Beware the Jabberwock, my son!
The jaws that bite, the claws that catch!
Beware the Jubjub bird, and shun
The frumious Bandersnatch!
— Lewis Carroll, Jabberwocky
One Scratch Below
Each day, new insights emerge about our economy. Recently, the St. Louis Federal Reserve revealed that American household wealth has declined by approximately 55 percent since late 2007. This statistic sheds light on the struggles many face, explaining why the economic environment feels so burdensome for the average worker.
“Household wealth plunged $16 trillion from the third quarter of 2007 through the first quarter of 2009,” notes The Dallas Morning News. “By the final three months of 2012, American households had collectively regained $14.7 trillion.
“However, when adjusted for inflation and averaged across the U.S. population, the situation looks less hopeful: The average household has only regained 45 percent of its wealth, according to the St. Louis Fed.”
This reality aligns with our longstanding suspicions of the recovery—it’s largely an illusion. While the numbers might suggest progress, the underlying inflation has eroded much of the apparent recovery. The economy feels like a significant disappointment for most American households.
Mired in the Quagmire of Negative Real Interest Rates
Inflating the money supply does not guarantee prosperity. This has become evident four years into the recovery, despite the Federal Reserve’s efforts. Job growth remains weak. Recent data from the ADP National Employment Report indicate that private employers added only 135,000 jobs in May.
By the time you read this, the Commerce Department will likely have reported job creation numbers for May, which we predict will fall well below 200,000. Such figures hardly keep pace with population growth.
These job statistics are alarming, challenging widely-held beliefs among mainstream economists about economic functioning. They dismantle the prevalent idea that stimulating aggregate demand through fiscal and monetary policies effectively increases employment.
At this stage of recovery, the economy ought to be generating far more new jobs each month—doubling or even tripling the current rate. Instead, it remains trapped in a mire of negative real interest rates.
Here’s what we mean…
Jabberwocky Adhesive Tape
Negative real interest rates are as perplexing as a three-dollar bill. They signify a contradiction in the market, akin to what Lewis Carroll described as “Jabberwocky.” They are nonsensical by nature.
In a truly free market, negative real interest rates would be impossible. They indicate borrowing costs that fall below the inflation rate, representing a credit market in which lenders receive less in return for their loans than the initial amount borrowed.
Like President Obama throwing a baseball, we find negative real interest rates utterly absurd. Yet here they are, a reality we can’t ignore.
The Fed’s policy of zero interest rates and quantitative easing is intended to drive real interest rates negative. Though they have managed to suppress the cost of borrowing artificially, the results have not aligned with expectations.
However, the Fed has limits on what it can control, including the prices of goods and services.
In essence, negative real interest rates act as a form of price control. As Senator Wallace Bennett stated over fifty years ago, they are akin to using adhesive tape to manage diarrhea.
Last month, 10-year Treasury yields surged by 30 percent, jumping from 1.63 to 2.13 percent. This shift caused a global panic in stock markets. One must wonder what chaos will ensue when the “adhesive tape” finally fails.
Sincerely,
MN Gordon
for Economic Prism
