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Sunday, May 4, 2014

More Jobs Nonsense

A friend of mine forwarded me an article from the UK Telegraph that reported in dire terms on the jobs "disaster" in the USA.  The author fixated on the decline of 800,000 people in the workforce in April in the latest statistics and combined that figure with the 0.1% growth rate for GDP during the first quarter.  Then the reporter announced that this slowing of the economy was likely due to the tapering by the Federal Reserve of quantitative easing, the buying of billions of dollars of bonds each month by the central bank.

The Telegraph article is the kind of seemingly thoughtful nonsense that passes for economic analysis in the media these days.  Don't get me wrong.  The growth rate in the GDP is horrible and the supposed departure of nearly a million people from the workforce is also a major negative indicator if it is true.  The problem, of course, is that the jobs numbers are so seemingly inconsistent and are based to such a degree on massaging the actual numbers that they are nearly meaningless in one month.  The GDP number is going to be further revised, and most experts now think that when finalized the GDP will actually have shrunk during the first quarter and America will be part of the way towards a recession.  But we are not there yet and things can easily change. 

The biggest problem with the Telegraph article, however, comes when it blames the reduction of bond buying by the Fed as the cause for these numbers.  It is a ridiculous argument.  The point of the Fed's bond buying has always been to keep interest rates low.  More demand for bonds means higher bond prices and lower interest rates.  So now, the Fed has cut its purchases about in half and guess what.  Interest rates have not risen.  That is not to say that there has been no movement in the interest rates, but despite some ups and downs, the key interest rates are pretty much where they have been since tapering by the Fed began.  For example, the rate for the ten year federal bond is actually slightly lower than it was at the start of tapering. 

The Telegraph article acknowledges that interest rates have not moved higher but then claims that the bond buying nevertheless was fueling growth.  Of course, the reporter offers no explanation how that was occurring.  Maybe he was referring to the "virtuous cycle" that former Fed chair Ben Bernanke talked about when the first QA was imposed.  The idea was that more money in the economy would lead to higher assets prices which would lead to people who hold assets feeling wealthier and then to increased purchases by those wealthy which would grow the economy.  Understand what that means.  Government policy was designed to increase the wealth of those who have a large amount of assets.  In other words, the Fed was working to make the rich richer.  You know, the federal government has been working to increase income inequality in the hopes that this would lead to higher economic growth.  It has been quite funny to watch the government follow policies that increase economic inequality while at the same time denouncing that very inequality.  But lets get back to the effects of QA.  There has been no proof after multiple rounds of QA and literally trillions of dollars being spent by the Fed that QA has had any positive effect.  That means that the Telegraph article is just so much hot air.  All that QA has actually done is to pump up asset prices and lay the foundation for a later crash in those prices or a major inflation in the next few years.  It would be insane to reinstate it.



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