From The Market Ticker
A hawk at the Federal Reserve has changed his plumage.
Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said in a speech Thursday that the central bank should respond to high unemployment with an even more aggressive approach than the Fed announced last week.
His proposal: Pledge to keep short-term interest rates very low until the unemployment rate, which was 8.1% in August, falls to 5.5%. He said it could take four or more years to reach that goal.
What if it never happens?
In short, what happens if employment isn’t falling because the economy has slack in it due to too-tight policy, but rather because too-loose policy has destroyed capital formation and in response to both this and an unfavorable fiscal environment along with idiotic trade policy that rewards enslavement of developing nations’ labor forces and pollution of their land, air and water a structural shift has occurred?
So you QE until the cows come home but unemployment never falls, because trade policy isn’t fixed, the health-care scam isn’t fixed and both continues to vacuum up GDP and make the labor market increasing uncompetitive. In turn the destruction of purchasing power drives government to continue to deficit spend so as to “ease the pain” of the populace (e.g. with food stamps, “disability” that magically appears in huge percentages of the people, “free” health care and similar.)
If this is the case then loose monetary policy is exactly backward.
So what does the evidence show us about the labor market on a population-adjusted basis?
Have we seen robust population-adjusted labor advancement at any time in the last 10 years?
And have we seen actual inflation-adjusted income progress over the last 10 years?
More to the point on inflation-adjusted income what is happening now, over the last few quarters, as the “QE to the moon!” and fiscal trainwreck policies have been imposed?
Have they resulted in inflation-adjusted income growth?
In fact since 2000 inflation-adjusted income has been negative!
Greenspan’s policies in response to the tech market collapse, which Bernanke has emulated and in fact Bernanke wrote his “seminal paper” on monetary policy during that time, have been factually proven not to work.
Remember that the only thing that matters to you is what your hour of work buys. You really don’t care if you have a $ 10/hour salary and your daily food costs $ 10 or if you have a $ 1/hour salary and your daily food costs $ 1.
The problem with inflation, provided wages match it (but they never do due to slippage in all systems, including economic ones) is that it destroys the value of accumulated capital in terms of currency and as a consequence capital formation is severely damaged. This in turn drives people to not accumulate capital but instead use credit which in turn leads to financial and banking bubbles as we refuse to impose a One Dollar of Capital standard.
The financial system is thus free to effectively counterfeit the currency and skim off a piece of it for itself which further damages capital formation and competitiveness, working exactly against the desire for a robust and competitive labor market.
These people need to be locked up in a rubber room, the excess liquidity must be removed and the law must be changed so that manipulations of this sort, if attempted in the future, result in life federal prison sentences (or even better, let’s go back to the punishment in the original Coinage Act) for the crime of deliberate counterfeiting of the nation’s currency.