Fed Policies Are Dangerous Claptrap: The Reason Why

Tyler Durden's picture

Submitted by Bill Bonner via Acting-Man blog,

Whatever Happened to Wages?

When we left off on Friday, we promised to take up an important theme on the morrow. The morrow is here. True to our word, we will do so. The subject is wages. And we are digging in. On the surface, we lament the lack of any forward progress in US hourly compensation over the last half century.

Deeper down, in the clay and subsoil, we wonder how it is possible that the world’s richest and most technologically advanced economy ever, operating during a 50-year period that included the invention of the Internet … the triumph of capitalism in China and Russia … and a landing on the moon – that is the most bountiful half-century in human history – failed to make its most important component parts better off.

And at the bedrock level, we find the explanation: Fed policies are dangerous claptrap.


Average Earnings 2014-06C

Real hourly wages since 1965 via Mish / Doug Short – click to enlarge.



Quackery and Incompetence

On Friday, we described and illustrated the quackery and incompetence behind the Fed’s economic forecasts. Clearly, it never knows what is coming. Today, we show what its policies have wrought.

Let’s begin with a conclusion: Thomas Piketty is wrong about the way the world works. He sees the working man… and the investing man… competing for the material rewards of a capitalist society.

As an old-fashioned lefty, he presumes the man with overalls will always get the short end of the stick. The working man has only the time on his hands and the sweat on his brow to offer his employer. Generation after generation, he has no more time or sweat than he had in the time of Jacob and Ishmael.

Capital, on the other hand, compounds… year after year… growing larger by the day… with more and larger factories… darker and more satanic mills. Piketty even gives a number – on page 356 of his tome – for the rate at which capital annually compounds: 4.5%.

As Jim Grant of Grant’s Interest Rate Observer helpfully points out, this is mathematically absurd. If wealth had compounded at that rate from the time of Christ until today, we would all be bazillionaires. Instead, capital compounds… and then gets whacked by bear markets, depressions, wars, and central bank policies.

In fact, there is no competition between capital and labor. Both benefit, according to relative scarcity and abundance of what they have to offer, from each other's contributions.



An imaginary conflict

(Image via symbologica.blogspot.co.at)

Cheating the Working Man

The capitalist puts up the resources. The working man turns them into something worth more – thanks to the value of his own time – than the resources he had to work with.

The richer the capitalist, the more pairs of skillful hands he needs to help him fructify his wealth. And the more the laborer has to work with – a backhoe, for example, rather than a shovel – the more new wealth he can create.

Generally, capitalists and laborers get wealthier, or poorer, together. When they don’t, something is wrong.

Readers of these pages already know what: The cronies always use the police power of government to cheat the working man, stifle competition, prevent progress… and generally strangle the public welfare with red tape, taxes, and regulation.

In the event, they have managed to keep wages more or less unchanged for 46 years. On this issue, we quote our favorite ex-White House budget director, David Stockman:

“Real hourly earnings of production workers at about $20.50 per hour in May were exactly the same as they were when President Lyndon Johnson was hauling his hunting dogs around by their ears back in 1968. [M]onetary inflation seemed to work for a few years because in those times of trade account surpluses organized labor was able to push up wage rates faster than the CPI – so real wages reached an all-time record of $22.30 per hour in the early 1970s.


Ironically, the catalysts for that final wage push were soaring construction wages in NYC obtained by the building unions working on the World Trade Center, and a 70-day strike at GM which resulted in the bountiful UAW “pattern agreement” that ultimately took Detroit down.


More importantly, the surge of Fed-fueled inflation in the late 1960s also took down the monetary system and paved the way for today’s destructive monetary central planning which erodes main street living standards and gifts the 1% with speculative windfalls on financial assets.


Specifically, the CPI had averaged about 1.2% annually between 1953 and 1965, but then soared to upwards of 6% by 1970-1971 (a level never seen outside of the two world wars and post-war demobilizations after the Fed’s opening in 1914).”

Amazing, isn’t it?

That is, in a period of apparent unrivaled progress, somehow the most important measure of economic success – the value of the working man’s time – went nowhere.

Short end of the stick? He got no part of the stick at all. Why? What went wrong?Nasty capitalist cheating? Or Fed policies?


capital and workers

In an unhampered, progressing economy, the more capital invested per worker, the higher real wages will go.

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PartysOver's picture

Paging Mr Holmes, Mr Sherlock Holmes.  Please meet you NoShiat Party in the Lobby.

ParkAveFlasher's picture

Up in the sky, it's a bird, it's a plane, it's...Captain Obvious!

Top Gear's picture

[from the article:] "In fact, there is no competition between capital and labor."

I thought competition was the very cornerstone of capitalism.

Is competion within every aspect of capitalism except between capital and labor?

Perhaps somebody other than Piketty has no idea how the world, or capitalism, works. 





