Middle
Class and Small Business are Victims of Fed Monetary Policy
by The Curmudgeon
Introduction:
In an earlier post this year, the
CURMUDGEON opined that most of America was still in a bear market. Recent evidence seems to corroborate that
assertion and conclusively proves that the Fed's reckless monetary policy (QE
and ZERO interest rates) is destroying the middle class.
Analysis of
Economic Data:
1. Let's start by updating disposable income. The chart below from Sentier
Research plots the median household income index vs. the seasonally adjusted
unemployment rate. As you can clearly
see, household income is way below its level in June 2009 when the recession
officially ended. It's now lower than in
September 2012, when the Fed started its massive $85B per month debt purchases
in Sept 2012. According to Sentier Research, "Real Median Income" has
dropped 8.5% from early 2008 to date.
2. The unemployment rate has NOT significantly
improved. Note that the unemployment
rate was 7.8% in September 2012 and is now only 0.2% lower at 7.6%. And today's 7.6% unemployment rate is
much higher than it was five years ago, as can be seen from the BLS chart and table.
3. What about the labor participation rate,
which continues to hover around 32-year lows?
The NY Times says
it's NOT coming back!
Binyamin Applebaum of the NY Times wrote:
"Lots of
people lost jobs during the Great Recession. In the aftermath, the great
surprise has been how few are looking for new jobs. Labor force participation,
the share of adults working or trying to find work, has stagnated at about 63.5
percent, almost three percentage points below the pre-recession level. The unemployment rate has dropped almost
entirely because of this decline in labor force participation. In other words, it
has not fallen because people are finding jobs. It has fallen because fewer
people are looking for jobs."
Comment: So even the incrementally small drop in
unemployment during the Fed's QE and ZERO interest rate policy is a
fake-out! Less people are actually
employed now and many of those are in low paying jobs or working part-time.
4. The following analysis was provided by Victor
Sperandeo to illustrate today's lower standard of living for America's
middle class:
"Using the
government's own CPI data from 1971 to date, the compounded rate of inflation
was 4.25%. The median income of
$7,734.00 in 1971 translates to $45,366.04 through June 2013 using that
rate. Nominal median income in 2011 was
$50,054. That's an annual increase of
only 0.23% of real wage growth! However,
when you factor in "progressive income taxes,"
and the additional government user taxes that did not exist in 1971, you can
easily see why the middle class has a lower standard of living today than 42
years ago."
5. Sperandeo believes that "massive
future inflation will be spawned from policies of Obama and Bernanke over
the last 4 1/2 years. Their actions make
clear that they have no concern for the potential (and actual current)
collateral damage being done with QE and 0% interest rates. Fed Chair Ben Bernanke has stated that the
amount of QE could increase further if economic conditions deteriorated. That would add to a never-ending binge of
paper money in an attempt to keep the economy from recession, while destroying
the nation in the process."
6. Victor believes the Obama administration and
Fed policies are impeding GDP growth by making it much more difficult for
small business' to be formed and survive.
He wrote, "Anything that is an obstacle to creating new businesses
is harming the common people. This means
whatever raises the costs -primarily taxes, inflation and regulations of
business - or lowers the incentives to go into business - are a detriment to US
workers jobs and income."
Conclusions:
In the last 4
1/2 years GDP is growing at real rates
of less than 2%, but the S&P 500 and other popular stock market averages
have compounded at double digit rates and are now at (or close to) all-time
highs. During the same time period, real
median income is down 8.5%, fewer people are working, and those that are have
not had wage increases that have kept up with inflation. The Fed continues to maintain a policy
that has greatly harmed the middle class, but has been a huge benefit to large
corporations and wealthy stockholders.
Sperandeo fears
the U.S. will eventually become one big Detroit. "One day America's debt, plus the
obligatory interest payments, will catch up with reality. Sadly, the nation at large will suffer a
terrible ending as a result."
The CURMUDGEON
is not as pessimistic as Victor. We are
hopeful that government policies will change for the greater good and stimulate
real economic growth. That would create higher
paying jobs and raise the standard of living for many Americans. However, we think that some unexpected crisis
will be needed to trigger such a policy rethink and bold action plan. Let's hope that it won't be too painful.
Till next time.....................
The Curmudgeon
ajwdct@sbumail.com
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.