The Prelude to QE4

The U.S. economy officially exited the Great Recession in June 2009.  But the recovery hasn’t done much to lift the broad population’s lot in life.  Six years into it, and the economy trudges along like a jack donkey up a muddy mountain road.

Progress is slow.  There’s an occasional backslide.  Moreover, with each slippery step there’s the danger it’ll stagger off the trail side and freefall onto the rocks 3,000 feet below.

The U.S. consumer, the primary engine of economic growth, is backsliding at the moment.  Recently the University of Michigan, Survey of Consumers, noted its consumer sentiment index fell to 85.7 in early September.  That’s down from 91.9 last month and to its lowest level in a year.

Producer prices are also in a lurch.  According to the Labor Department, the producer price index has declined on a 12-month basis for seven straight months.  This would indicate the economy’s in a rut as far as we can tell.

Yet other data points are saying something else.  As of August 2015, the unemployment rate’s fallen to just 5.1 percent.  The historical average is 5.6 percent.  Shouldn’t a 5.1 percent unemployment rate indicate a strong, robust economy?

Working for Less

A simple read of the headline numbers certainly seems to confirm this.  But a scratch below the surface reveals something less favorable.  Here are some of the low points…

The labor force participation rate, the percentage of the working age population that’s either employed or actively looking for a job, is 62.6 percent.  This is as low as it has been since the late 1970s.  What this means is there’s 37.4 percent of the working age population not working.

Are they independently wealthy?  Are they getting rich selling doodads on eBay?  Do they live in their parent’s basement?  No one really knows.  But what is known is that they aren’t working.

Those who are working, though, are making less.  The U.S. Department of Commerce has documented that, after adjusting for inflation, U.S. median household income is 8.7 percent lower than its peak in 1999.  In other words, the economic recovery has not resulted in higher incomes for the typical American family.

So, if we get this right, despite an unemployment rate below the historical average, less people are working…and those that are working are making less money.  Is there any reason consumers aren’t eager to go spend what money they have?  They’re already tapped out.  Their incomes can’t support greater debt levels.

The Prelude to QE4

The point is, seven years of radical Fed policy hasn’t brought the promised economic results.  Everyone can see this.  No one questions it.  But the blockheads in charge can’t break away from it.  They’re prepared to give it everything they’ve got to drive the economy squarely into the ground.

If you recall, ZIRP was supposed to do remarkable things.  No one really remembers how or why exactly.  December 2008 was a long time ago.  Though our memories a little foggy…we’ll attempt to recount the twisted logic of it all…

The idea behind it, if we remember correctly, was that cheap credit would encourage consumers to borrow money and spend it.  Before long the spending spree would increase the production of goods and, thus, there’d be vigorous jobs growth.  Incomes would then rise and we would all get rich together.

Instead, something quite different has happened.  The real economy lurched and financial assets – namely stocks – leaped.  While a cheap credit induced bull market is a rip roaring good time, it’s incredibly disruptive.  For after the boom comes the inevitable bust…and the next Fed policy response.

Later this week the Fed will announce if they will finally raise the federal funds rate like they said they would.  No doubt, Wall Street is banking the Fed will hold off.  They fear that grossly inflated stock prices, a lackluster economy, and the end of ZIRP could be the triple edged axe that cuts financial markets off at the knees.

Certainly, declining stock prices would help bring back into balance.  So why fight it?

Plus, if the Fed doesn’t raise rates, we’ll have to relive this confab in the run up to the next FOMC meeting in late October.  Or maybe not.  Because maybe stocks will roll over in exhaustion even if the Fed leaves rates at near zero.  Maybe this FOMC meeting is merely the prelude to QE4.

These dunces never seem to learn a doggone thing.  In any event, be prepared for more market chaos in the days and weeks ahead.


MN Gordon
for Economic Prism

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