This post is a continuation of the train of thought I had going on my last post, A Paradigm Shift in the American Economy. I mentioned a New York Times article that attributed the Fed’s continued manipulation of the Fed Fund Rate (keeping it close to zero), as one reason for the current boom in the stock market and corporate bottom lines.
At the same time, we continue to see current jobless rates remain around 8% according to the US Bureau of Labor Statistics, while realistically the unemployment rate is much higher hovering around 14.4% if you prefer the BLS’s less optimistic/more realistic U-6 unemployment statistics.
What does all this mean? It means that business is good, real good, but not so much for the common man. The reason being is that what growth we are experiencing at the moment is purely based off stimulus. The stimulus being a result of The Federal Reserve’s manipulation of interest rates, pumping/propping up the economy by minimizing a ton of risk associated with investing.
Theoretically, this should allow companies to invest and grow, creating jobs. Well… investing and growing they are, but creating jobs, they are not. The reason being, as I pointed out in my last post, is at least partially thanks to our leaps forward in automation technology. We have simply automated away a lot of our work. While this is painful in the short term, it is to be seen what happens to our economy and the global economy at large, but I digress.
The current situation with the fed has led some forecasters like Peter Schiff to call this a “Lance Armstrong Economy.” Check out his youtube rants, they’re pretty good. He thinks it’s pretty damn funny that America is outraged that a cyclist used artificial stimulus to win a race, but that it is perfectly acceptable for our central bank to artificially stimulate the economy.
Just who is the Fed Looking out for?
The Federal Reserve’s official goals are to promote “maximum” sustainable output and employment and to promote “stable” prices. Meaning, keep unemployment and inflation in check with one another. When inflation and unemployment are either too high or too low, things go south.
Yes, absolute zero unemployment is actually bad news. It equals unhealthy inflation.
The Fed manipulates interest rates through Open Market Operations, a central bank buying its own government’s debt—yes that’s a real thing, or through monetary policy, adding/reducing the money supply—aka, printing/shredding money. There are some other fancy maneuverings our bank has done lately, but these are its fundamental tools.
From here the bank hopes to see a trickle-down effect take effect. They help the banks out by making money really cheap for them to borrow and lend to businesses/people (businesses get cheap lines of credit, people get cheap mortgage rates), the business uses cheap credit to invest in more risky ventures and new jobs abound!
The only problem is the trickle-down effect doesn’t appear to be happening. Businesses aren’t investing in ways that create jobs. And so, we see the Fed policy really do nothing more than provide steroids to Wall Street and fuel the corporate bottom line.
Headline VS Core Consumer Price Index (Inflation)
Wait, we’re not finished yet! We’ve covered the Feds two objectives– Keep both unemployment and inflation at a healthy level. Well, they’re apparently failing at keeping unemployment in check, how about inflation? Surely they have that under control, right? Depends who you ask….
Statistics are a funny thing. Everyone loves to throw numbers around as FACT, but in reality there is almost always more to the story. If you happen to flip on CSPAN of CNN or whatever your favorite news network is and catch Ben Bernanke talk about inflation, he’ll probably say it has remained relatively stable over the past few years.
Mr. Bernanke would most likely refer to the Consumer Price Index (CPI). The CPI is supposed to gauge the fluctuation of prices of goods typically consumed by the average Joe. It turns out that like unemployment, there are multiple official CPI statistics. The two being tracked by the Bureau of Labor Statistic are healine CPI and Core CPI.
- FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks);
- HOUSING (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture);
- APPAREL (men’s shirts and sweaters, women’s dresses, jewelry);
- TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance);
- MEDICAL CARE (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services);
- RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions);
- EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
- OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
All the same stuff minus high price volatility items such as food and energy.
The fed is concerned primarily with the less volatile Core CPI. The numbers they are reporting to us are essentially heavily padded and sedated. Of course, they have their reasons for this, but regardless, it is more than a little confusing to the guy who hears reports that inflation is steady on one hand while his healthcare, gasoline and grocery bill are skyrocketing.
And just to top this all off with a cherry, check out this comparison of Headline and Core CPI! The figure you’ll hear government officials mostly refer to is the line in blue, which looks much less scary than the roller coaster ride in red that we’re experiencing here in the real world.
(borrowed without permission. Click the graphic for a link back)
In short, the government is bullshitting us. Their unemployment statistics are pure horse shit. Their inflation statistics are pure horseshit, and they’re really doing nothing to help anyone out. The real winners again, are the top 1%. And I’m not even an Occupy Wallstreet type of guy! I have no issue with corporations being profitable and making bucket loads of money, if done so legitimately.
That is not the case as of now. As of now, the average Joe has little reason to be optimistic. The only thing most of us have going for us is we don’t understand what the hell is going on. We just know something smells funky and it doesn’t look good.
If you have any critiques, criticisms, corrections, praises, etc. I’d love to hear them. I’m in no way an expert, just an anonymous blogger.