The Commerce Department announced on Tuesday that the economy experienced a growth rate of 2 percent in the third quarter, which is a downward adjustment from last month’s initial estimate of 2.5 percent. More notably, it was revealed that after-tax, inflation-adjusted incomes decreased by 2.1 percent, marking the most significant drop in income since the third quarter of 2009.
This decline in incomes could negatively impact growth figures for the fourth quarter. It’s essential to remember that consumer spending accounts for 70 percent of the economy; therefore, falling incomes are likely to lead to diminished consumer spending and, subsequently, a slowdown in economic growth.
Clearly, the foundation of economic recovery hinges on job creation. However, not just any jobs will suffice; we need profitable positions—those that generate more revenue than they consume, fuel business expansion, and enable further investment and hiring.
At present, the economy is falling short in creating these types of jobs. On Wednesday, the Labor Department reported a rise in unemployment insurance applications, which climbed to 393,000—an increase of 2,000 from the previous week’s figures of 391,000.
Sadly, the unemployment rate has hovered around 9 percent for over two years. Moreover, the strategies employed by the Federal Reserve to lower unemployment may be contributing to the problem rather than providing a solution. Here’s why…
Total Debt Saturation and Firing Monetary Blanks
The Federal Reserve has traded the discipline associated with genuine economic growth—rooted in capital investment and production—for asset price increases driven by bubbles and credit-fueled consumption. Instead of fostering savings and investment, their approach has involved undermining the value of the dollar.
Milton Friedman advised central bankers that a slight easing of credit—through lowering the federal funds rate—could reignite economic activity when it slows down. The theory is that when the economy gains momentum, interest rates can gradually rise to restore balance.
Over the past three decades, the Federal Reserve has effectively applied Friedman’s principles. The U.S. economy experienced boom after boom; whenever signs of cooling emerged, the Fed would respond with low-cost credit. However, this strategy no longer appears effective.
After years of easy credit, the one-time reliable solution of monetary easing seems to have lost its impact. When the economy needed this “magic bullet” in 2008, the Fed delivered a blank. Rather than igniting growth, public debt spiraled out of control. This pattern repeated itself when more monetary easing led to further debt accumulation.
Consequently, with each interest rate cycle, economic downturns have become more frequent and severe, while economic upswings grow increasingly sluggish. Although the economy has technically emerged from recession for over two years, the unemployment rate remains at 9 percent, with economic growth stagnating at 2 percent. Despite the Fed’s expansion of its balance sheet by $2 trillion, the recovery feels more like a prolonged slump.
The core issue is that the economy has reached a threshold of total debt saturation, meaning it is burdened with far more debt than it can sustainably support. While in theory, the economy could potentially grow out of this debt crisis, it is now so encumbered that even modest growth seems unattainable. This is evident in the low yields on the 10-Year Treasury note, currently at just 1.87 percent, which contrasts sharply with persistently high unemployment and lackluster growth rates.
And there’s more to be aware of: you can also blame the Fed for increasing the costs of your Thanksgiving feast…
Smiling with Gratitude
The American Farm Bureau Federation reports that the “retail price for a traditional Thanksgiving dinner, including turkey, stuffing, cranberries, pumpkin pie, and all the essential sides rose by approximately 13 percent this year.” Notably, the cost of turkey alone surged by more than 22 percent compared to last year.
However, this increase is modest when viewed in the context of the last decade. Since the beginning of the new millennium, the cost of a traditional Thanksgiving feast has risen nearly 52 percent.
Factors such as the 16.5 percent rise in corn prices over the past year—used to feed turkeys—contribute significantly to these soaring costs. These corn price hikes are largely unintended consequences of governmental policies and farming subsidies that promote converting food into fuel. Monetary expansion from the Fed further exacerbates these price increases.
Yet, as we approach the holiday season, let’s not dwell too heavily on economic woes. Thanksgiving Day has just passed, and here at Economic Prism, we are grateful for both what we have and what has been taken away.
Marvelous events occur around us every day, and we find wonder through the innocent eyes of children, reminding us that, regardless of the circumstances, the universe unfolds as it should.
So, even amid an economy that struggles to find its footing, and as well-meaning mischief from Washington seems to take a toll, we choose to smile with gratitude. For despite all the chaos and challenges in our surroundings, we give thanks; it remains a beautiful world where miracles happen daily.
Sincerely,
MN Gordon
for Economic Prism