Submitted by David Stockman via Contra Corner blog,
Dr.Yellen is at it again. Noting that there is still “slack” in the labor market, she insists that more liquidity pumping action by the Fed is warranted:
“Based on the evidence, my own view is that a significant amount of the decline in participation during the recovery is due to slack, another sign that help from the Fed can still be effective.”
Once again, what Yellen is really saying is that our macroeconomic bathtub is not yet full to the brim—owing to insufficient aggregate “demand”. The purpose of the Fed’s “accommodative” policy, therefore, is to flood the American economy with additional consumer and investment spending—so that “slack” or unutilized labor and capital resources will be “pulled” into production. Thus guided by the visible hand of the Fed, a virtuous cycle of rising spending, output and income will at length levitate our $17 trillion economy to its full-employment potential.
As a practical matter, however, the Fed cannot stimulate additional “spending” unless it can also cause the economy’s leverage ratio to rise, thereby supplementing “spending” derived from current income with purchases financed by freshly minted (incremental) credit. Yet the flood of demand by which the Fed endeavors to “pull” idle and underemployed workers back into production cannot be activated if the US economy has reached a condition of peak debt, as I strongly believe to be the case. Indeed, when the credit expansion channel is broken and done, all the Fed’s liquidity “accommodation” flows into the Wall Street finance channel where it pulls up the price of existing financial assets, not the employment rate of idle labor.
And it cannot be gainsaid that the Fed is entirely ignoring the facts of peak debt and the broken credit channel it implies. For approximately 35 years, the ratio of household debt to wage and salary income ratcheted steadily upward from 80% to 210%. But once household leverage reached the latter precarious peak under the lunatic mortgage blow-off during 2002-2007, it buckled and now stands at about 180%.
Yet why would it be reasonable to expect a retracement back to the 2007 peak—even if the madness of the student loan explosion continues or sub-prime auto lending keeps surging? These are minor upwellings compared to the $10 trillion mortgage mountain. Besides, a renewed household borrowing binge is not going to happen due to the baby-boom retirement crush, which liquidates household debt, and the “Dodd-Franking” of the banking system, which inhibits lending—risky and otherwise. So the Fed’s transmission mechanism to the household sector is blocked.
The same is true of the business sector. After exploding from $5 trillion to $11 trillion in the decade up to the 2007 peak, it has continued to climb owing to the yield-seeking boom in demand for corporate bonds, and now exceeds $13.5 trillion. But virtually the entire $2.5 trillion lift since the financial crisis has gone into financial engineering extractions such as LBOs, stock buybacks and M&A deals. That is, new credit has flowed into the re-pricing of existing assets rather than the acquisition of productive plant and equipment. Indeed, the latter is still $100 billion or 8% below it late 2007 level in real terms, marking the worst 7-year investment performance since WWII. So the business credit expansion channel to higher GDP is blocked, too.
This much is obvious, yet Yellen and her monetary politburo keep on attempting to flood the nation’s macroeconomic bathtub with more “demand”. Worse still, they fail to note that even if they could induce business and households to bury themselves deeper in debt that it wouldn’t necessarily have a salutary impact on the “labor market”— the ostensible target of their strenuous ministrations.
The graphs below are dispositive. The first shows that literally not a single net new NFP payroll job outside of the fiscally-driven HES Complex (health, education and social services) has been created in the US economy since January 2000. There were 106.6 million such jobs when Bill Clinton left office–virtually the same number (106.4 million) reported last Friday for March 2014.
By contrast, the Fed’s balance sheet was $500 billion then and $4.5 trillion today–a 9X gain. Needless to say, this comparison does not comprehend a brief interval; it encompasses the greatest monetary policy experiment ever undertaken and suggests that there is no link whatsoever between the Fed’s policy of radical balance sheet expansion and job market developments.
A closer look at the HES Complex further underscores the non-existent link between strenuous money printing and the labor market. Nearly half of the 31 million jobs in this sector are in education, including both public and private institutions. It is self-evident that the driving force here is fiscal policy, not the word clouds and monetary injections which emanate from the Eccles Building.
In a word, after robust growth up to the 2007 peak, education jobs have been flat as a pancake because governments are broke. Stated differently, the phony prosperity of the Greenspan Bubble years led state and local governments especially to over expand education spending based on non-sustainable revenue windfalls from the housing and credit binge. That one-time expansion is now deep in the rearview mirror.
Essentially the same thing is occurring in the balance of the HES Complex. Health care job growth is also beginning to slow significantly in response to the tightening fiscal equation at the Federal level. In any event, for several decades it was possible to induce households to buy more autos, big screen TVs and trips to Disneyland on mortgages and credit cards, but that has never been the case for health care. Demand surged for decades due to the perverse incentives of the third-party payment system and heavy government subsidies, not because of the household credit channel through which monetary policy was formerly transmitted.
In short, any reasonable examination of the NFP data based on longer term trends and on disaggregation of the lump-sum monthly number which comprises the Jobs Friday “print” demonstrates the silliness of the Fed’s “labor market” excuse for running the printing presses at white hot speed. The graph below, for instance, shows the dismal 14 year trend in good-producing jobs in manufacturing, construction and mining/energy.
Here we are reminded that the US economy is not a closed bathtub. Much of the credit-fueled demand for goods in the decades leading up to the financial crisis “leaked” into foreign production, not increased utilization of domestic capacity and labor. So the dramatic decline of the very best paying jobs in the US economy was a structural issue related to high domestic wage rates and the competitive dynamic of the global economy in tradable goods; it had virtually nothing to do with the massive expansion of the Fed’s balance sheet—other than the perverse impact that that the latter permitted the American consumer to live high on the hog on borrowed money used to purchase Chinese manufactures:
Finally, the Fed’s serial bubbles have also impacted the job market—but not especially in the manner intended. With each successive inflation of financial assets, households in the upper reaches of the income ladder have been able to increase discretionary spending for leisure and entertainment spending, thereby causing a punctuated rise in the job count . However, jobs in the Bread &Circuses Economy have a pay rate of barely $20k per year—meaning that they have added a lot more to the monthly jobs print than to the real prosperity of the Main Street economy.