— Lewis Carroll, Jabberwocky
One Scratch Below
More is revealed each and every day. For instance, the St. Louis Federal Reserve recently revealed that American household wealth is down about 55 percent from where it was in late 2007. This little fact offers a remarkable insight into what’s been going on and why the economy feels like such a tedious slog to the average working stiff.
“Household wealth plunged $16 trillion from the third quarter of 2007 through the first quarter of 2009,” reports The Dallas Morning News. “By the final three months of 2012, American households as a group had regained $14.7 trillion.
“Yet once those figures are adjusted for inflation and averaged across the U.S. population, the picture doesn’t look so bright: The average household has recovered only 45 percent of its wealth, the St. Louis Fed concluded.”
You see, this is the sort of conclusion that confirms what we’ve been suspecting all along…that the recovery’s a sham. That it’s not much of a recovery at all. But, rather, for most American households, it’s been a gigantic disappointment.
On the surface the recovery may appear to be real. Count up the beans and you get to $14.7 trillion. That’s 91.8 percent of the way to $16 trillion, which is where things were before the economy went to hell in a hand bucket. But just a scratch below the surface reveals that inflation has eaten up over half of the nominal recovery.
Mired in the Quag of Negative Real Interest Rates
This brings us to another obvious axiom: inflating the money supply doesn’t bring about prosperity. That’s why, four years into the recovery, and despite the Fed’s best efforts, jobs growth is feeble. In fact, according to the ADP National Employment Report released Wednesday, private employers only added 135,000 jobs in May.
By the time you read this, the Commerce Department will have reported its counts of new jobs created in May. Our guess is that May jobs growth, as reported by the Commerce Department, will be well below 200,000. That’s hardly enough to keep up with population growth.
When it comes down to it, these jobs numbers are a downright disgrace. They discredit everything that mainstream learned economists believe about how the world works. It disqualifies their popular notion that provoking aggregate demand through fiscal and monetary stimulus adds people to the employment rolls.
At this point in the recovery, the economy should be adding twice the current rate of new jobs – or more – each month. But it’s not. Instead it’s mired in the quag of negative real interest rates.
Here’s what we mean…
Jabberwocky Adhesive Tape
Negative real interest rates, if you never considered them, are as queer as a three dollar bill. They represent an absurdity. They signify what Lewis Carroll called “Jabberwocky.” They are complete nonsense.
In a free market, negative real interest rates are an impossibility. They represent a borrowing cost that’s below the rate of inflation. In other words, they characterize a credit market environment where the price of money is beyond free. Where, in inflation adjusted terms, lenders receive less money in return than they loan out.
Like President Obama throwing a baseball, we find negative real interest rates to be absolutely ridiculous. Yet they presently exist all the same.
The Fed’s zero interest rate and quantitative easing are monetary policies deliberately executed to drive down real interest rates into the negative. Over the last several years the Fed has succeeded in artificially suppressing the price of money…though the outcome hasn’t been what they said it would be.
But make no mistake, there are limits to what the Fed can control…including prices.
Negative real interest rates, in short, are a form of price controls. And price controls, as elucidated by Senator Wallace Bennett over a half century ago, are the equivalent of using adhesive tape to control diarrhea.
Last month 10 Year Treasury Yields jumped 30 percent, from 1.63 to 2.13 percent. That’s all it took for stock markets the world over to panic. Just wait and see the mess when the adhesive tape finally gives.
for Economic Prism