Why We Are All Doomed

Second quarter GDP, as reported in by the Bureau of Economic Analysis on August 28, grew at an annualized rate of 4.2 percent.  This follows up a 2.1 percent decline in the first quarter.  Just what is it that turned things around from one quarter to the next?

According to the BEA report, “this upturn in the percent change in real GDP primarily reflected upturns in exports and in private inventory investment, accelerations in personal consumption expenditures (PCE) and in nonresidential fixed investment, and upturns in state and local government spending and in residential fixed investment that were partly offset by an acceleration in imports.”  Not bad, indeed.  It sounds like the economy’s expanding at a very robust rate.

But it doesn’t feel like things are improving for most households.  The amount of money Americans earn each hour after adjusting for inflation is lower today than it was five years ago.  Yet corporate profits are at an all-time high.

You’d think with the economy expanding and corporate profits at an all-time high there would be an abundance of new jobs.  Unfortunately, this isn’t what’s happening.  Rather, new jobs are being created at a sluggish rate.

The latest Bureau of Labor Statistics report showed an increase of just 142,000 new jobs in August.  While the unemployment rate fell, it was only because the labor participation rate fell.  If the economy’s growing at 4.2 percent and corporate profits are at an all-time high, then, from a jobs and incomes perspective, something isn’t adding up.

Getting Back Into Line

We don’t quite know what it is that’s causing the divergence.  But we think monetary policy may be the culprit.  Six years of zero interest rate policy must have something to do with it.

For one thing, the Fed’s artificially suppressed interest rates have incentivized corporate executives to borrow and buyback shares of company stock.  This has led to an average total compensation of $30.3 million for the 500 highest paid executives.  In other words, Fed policy has handed corporate executives an unconditional opportunity game the system to their benefit in a major way.

The Fed’s rationale is that a zero interest rate will encourage banks to loan out more money and depositors to spend rather than save.  To the experts at the Federal Reserve more borrowing and more spending should boost demand, spur growth, and create jobs.  In practice, the Fed’s desired result hasn’t materialized.

They have, however, succeeded at inflating the stock market.  This has certainly supported the notion that the economy’s sound.  Record stock market highs must mean the economy’s strong, right?

Not necessarily.  We believe there’s a discrepancy between the stock market and the economy.  Moreover, we believe this discrepancy is an expression of the Fed’s activist monetary policies.  Eventually this divergence between asset prices and the real economy will come back into line.  This will most likely be achieved through falling stock prices.

Why We Are All Doomed

When the stock market cracks the pleasant façade it has casted over the economy will disappear.  Panic will return…along with frightful calls for the government to do something.  This will mean a new round of bailouts, greater credit creation, and the socialization of private losses.

The policy geniuses will not stop.  They will keep pumping funny money and credit until the final collapse.  It is not within their capacity to recognize that pumping up GDP by pumping up consumer debt represents a kind of phony growth stimulated by drawing down capital and burning up wealth.

Real long-term sustainable economic health is achieved with increased savings and investment.  Not increased debt.  Yet this takes work.

No one likes hard work, prudence, and deliberate discretion these days.  That’s why the public goes along with these reckless policies…and reelects the same scoundrels who promise more handouts.  When it comes down to it, people want bailouts, safety nets, and free drugs from the government.  They want cradle to grave protection.  They want to handover their personal responsibility in return for economic security.

In short, they want something for nothing.  We don’t like saying this.  But the evidence is overwhelming.  This, in a nutshell, is why we are all doomed.


MN Gordon
for Economic Prism

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