Federal Reserve Dangerously Close to Needing New Statistics

Hear this, you who trample on the needy and bring the poor of the land to an end,saying, “When will the new moon be over, that we may sell grain? And the Sabbath, that we may offer wheat for sale, that we may make the ephah small and the shekel great and deal deceitfully with false balances,that we may buy the poor for silver and the needy for a pair of sandals and sell the chaff of the wheat?”The Lord has sworn by the pride of Jacob: “Surely I will never forget any of their deeds.” – Amos 8:4-7

A while back we published “Bernanke Prints On, How Do We Change the System?” In it we showed the “Bernanke Decision Tree” (reproduced shortly). The idea was simple: continued, gradual money-supply inflation is an effective means of transferring wealth from the poor and middle class to the politically-connected and already-rich. Because the “system” is always rigged in favor of the people in charge, the people at the center of the “system” – one can expect mental some impressive mental gymnastics and rationalizations to keep the printing presses going even if all the favored “indicators” say they can stop printing. (The only real reason to stop printing is if more printing threatens to destroy the whole system, thereby killing the golden goose for the super-rich.)

On Friday the US released it’s Non-Farm Payrolls Report (NFP) which showed some frustrating trends for the Fed. The so-called “establishment survey” showed that the growth in jobs is paltry, perhaps dangerously so. Yet the “household survey” showed that the unemployment rate had dropped to 6.7%, largely on the back of a massive drop in the labor force (people “retiring” or giving up). This represents a problem for the Fed, as once upon a time they claimed that 6.5% unemployment was some sort of meaningful number whereby asset purchases could be eliminated and one could even consider raising rates. Uh-oh. Not to worry, we’ll find another way.

Recall for a second the Bernanke Decision Tree, with my recent notes in green.

Slide2

Prices of things people buy have been rising. Prices of things they don’t buy as much, which is the measure preferred by the Fed, have also been rising, but not out of the ranges the Fed prefers – so Janet Yellen (the incoming Fed Chair) always has the option of saying “well keep the printing presses going because prices are still stable.” But if we saw an uptick in prices, and the unemployment rate keeps plummeting (because unemployed people stop looking for jobs) then we’ll have to find another measure of unemployment so we can keep turning the crank.

Articles on the subject have already started coming out – dismissing the lower unemployment as a statistical mirage. That’s fine, and I actually believe it’s a legitimate criticism … but it was legitimate to call unemployment a bad measure of economic health three years ago too.

But, to the super-rich who read this blog, I say “never fear” – Yellen will find a justification to crank up the printing press again. Money supply growth, which Keynesians equate to goodness and light, is not going anywhere if the Fed stops printing. Or, if the bottom is going to fall out, she’ll at least give you a “heads-up” before it happens. For those who don’t recall, Treasury Secretary Hank Paulson did exactly this back in 2008, when he told Congress that everything was sunny at Fannie Mae & Freddie Mac, and then proceeded to tell Hedge Fund managers [and thus their billionaire clients] that Fannie and Freddie were heading into conservatorship. Insider trading in the cabinet … that’s our America.

So, it will be interesting to see what happens to the unemployment rate. If it continues its slide lower I suspect we’ll see some dancing by Yellen and the Feds. We’ll check back in about three months.

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