The Federal Reserve will meet Tuesday and Wednesday of this week. There is endless speculation about whether the Board will raise interest rates or delay a decision until its December meeting. Much of the speculation in the media this past week has been about the low “unemployment” numbers and the low inflation rate. The popular “wisdom” is that continued low unemployment numbers are likely to spur inflation – they haven’t yet. (For those of you who have suffered through a teachers union led K-12 education in the Portland Public Schools this means that if there is low unemployment that there is greater competition for labor and that stirs wage increases which in turn stimulates inflation.)
There are a couple of problems with those assumptions. First, the figures used by the Department of Labor Bureau of Labor Statistics and relied upon by the Federal Reserve do not actually represent the number or percentage of people unemployed. Rather it represents the number of people who have registered to receive welfare in the form of unemployment compensation. It does not include those who have given up looking for work, those who are working part time but are seeking full time employment, or those who have exhausted their unemployment compensation – those combined numbers are legion. It is bad enough that President Barack Obama seeks to mislead us as to the status of economic recovery by citing those unemployment numbers, but to have the Federal Reserve citing those same numbers as evidence of “full employment” or as a “trigger” for inflation is just downright dangerous.
An easy way to understand this is that as of January 1, 2008, at the beginning of the Bush/Obama recession the population was 302.75 million and by July 1, 2016, the population had grown to 322.69 million – an increase of 19.94 million or 6.58 percent. In comparison, the total number of jobs, according to the Bureau of Labor Statistics, as of January 1, 2008, was 138.43 million, and by July 1, 2016, that number had grown to 144.48 million – an increase of 6.05 million or 4.37percent. In other words, the population of the United States increased dramatically faster than the number of jobs created.
That phenomena is also played out in the statistics relating to the Labor Force Participation rate which the Bureau of Labor Statistics compiles and which now hovers near the lowest levels in over three decades. The fact that there has been virtually no wage inflation since the “unemployment rate” dropped below 5% (the presumptive “full employment” statistic) should be a signal that the current unemployment rate is bogus.
The second problem is that low unemployment does not necessarily translate into “competition” for employees leading to higher wages. The fact of the matter is that, particularly for large employers, it can just as easily translate into higher mechanization (computers, robotics, etc.) where workers are displaced permanently. Even the heavily labor dependent fast food industry is migrating towards mechanization as a response to the threat of higher wages. McDonalds has responded to government imposed higher minimum wages by introducing kiosks in their stores where customers can place their orders with greater accuracy, pay by credit or debit card, and only interact with humans when they approach the counters to pick up their food orders.
Or the increased cost of labor can cause businesses to relocate some or all of their functions to other countries where labor is much cheaper. Nike already makes most of its shoes and clothing overseas. Many businesses have outsourced their customer service business to India, and Southeast Asia. And significant elements of the manufacturing business (particularly automobiles and appliances) have moved to Mexico, South America, China and South Korea. Even those portions of the high tech business that manufacture instruments (as opposed to accumulating and disseminating information) undertake significant manufacturing overseas. Labor scarcity and/or labor costs have always been a significant incentive for migration and innovation.
I am relatively certain that all of those “experts” at the Federal Reserve are well aware of the weakness of the unemployment figures. And more importantly they are aware that the “low unemployment” hasn’t driven any change in the rate of inflation. They simply need a public rationale to gloss over the real and more immediate concerns.
For seven and one-half years the Federal Reserve has driven interest rates to near zero. In the beginning it was a legitimate means of mitigating the long term effects of the government driven housing collapse – a bubble created by Congress and President Bush having forced financial institutions to lend mortgage money to people who could not or would not repay it and thus artificially inflating the housing market until it collapsed of its own weight.
But it soon became obvious that the new president, Barack Obama, had little knowledge of how the economy worked and even less concern about it. Mr. Obama embarked on a spending spree commencing with the one trillion dollar bogus “stimulus” plan that wound up stimulating nothing more than increased wages and benefits for public employees and massive payments for failed projects given to Mr. Obama’s supporters – think of the waste and subsequent bankruptcies in the “green energy” grants and loans and the funding of social action networks who were primarily liberal political organizations (e.g. ACORN, etc.) The resulting increase in the national debt (nearly doubling during Mr. Obama’s tenure) would have crushed a presidency if the Federal Reserve had not held the interest rates to near zero.
The artificially low interest rates had an ancillary benefit. Because there was basically no return on the safest investments (government bonds) money was driven out of the bond market and into the equities market thus stimulating the stock market which quickly regained its losses from the Bush/Obama recession and has continued to soar to new heights particularly following each announcement by the Federal Reserve that it will postpone again the next interest rate increase. It is little wonder that the Wall Street bankers and investment firms have been faithful and ardent supporters of Mr. Obama and have now transferred that loyalty to Mr. Obama’s would be successor, former Secretary of State Hillary Clinton – a person who over her entire career has demonstrated that she knows how to use the government to increase her personal fortunes.
Now the national debt stands at $20 Trillion and that does not include the unfunded future liability for the federal public employees pension plans. At $20 Trillion, each quarter point increase in the interest rate increases the current cost of government by $50 Billion annually which will only add to the national debt since not once during Mr. Obama’s tenure was a budget submitted or passed that did not add significantly to the national debt. (The current fed funds rate is 0.50 percent; a return to its June 2006 rate of 5.25 percent would add nearly $1 Trillion annually to the budget just to fund the current debt load.) It is the growing national debt and the increasing cost of funding that debt that is more likely to contribute to inflation than non-existent wage increases from bogus unemployment numbers. But if the risks were equal over the short term, the increasing cost of funding the growing debt cannot be mitigated while the cost of labor can be mitigated through mechanization, increased productivity or labor reassignment.
But most people look at the “health” of the stock market as the premier indicator of economic well being. And most of those people do not realize that the stock market is hyper-inflated as a result of the Federal Reserves decisions to suppress interest rates. The current stock market (all three major indexes) are trading at a price/earnings ration of about 24:1 while the market has historically traded at 17:1. Increases in the interest rates will allow money to flow out of the stock market and back into the safe venue of government bonds. And such an outflow will have the ancillary effect of driving the market back to its historical norms – particularly back to back increases in September and December. A reduction in the price/earnings ratio to historical norms would result in a nearly thirty percent reduction in the value of the stock market – a paper loss of nearly $3.5 Trillion.
Given the politicization of the Federal Reserve under Mr. Obama and given the dramatic impact it would have on the financial industry, it is highly unlikely that the Board will move aggressively to increase the interest rate. (The Board would not want Mr. Obama to exit his presidency in the face of a new recession.) It is far more likely that it will bend to the pressure from Wall Street and the Obama administration and delay any increases until Mr. Obama leaves office – or at least until December when the effects will not be seen until Mr. Obama leaves office. However, should Donald Trump be elected you can also be sure that the Board will act to deliver a financial crises by raising the interest rates in rapid fashion.