How the World Becomes Unrecognizable

Ninety three percent of Americans believe Elvis Presley is dead.  That means 7 percent believe he’s still alive.  The real insight here is that 7 percent of Americans are morons.

The secondary insight is that a statistical result of 93 percent or more is near conclusive.  The Elvis factor, up to 7 percent, is too trivial to warrant consideration.  Anything less than that should be taken as mere noise.

According to the Bureau of Labor Statistics, the unemployment rate fell to 5.3 percent in June.  This is the lowest it has been since April 2008.  This is an especially remarkable feat considering economic growth has been stuck in first gear since the recovery began in 2009.

Hence, we must pause to praise the headline number before pelting it with rotten tomatoes.  A 5.3 percent unemployment rate is practically full employment.  It means 94.7 percent of the labor force is employed.

The Elvis factor more than covers the unemployment rate.  When it comes down to it there will always be a certain level of people – up to 7 percent – who are unemployable.  Policy makers will not be able to overcome this, no matter what.  Pumping the credit market will not create jobs for all.

Where Has the Labor Force Gone?

For this reason, and others, the Federal Reserve should consider their handy work done.  They should pack up their belongings and go volunteer at the soup kitchen.  At least then their actions would be adding value to the world.

Clearly trying to further tinker down the unemployment rate by throttling the money supply is futile.  It will be no more effective than a carpenter trying to frame a door jamb with a jackhammer.  The resulting destruction will far outweigh any benefit it may have.

But that doesn’t mean the Fed won’t give it a try.  At this very moment, Janet Yellen and her partners are pondering with painstaking examination whether they should finally raise the federal funds rate from practically zero or not.  Shouldn’t an unemployment rate of 5.3 percent signal it is finally time?  So what’s with all the dithering?

Alas, the 5.3 percent reading only tells half the story.  The other half is less agreeable.  In particular, the percentage of able-bodied Americans who have a job or are seeking one, otherwise known as the labor participation rate, is just 62.6 percent.  It hasn’t been this low since 1977.

So where have the remaining 37.4 percent of workers gone?  Perhaps some of the labor force decline is from baby boomers taking early retirement.  But that shouldn’t account for all of it.  Many workers, we suppose, have had to become long-term freelancers.  This is likely not by choice but because of the lack of decent paying full-time jobs.

How the World Becomes Unrecognizable

Enduring weakness in the labor market has the Fed stumped.  This, and low consumer price inflation, continues to be their hang up.  They don’t want to raise the federal funds rate until these are on a firmer footing.

“Although the recovery has been slow, there has been significant cumulative progress,” said Fed vice chair Stanley Fischer to the Economic Club of New York in late March.  “An increase in the target federal funds range likely will be warranted before the end of the year.  Liftoff should occur when the expected return from raising the interest rate outweighs the expected costs of doing so.

“In deciding when that time has come, we will continue to monitor a wide range of information regarding labor market conditions, inflation, and financial and international developments.  We anticipate that it will be appropriate to raise the target range when there has been further improvement in the labor market and we are reasonably confident that inflation will move back to our 2 percent objective over the medium term.”

Unfortunately, the expected return Fischer is after doesn’t exist.  At least, it doesn’t exist because of the price of the federal funds rate.  But the costs of using a jackhammer to frame a door jamb are real and ever present.

What we means is stocks, bonds, sovereign debt – not just Greece and Puerto Rico – all depend on cheap credit.  Yet all of these appear to have reached a tipping point.  And if they haven’t already, they soon will.

When the melt down finally heats up in earnest it’ll become strikingly obvious that the Fed’s games – and other central banks too – were not at all worth it.  The fundamental fact is any jobs the cheap credit was supposed to create were meager.  They probably weren’t the Fed’s doing to begin with.  What’s more, many of the jobs created during the recovery will vaporize before the cycle play out.

Then what?  Will the Fed pump even more credit?

You know the answer to that.  Of course they will.  Yet each time the Fed initiates a new credit expansion the world becomes a little more defaced.  Quite frankly, it has already become unrecognizable.

Sincerely,

MN Gordon
for Economic Prism

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