Smiling with Gratitude

The Commerce Department reported Tuesday that the economy grew at an annual rate of 2 percent in the third quarter…a downward revision from the initial 2.5 percent estimate made last month.  More importantly, it was reported that after-tax, inflation-adjusted incomes fell by 2.1 percent.  That’s the biggest drop in incomes since the third quarter of 2009.

The incomes decline could drag down the fourth quarter’s growth numbers.  Remember, consumer spending makes up 70 percent of the economy.  Declining incomes would presumably lead to declining consumer spending, and declining economic growth.

Obviously, the cornerstone of the economic recovery is jobs.  But not any old jobs will cut it.  Profitable jobs are what are needed.  Jobs that generate more revenue than they consume, contribute to business growth, and fund further investment and hiring.

Currently the economy is not creating these jobs.  In fact, on Wednesday the Labor Department reported that applications for unemployment insurance increased last week to 393,000.  That was an increase of 2,000 applications from the 391,000 reported for the prior week.

Unfortunately, the unemployment rate has been stuck around 9 percent for over two years.  Additionally, the actions taken by the Federal Reserve to reduce the unemployment rate may be the problem…not the solution.  Here’s what we mean…

Total Debt Saturation and Firing Monetary Blanks

The Federal Reserve has traded the discipline of true economic growth based on capital investment and production for bubble based asset price increases and credit based consumption.  In other words, rather than encourage savings and investment, they attempt to boost the economy by ruining the dollar. It’s what they were trained to do.

Milton Freidman told central bankers that when the economy cools, a little easy credit, via lowering the federal funds rate, is what’s needed to spark a fire and heat things back up.  Once the economy’s roaring, goes the thinking, rates can be gradually raised to balance things out.

For the last 30 years the Federal Reserve’s implemented Freidman’s theory with excellence.  The U.S. economy enjoyed boom after boom after boom.  Any sign the economy was cooling and the Fed would turn up the heat with cheap credit.  This no longer seems to be the answer.

After all these years of easy credit the once sure fire bullet of monetary easing seems to have lost its magic.  When the magic bullet was needed most in 2008 the Fed fired off a blank.  Instead of a booming economy, public debt exploded.  After that they fired off another blank…again, public debt exploded.

What it comes down to is that with each interest rate cycle, the busts are more frequent and destructive and the booms are ever more lethargic.  Currently, the economy has been officially out of recession for over two years, yet unemployment sits at 9 percent and the annual growth rate is at 2 percent.  Clearly, even with the Fed expanding their balance sheet by $2 trillion, the recovery has been more like a slump.

The problem is that the economy has reached total debt saturation.  By this we mean the economy is overloaded with way more debt than it can support.  Conceivably, the economy could grow its way out of debt. However, the magnitude of the debt is so massive that it’s preventing the economy from hardly growing at all.  That’s why, even with the 10-Year Treasury note yielding just 1.87 percent, unemployment remains high and growth remains low.

But that’s not all…you can also thank the Fed for increasing the price tag on your Thanksgiving meal…

Smiling with Gratitude

According to the American Farm Bureau Federation, the “retail cost of menu items for a classic Thanksgiving dinner including turkey, stuffing, cranberries, pumpkin pie and all the basic trimmings increased about 13 percent this year.”  The turkey, alone, increased over 22 percent from last year.

But that’s nothing.  Since the turn of the new millennium the cost of a classic Thanksgiving dinner is up nearly 52 percent.

Certainly, the cost of corn – up 16.5 percent over the past year – to feed a turkey has added to the price increase.  Of course, rising corn prices are just an unintended consequence of Congressional policies and farm subsidies that encourage burning food for fuel.  Fed policies of monetary expansion also inflate the cost.

Nonetheless, we won’t dwell on it any more.  Yesterday was Thanksgiving Day, after all, and here at the Economic Prism we’re thankful for what we have been given and what has been taken away.

Extraordinary things happen around us.  Marvelous occurrences transpire.  We witness the wonders of the world through our child’s eyes, reminding us, whether it is clear or not, the universe is unfolding as it should.

So even as the economy sputters, and the well intentioned tomfoolery in Washington fleeces us for our own good, we smile with gratitude.  For despite all the fraud and folderol out there, we give thanks; it is still a beautiful world, where miracles come to pass every day.

Sincerely,

MN Gordon
for Economic Prism

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