June 7, 2015
Older readers may remember Bizarro Superman, the mirror image of Superman, who did things backwards, or in reverse. That’s the world we live in today; good news is bad, and vice versa. The employment news was doubly good. Job gains were stronger than expected at 280,000 but more importantly the unemployment rate went up a smidge, and for the right reasons. As people become more confident in the job market, they re-enter the labor force, actively looking for work. Discouraged job applicants have fallen 20% in the past twelve months. The civilian labor force, the sum of employed and the unemployed, has grown.
Is good news good or bad? If only the news would wear a hat, white or black, so we could tell. In Friday’s trading, investors bet on the timing of the Fed’s first interest rate increase. September of this year or the beginning of 2016? When will Sugar Daddy, the Fed, take away the punch bowl of easy money?
The core work force, those aged 25 – 54 who drive the economy, continues to show growth greater than 1%.
Although hourly wage growth for all private employees has been modest at 2.3% annual growth, weekly earnings for production and non-supervisory employees have risen 30%, or 2.7% per year in the past decade, a period which has included the worst downturn since the 1930s depression. This more positive outlook on wage growth does not fit well with some political narratives.
The decade from 1995 – 2005 had 36% gains, or 3.1% annual growth, only slightly above the gains of the past decade and yet this period included the go-go years of the dot-com bubble and the housing boom. Inflation was higher in that decade, and in inflation adjusted dollars, the earlier period was only slightly stronger than this past decade. In short, we are doing suprisingly well considering the negative impacts of the financial crisis.
Every month I update the Constant Weighted Purchasing Index, a composite of the Purchasing Manager’s monthly index published by the Institute for Supply Management. This month’s reading was similar to last month’s, continuing a trough in the strong growth region of this index.
Heaven On Earth
Last week I asked the question: Why can’t a government with a fiat money system simply give everyone a lot of money and create a heaven on earth? The standard answer is that it would cause inflation. For several millennia, when a government injects money into an economy, inflation soon follows as the supply of purchasing power increases without a concurrent increase in the supply of goods and services. In the 18th century philosophers David Hume (On Money) and Adam Smith (Wealth of Nations) noted the phenomenon. Peter Bernstein’s Power of Gold recounts ancient examples of kings and governments debasing metal monies and the inflation that ensued.
In the seven years since the recession began in late 2007, the government has borrowed and spent $27,000 per person and there has not been the slightest hint of inflation. Why? There are several reasons. If a government borrows money from the private sector, there is no net injection of money into the system, no printing of money. A Federal Reserve FAQ on printing money is careful to note that “printing money” is the permanent financing of a government’s debt by a central bank. Whatever people want to call it, when the Federal Reserve buys government debt, new money is injected into the system. Since 2007, the Fed has injected almost $4 trillion (Balance Sheet), or about $12,000 per person, of new money without an uptick in inflation. How is this possible?
There are two types of spending – today and tomorrow. Spending for today is consumption. Spending for tomorrow is investment. Both types of spending drive demand for goods and services. The paucity of private investment since 2007 is at levels not seen since the years immediately following World War 2.
Although government investment is a relatively small percentage of GDP, that has also fallen to historically low levels.
The sum of private and government investment as a percentage of GDP is shockingly low.
If we use 2007 investment levels as a base, the accumulated lack of investment is far more than the $4 trillion that the Fed has pumped into the economy.
The Fed’s injection of money into the system is primarily spent on government consumption, or today spending, which is helping to offset the lack of investment spending. As investment spending rises, the Fed has been able to stop adding to its portfolio, although this “tomorrow” spending is still so low that the Fed can not begin to lighten its portfolio of government debt.
Advocates – economist Paul Krugman for one – of greater government investment spending, even if it borrowed money, hope to offset the lack of private confidence in the future. Previous government stimulus spending did have little effect on overall economic growth simply because it did little more than offset the lack of long term confidence by those in the private sector.