too…

When inflation is calculated the way it was measured in the 1980s, before government statisticians began fudging the numbers through hedonic pricing adjustments and other nonsense for political reasons, the CPI is rising by 9.3 percent annually.  What this means is that when savers put their money in a Certificate of Deposit, currently paying just 0.09 percent annually…they’re robbed of about 9.21 percent of their purchasing power in just one year.  Even worse, a typical savings account is currently paying just 0.02 percent yield annually.  That amounts to a loss of 9.28 percent.

Quite frankly we find this disgraceful and insulting.  The fact is, until monetary policy gives a fair shake to saver the economy will never experience sustained robust growth.  Instead, with the exception of the fleeting and false boost of debt based government stimulus, the economy will not grow.

No doubt, over a half century several generations of politicians have encumbered a hopeful populace with an insurmountable debt burden.  Now, to deliver on political promises, the Fed must inflate the money supply, and suppress borrowing costs, which robs the economy of capital needed for growth.  In the meantime, living standards continue to fall.

Sincerely,

MN Gordon
for Economic Prism

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