Bemused Observer's picture

I think it ought to read, "There SHOULD BE no competition between capital and labor." And there shouldn't be, at least not within the same entity. The entities do of course compete among themselves for market share, but when the people within an entity are thrown into competition with each other, the business eats itself alive.

This isn't capitalism. It's some warped mutation that CALLS itself capitalism. And most people aren't aware of how capitalism is supposed to work because they don't even know what it IS.

Top Gear's picture

Why shouldn't there be competition between labor and capital, if captialism is based on competion?

Are you for or against competition?

If you are indeed for competition, why would you be against competition between labor and capital?

NidStyles's picture

Because it would mean that there is a singular group holding all of both resources that you mentioned and the holders of each group were fighting each other instead of having competition amongst themselves.. By definition, what you are saying is exactly what communism desires. The conflict between the worker and the capital owner. Communism wants that scenario, not capitalism. 


When you have the scenario you described the people at the bottom are the losers of the exchange. That exact thing is what is causing the mess that we have now. The "capital" holders are controlling everything using fake capital. Money can not be capital, but the bankers figured out a con that would make it so they could take charge and the government enabled them. 


Centralization leads to societal collapse. 

Top Gear's picture

> "[...] people at the bottom are the losers [...]"

Indeed, that is what competition entails.

Don't be a sore loser.

> "The 'capital' holders are controlling everything..."

True. In basketball, capitalism, or any competition, the winner wins, and takes all, grabs the trophy. Problem, Marxist?


Bemused Observer's picture

You're calling him Marxist as if it was an insult. As if there could not be any other way to do things other than the way you describe. But yet you are advocating the rules that govern life among animals, and I think it is YOU who are wrong. There is a reason we have evolved beyond the rest of the animal world. The survival of the fittest world you describe is what we have evolved beyond. We're supposed to watch it on NatGeo, not emulate it in our own day-to-day lives.

Top Gear's picture

We're animals, great apes to be exact, in case you haven't noticed.

• Kingdom: Animalia • Phylum: Chordata • Class: Mammalia • Order: Primates • Superfamily: Hominoidea (APES) • Family: Hominidae (GREAT APES) • Tribe: Hominini • Genus: Homo • Species: H. sapiens

Let me know when we're not, ok?



Bemused Observer's picture

It doesn't necessarily follow that if competition between businesses is good, then competition within businesses is also good. Everything is fine, in its proper place. You don't use the same techniques with your family that you use in dealing with people and agencies in the outside world.

pods's picture

Bonner should have kept open the messageboard on The Daily Reckoning.  That was a fun place.


NotApplicable's picture

I wish that Agora wasn't such a scummy sales-pitch type of advertising entity. Bonner is one of my favorite writers alive today, but  I quit going to the DR long ago.

Top Gear's picture

"Scummy sales-pitch," say you? It looks like a line lifted from the International Socialist Review.

buzzsaw99's picture

twaddle speak. slave wages in china produce billionaires. everyone in the usa exploits the resources and labor of other countries without a second thought. when that stops working they will eat the billionaires for breakfast and the billionaires damn well know it.

disabledvet's picture

"Faster, better, cheaper" slams into a debt regime.

Fed has done a great job re-inflating the bubble...but the inflation has succeeded only in encouraging a debt bing on steroids.

Nobody in their right mind believes that this money will be repaid. The redefault rates on these mortgages are off the charts.

"Once the confidence breaks it's every banker for himself."

yogibear's picture


and then


Always works.

ENTP's picture

Who needs an increase in wages when the increase for doing absolutely nothing has skyrockted over the decades?

Think about how many bags of Hot Chips a person can buy today vs. in the 60s for doing nothing.  

Urban Redneck's picture

FRBNY gold policies seem to be working beautifully. The Germans apparently could give the Poles lessons in American cock-sucking.


magpie's picture

Well, it's only "gold" now...

ENTP's picture

Hush Germany, well print you off some nice shiny FRNs and you keep quiet.  Deal?  Come out and say we are keeping if "safe" and well even tell you the Eastern party that it was transferred to.

NotApplicable's picture

It's a rebuff to the "Euro-doubters?" Really? LOL

Dollar Bill Hiccup's picture

Working man in China is doing just fine ...

Top Gear's picture

Now that they've got the suicide nets installed, yes.  Unless he wants to breath clean air or drink clean water.

Bobportlandor's picture

When you factor in all the people that can work and are not then what is the average wage rate?

Second from the chart you can see computers influence on the economy, problem is not enough NEW goods and services are created to replace the jobs lost.

Third immigration is not helping, but making things worse by crowing people into the most desirable areas and causing wage stagnation.


kchrisc's picture

The FedRes has no "policies," but only SOPs of theft.


"My guillotine's SOP is 'slice, reset, next'."

Bemused Observer's picture

What went wrong was a unique historical anomaly. Technology severed the link between the working man's time and his productivity. Time is what the laborer has to 'sell', and he can only sell 60 minutes an hour.
But productivity is what the business owner has to sell, and technology has opened the spigot for ever-increasing productivity. One man can do the work of 50 with the right machines, yet he still gets paid by the hour. And technology has NOT given him any more minutes an hour to sell.

