Federal Reserve Quandary: Stagflation
Posted by Larry Doyle on June 18, 2014 9:44 AM |
The Federal Reserve will wrap up its regularly scheduled meeting and release its highly anticipated statement this afternoon at 2pm. The markets always eagerly await this statement so as to read the tea leaves and see what they say about our economy and the impact on interest rates.
Do we really need to wait for 2pm, though, to determine what is really going on in our economy? I think not. What do we know? Plenty, although the financial media, government officials, and the bankers themselves are not always fully forthcoming in promoting the truth. Let’s navigate.
1. Labor markets: the structural level of unemployment remains at elevated levels as reflected in the fact that labor participation rates remain at 35 year lows. This slack is not only a drag on our economy but keeps overall level of wages in check for the economy as a whole. I do not believe that monetary policy has a meaningful impact on alleviating this enormous problem in our nation. Labor markets are presented as being healthier than the reality.
2. Inflation: under reported given the lack of meaningful wage inflation. While wages for many in our nation are largely fixed, the basic costs of living (food, fuel, healthcare, housing) are moving higher at an appreciable rate. Is there any surprise that spending on discretionary items remains largely in check for so many in our nation? Monetary policy, both here and abroad, is a primary driver of the increased costs of food, fuel, and housing. Can the Federal Reserve think about tightening so as to mitigate these price increases when the EU and Japan are doing all they can to stave off underlying deflationary pressures?
3. Economy: with the housing industry clearly slowing — this is what happens when cost of housing in terms of both rents and prices outpaces incomes — the economy overall is hard pressed to grow at better than the 2% GDP level that we have averaged over the last decade. Although many pundits and political hacks are wont to talk the economy up, talk is cheap. Sluggish growth is exacerbated by the increased costs highlighted above. If we were to extrapolate this further, we might define the real challenge facing our economy as stagflation, that is, “a condition of slow economic growth and relatively high unemployment – a time of stagnation – accompanied by a rise in prices, or inflation.”
What does Janet Yellen have in her bag of tricks to deal with that?
Nothing more than double talk along with a whole lot of hope. While hope is a virtue, it is not a central bank policy nor an economic program. Washington needs to address the structural issues impeding our economy by engaging in the following:
1. tax reform
2. entitlement reforms
3. preeminence of the rule of law . . . that humanitarian disaster on our southern border is running roughshod over the laws we have in place to protect our borders. We are supposed to be a nation of laws not men. When laws are not upheld it has a negative impact on the economy.
4. protecting the rights of property holders and investors. Capital flows and formation are predicated on real protections.
5. rooting out cronyism that has grown more deeply embedded in our nation. This reality goes hand in hand with the topic referenced in point 3 above.
Has Washington shown itself capable of taking on these issues? Regrettably not, due to a screaming lack of real leadership on both sides of the aisle.
As a result, all the pressure is placed on the Federal Reserve to continue the charade that erodes the value of our currency and the accompanying quality of life in America for so many. What is the result? The American dream slips further and further away over the horizon.
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