As spring approached in 2013, many believed that the economy was poised for a significant recovery. The housing market was finally showing signs of growth, and the Federal Reserve was actively supporting this momentum with monetary policies injecting $85 billion into the economy each month.
Prospects of substantial economic growth appeared imminent, almost palpable. The anticipated rewards of a fruitful summer seemed just around the corner.
The stock market, often a harbinger of economic expectations, seemed to be flourishing. It was eagerly investing borrowed funds, banking on future profits, and hitting new highs almost daily. Investors were once again lured into buying stocks.
After all, it’s a well-known pattern: many investors tend to buy at peak prices and sell at a loss. The soaring stock market served as an enticing bait for those unprepared for potential downturns.
However, in an unexpected turn of events, an economic setback struck; the labor market faced troubling news, reminiscent of an unwelcome childhood memory. Here are the details:
Labor Department Number Crunching
According to a report by USA Today, “Employers added a disappointing 88,000 jobs in March, a stark contrast to the 268,000 created in February.” This raised concerns about a potential slowdown in hiring that economists warn could last for several months.
Typically, around 100,000 jobs must be created each month to match population growth. Surprisingly, despite the meager 88,000 jobs added in March, the unemployment rate slightly improved from 7.7% to 7.6%. This misleading decline resulted mainly from 496,000 Americans exiting the labor force.
The Labor Department’s statistics indicate that those who have stopped searching for jobs are no longer counted in the labor force. If the nearly half a million individuals who ceased their job hunt were included, the unemployment rate could have actually risen to 7.9% in March.
Importantly, the labor participation rate has plummeted to 63.3%, the lowest level since March 1979. This statistic reveals that 36.7% of working-age adults are neither employed nor seeking work. Yet, they still exist…
So, what are they doing? Some have chosen early retirement, others are pursuing education, while many have turned to disability assistance after their unemployment benefits expired.
Clogging Up the Economy
What’s the issue? Wasn’t the aggressive money printing meant to resolve these problems? That’s certainly what the Federal Reserve posited.
The theory suggests that this influx of capital would boost demand, prompting businesses to hire more workers to satisfy that demand, ultimately leading to robust economic growth. So, what is preventing this from happening?
Regrettably, inflating the money supply does not equate to genuine wealth creation. True wealth derives from saving and investing—processes that demand time, discipline, and hard work. Simply creating money and lending it at negligible rates distorts investment priorities.
This policy encourages risk-seekers to borrow funds for investments that, without the Federal Reserve’s intervention (through artificially low interest rates), would not be sustainable or profitable. Such endeavors, including those by organizations like Research in Motion and American Airlines, illustrate the pitfalls of this approach.
Ultimately, the economy has become bogged down by the Fed’s maintenance of cheap credit. Businesses that should have naturally exited the market are still operational, yet they are not expanding or increasing their workforce. They are merely surviving.
In the end, no matter how much the Fed inflates the stock market—are we heading for DOW 20,000?—these efforts cannot genuinely benefit the real economy. In fact, their policies of rampant money inflation may be hindering growth. The most recent employment report only underscores this reality.
Sincerely,
MN Gordon
for Economic Prism