Labor unions in this country dropped the ball. By sticking with the old hourly-wage formula and pushing for increases to the minimum wage, they chained the laborer to an archaic formula that prevents him from ever being properly compensated, by the simple fact that an hour will NEVER have more than 60 minutes... What they SHOULD have been doing is coming up with an alternate way to compensate labor that gave the worker a way to capture some of the gains in his productivity. All they accomplish by raising the minimum is the inevitable, and ridiculous situation where you have 50 dollar an hour busboys, with the most productive workers STILL not able to earn their share of what they produce. Which will just kill off a lot of small businesses and make the situation for labor even worse.

asking4it2k's picture

You cant outsource good paying jobs for 30+ years and think nothing bad will happen economically. Where are our kids supposed to work??

This article is proof globalization and free trade have been epic failures and ruined the American middle class !!!

Top Gear's picture

Competition is good. Except when it isn't.

eddiebe's picture

And yet when the Oppose Wall Street movement was going on, there were plenty of people that were certainly not part of the '1%' crowd, that were decrying the movement and calling the protesters slackers and no-good moochers. Plenty of them right here on this site. That, as far as I know was the last protest movement that came anywhere close to protesting the status quo and the whole corrupt ' money that flows uphill ' scam. 

 Hell even Germany had an anti-Federal reserve protest over the week-end.

I suppose things aren't bad enough yet here in the USA for people to inform themselves of what is going on and to start actually standing up for themselves. Pathetic. 

No wonder Yellen can get away with calling the rise in food-prices just 'noise'. Where is the outrage? 

gcjohns1971's picture

Inform themselves?  Standing up for themselves?

People are on the treadmill to infinity just trying to make ends meet.  This is why the hours-worked statistics keep rising.

Everyone else is on the take, and benefiting from the exploitation.

Ewtman's picture

A Robert Wenzel speech at the New York Fed in 2012 sums up the Fed's ineptness as well as it can be. "Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats."




no more banksters's picture

Already happens: Capitalism destroys human labor force and goes to the next phase


gcjohns1971's picture

Is it lost on everyone that 50 years ago was when the essentially unlimited immigration across the southern border began?  (But not for immigrants from elsewhere.  NO!  We don't want no stinkin' highly educated Europeans!  Just wage labor from the south!)

What happens to the price of hourly labor when you raise the supply but the demand stays the same?

What happens to "aggregate demand" when the newcomers work off-the-books and take welfare paid for by their on-the-books co-workers?

tonyw's picture

Look at what else also happened around that time, two examples: currency uncoupled from reality; US production of cheap, easy to get at oil peaked.

FWIW, not saying immigration not linked, of course if people can do better than back home they will come.

Top Gear's picture

[from the article:] the more capital invested per worker, the higher real wages will go.

...for the few people managing the robot welders, robot food preperation, robot labor everywhere.


Reality: google.com/search?q=robots+replacing+workers

moriarty's picture

Careful not everyone likes it Upping’em, still got the Lightening in the garden?


Like the avatar, atom is it not?



MagicMoney's picture

I agree with this article. Nothing has more degraded laborers than the federal reserve. Real money, which was gold at one time improved real wages. The Era Of Great Deflation in America improved wages dramatically. Ironically, mainstream economist consider deflation a mortal enemy. It's laughable they would consider higher prices for goods a wonderful thi9ng. The installation of the Federal Reserve has reversed that. Real wages have decreased, while inflation is north of 2%, though by other measures, well north of that.

Purchasing power decreases or stays the same, no progress. Inflation runs higher than the increase of real wages. The result of inflation on goods is higher prices, because the currency is debased. Same goes for labor, labor is debased in terms of purchasing power. While everything gets more expensive, your wages don't match the increased expense. With real money, as productivity increases, things get cheaper, you can afford more without having your nominal wage increase, but the value of your wage increases in real terms.


David Stockman is very correct in that respect. 60's and 70's saw a lot of inflation. The federal reserve, and the US government increased the throttle on debasing the currency, thus debasing the economy altogether, the capital structure that was once built, inflated away and with that, you don't simply get lower real wages in ability to purchase goods with a finite wage, but also quality of those goods you purchase decrease.  This means high quality products are now poorly  and cheaply built, not necessarily because Chinese don't know how to build things just as good as Americans. They can, just the currency doesn't command high quality labor. This I do believe. As Adam Smith described purchasing power, it's the command of one's labor. When you work to reverse purchasing power, you trying to reverse capital accumulation altogether in the currency, and the economies it commands.

hairball48's picture

If the sheep ever understand the relationship between labor, wealth, and "real money" e.g. gold...then they'll understand what Bill Bonner is saying. Those who cling to believing in monetary systems that use "fiat money" will never understand.