Change is the only constant in life. A few years back, the freeway off-ramps in Long Beach, California, were frequented by Mexican immigrants selling oranges and roses to commuters returning home from work. Today, you’re more likely to see new college graduates strumming guitars for spare change, struggling to find their footing in a challenging job market. Graduating with substantial student debt during the tail end of a 60-year economic expansion is undeniably tough. When the economy falters, it pushes individuals to engage in unconventional or even perilous ways to make ends meet.
During a visit to Mexico City about a decade ago, I encountered some extraordinary street performances. At one traffic light, a shirtless performer appeared in front of our car with broken glass wrapped in a towel. In a shocking display, he laid the towel and glass on the street and rolled around on it.
Another crowd-pleaser, especially after dark, was the fireball blower. This daredevil would sip a flammable liquid, ignite a match, and unleash a spectacular fireball into the night sky. If memory serves, these audacious spectacles earned performers around 10 Mexican pesos, roughly equivalent to one U.S. dollar. Not a bad income for those facing empty stomachs and no job prospects.
Statistical Stunts
In the U.S., the job market appears to be on an upward trend. Recently, the Bureau of Labor Statistics reported an addition of 146,000 jobs in November, with the unemployment rate dropping to 7.7 percent. However, a closer look reveals that these figures are not as rosy as they seem.
To merely keep pace with population growth, approximately 150,000 new jobs must be created each month. Consequently, the unemployment rate should have remained static. But instead, it decreased from 7.9 percent to 7.7 percent, a puzzling discrepancy for anyone who thinks critically about the data. Interestingly, government statisticians managed to report a reduction in the unemployment rate by simply excluding certain individuals from the totals. It appears that last month, 350,000 workers exited the labor force. Had these individuals been counted, the economy would have actually lost 204,000 jobs rather than adding 146,000.
Clearly, the employment report has become little more than political spin, failing to align with reality. This is why the Federal Reserve feels compelled to inject more monetary stimulus into an already saturated economic landscape.
Blowing Gas
Just recently, the Federal Reserve reaffirmed its commitment to aggressive monetary policy. Following two days of deliberation, Fed Chairman Ben Bernanke announced the initiation of QE4. Yes, you read that correctly. Here are the key details:
“QE4 is here,” proclaimed Forbes. “Just months after unveiling what was termed QE3, an open-ended $40 billion monthly initiative to purchase mortgage-backed securities, the FOMC has opted to ramp up asset purchases in 2013 as Operation Twist comes to a close.
“The Fed will consequently increase its balance sheet expansion rate, further easing monetary conditions. Unlike Operation Twist, which was counterbalanced by selling off assets, the new program will focus exclusively on purchasing Treasuries. When combined with QE3, the Fed will be taking an impressive $85 billion in bonds, including both Treasuries and MBS, out of circulation.”
In simple terms, $85 billion each month translates to over $1 trillion annually. By way of comparison, from the Federal Reserve’s inception around 100 years ago until mid-2008, its balance sheet expanded by approximately $900 billion. Since then, it has surged by about $2 trillion.
Now, under QE4, the Fed is projected to add over $1 trillion to its balance sheet each year for as long as circumstances allow. But where will the funds for this purchasing spree originate?
You already know the answer: they simply create it out of thin air.
At this juncture, the economy and financial systems have become reliant on constant increases in the money supply just to maintain the status quo; GDP growth hovers around 2 percent annually. Additionally, the government needs accessible credit for borrowing at favorable rates to fund entitlements. A brief slowdown in the money supply growth could lead to a significant downturn.
Undoubtedly, the Fed will persist in injecting gas into the system. They won’t stop. The onslaught will continue until it culminates in a massive explosion.
This should make for quite a spectacle.
Sincerely,
MN Gordon
for Economic Prism
