Over the past four years, approximately 4.4 million workers have vanished from the labor force. Their whereabouts remain a mystery.
These individuals are absent from unemployment statistics but still exist, concealed within the data. Meanwhile, those fortunate enough to have jobs venture out daily, exchanging their time and skills for compensation. Among this group, a few manage to live within their means, saving the excess.
With sufficient savings accumulated over time, they can ultimately achieve lasting wealth, granting them the freedom to choose whether to work or not. Regrettably, reaching that milestone has become increasingly arduous.
While diligent savers might manage to set aside some funds, they are continuously confronted with bureaucratic actions draining their savings through inflationary policies. It might seem unbelievable, yet this scenario is indeed unfolding.
For instance, on Wednesday, Federal Reserve Chairman Ben Bernanke addressed Congress, indicating that the Fed is intent on increasing prices. Below are some key points from the Chairman’s prepared remarks:
The Purpose of Monetary Policy Tools
“Typically, the Committee would implement policy adjustments by lowering its target for the federal funds rate, thereby exerting downward pressure on interest rates. However, since late 2008, the federal funds rate and other short-term money market rates have hovered near zero, necessitating the use of alternative policy tools.”
“The first such tool is ‘forward guidance’ concerning the FOMC’s likely future federal funds rate targets. Since December, the Committee has signaled that its current target range of 0 to 1/4 percent will remain appropriate as long as unemployment stays above 6.5 percent, inflation is projected to exceed no more than half a percentage point above the Committee’s 2 percent long-term goal, and long-term inflation expectations remain stable.”
“The second tool in play involves large-scale purchases of longer-term Treasury securities and agency mortgage-backed securities (MBS). These acquisitions exert downward pressure on longer-term interest rates, including mortgage rates. For some time, the FOMC has been purchasing longer-term Treasury securities at a rate of $45 billion monthly, alongside $40 billion per month in agency MBS, intending to maintain these purchases until significant improvements in the labor market occur within a stable price context.”
When simplified, the main aim of these monetary policy tools is to depreciate the value of the dollar. Bernanke’s objective is to encourage spending over saving, believing this approach will ignite demand, enhance the economy, and generate new jobs—according to his data, of course.
Unfortunately for Bernanke, the global landscape is far from static. It is dynamic and ever-changing…
The Mad World of Money
While Bernanke attempts to weaken the dollar to stimulate demand, his counterpart, Haruhiko Kuroda at the Bank of Japan, is busy doing the same with the yen. In fact, the yen is currently leading the race to devaluation significantly.
Over the past four-and-a-half months, the dollar has surged by 25 percent against the yen. This depreciation of the yen has resulted in a thriving Japanese stock market. The Nikkei 225 index climbed nearly 80 percent in the past year, only to plummet 7.3 percent in a single day recently.
Despite the recent downturn, Japanese investors have greatly benefited from the stock market’s rise. However, given that this growth has been fueled by easy credit, the looming specter of a yen collapse raises concerns about potential disastrous effects. We will continue to monitor this situation closely.
In the U.S., the scenario unfolds differently. The dollar retains its status as the world’s reserve currency, which places Bernanke in a precarious position.
The Belgian-American economist Robert Triffin described a dilemma that Bernanke faces over 50 years ago. This dilemma asserts that to supply the global economy with a surplus of dollar reserves, the U.S. must simultaneously run trade deficits—importing more than it exports and spending beyond its means, inevitably leading towards financial ruin.
The United States has consistently run trade deficits since 1980. Still, despite these ongoing challenges, along with Bernanke’s attempts to weaken the currency, foreign lenders persist in demanding dollars. The longevity of this situation remains uncertain, yet it clearly illustrates the chaotic nature of our monetary system.
In conclusion, as financial policies evolve and global dynamics shift, navigating the mad world of money becomes increasingly complex. It raises urgent questions about sustainability and economic strategies for the future.
Sincerely,
MN Gordon
for Economic Prism
