Whirlwind Economics

Things may be looking up for the unemployed working stiff.  After years of competing for scarce jobs with stagnant wages something extraordinary may be happening.  If you can believe it, opportunity has finally come for the unemployed.

According to the Labor Department’s recent monthly Job Openings and Labor Turnover Survey, the number of unemployed workers competing for each open job fell to a six-year low in June.  The number of unemployed job seekers per open job fell to 2.02 in June,” reported Reuters, “the lowest level since April 2008.  The ratio was at 2.14 in May and is now below the average from 2002 to 2006.”

On top of this, the number of job openings is at its highest level in over 13 years.  In addition, the rate of hiring hasn’t been better for over 6 years.  If these labor market improvements continue, wage growth should pick up too.

“Dallas Fed analyst Alan Armen, in a research articled dated Friday, forecast a half-percentage-point rise in wage growth, citing a survey from the National Federation of Independent Businesses showing small businesses increasingly planning to raise pay in the coming year.  An NFIB survey released on Tuesday showed its compensation gauge held at a six-year high in July.”

Finally, after years of getting kicked in the teeth, the working stiff has a reason to smile.  What could possibly go wrong?


The problem with rising wages is that the financial system is completely unprepared for it.  After years of radical monetary policies things have been utterly disfigured.  Lending mistakes have been larded over.  Asset prices have been pushed up.

Things have been so mixed up over the last few years the best move a corporate officer could make is borrow money for ultra-low rates and by shares of their company’s stock.  What kind of world are we living in where corporations borrow money to buy their own stock?  In a healthy economy, they’d borrow money to increase production and expand into new markets.

The point is, these financial shenanigans have produced the appearance of prosperity with an inflated stock market.  All the while the real economy’s dragged along.  What will happen when the economy actually improves?  What follows is an attempt at an explanation…

Interest rate cycles span long periods of time…often they last between 25 and 35 years.  U.S. Treasury yields reached a peak in 1920 and then slowly slid down a soft bunny slope until the mid-1940s.  Then, they rose again – along with inflation – and Franz Pick famously declared that “bonds are certificates of guaranteed confiscation.”

What Mr. Pick didn’t realize at the time of his declaration is that an inflection point had been reached.  For in early 1982 yields again ventured over the mountain and slid down a soft bunny slope to historic lows in December 2008.  Since then, yields have skidded along the bottom…and the Federal Reserve has gone completely mad to keep them there.

Whirlwind Economics

Perhaps the Fed can keep yields on the 10-Year note around 2 percent as long as the economy slumps.  But eventually, and in spite of the actions of government policy makers, economic growth will return.  The job market will tighten up.  Wages will increase.  What’s more, when that happens inflation will return along with it.

Over the last six years, the Federal Reserve’s inflated its balance sheet by over $3 trillion.  Considering the money multiplier effect and the “magic” of fractional reserve banking, at some point, each $1 trillion added to the Fed’s balance sheet could translate into $5 trillion – or more – of money flowing into the economy.

All this new money flowing into the economy will drive up prices.  Conversely, it’ll drive down stock prices and drive up bond yields.  So, too, it’ll drive down the value of the dollar.

Foreign lenders, like China and Japan, with massive holdings of Treasuries will demand higher compensation for holding a dwindling asset.  Similarly, corporate bond holders will also demand more yield.  In other words, interest rates will rise and payments on government and corporate debts will become completely unserviceable.

Any boost to GDP and increase in tax revenues will quickly be overwhelmed by the rising price of interest on government and corporate debt.  The gas that’s inflated the stock market will quickly blow out.  This is the mess the clever fellows at the Fed have created.

In a most perverse way, an improving economy will wreck the balance sheets of corporations and treasuries at all levels of government.  The economic growth that triggers this will be snuffed out by the financial whirlwind that follows.


MN Gordon
for Economic Prism

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