Tough Day For Our Calamity Economy

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The ugly numbers speak volumes on how the policies of the Federal Reserve hurt the real economy. But those very policies enable Congress and the White House to run up ruinous budget deficits.

Inflation is getting worse. CPI is up 3.9% over the past 12 months. For “Urban Wage Earners and Clerical Workers,” it spiked 4.4%. Price pressures in the supply chain indicate that this trend isn’t going to abate anytime soon. Producer prices jumped 6.9% over September last year, and import prices shot up a red-hot 13.4%. There is absolutely nothing “subdued” about this kind of inflation though the New York Times inexplicably used that term.

But that’s inflation in goods and services. Not wages!

Wages dropped 1.9% from September a year ago and .1% for the month on an inflation-adjusted basis. For production and non-supervisory employees, the drop was even steeper, down 2.4% for the year—those at the lower levels of the wage scale are getting whacked the most. It’s a continuation of a 12-year trajectory during which real wages dropped 9%.

Could we have a little deflation in goods and services please, to keep up with wage deflation? Yes. During a few months in 2009, consumer prices actually declined a bit while wages rose a smidgen. Result: a jump in purchasing power and an improvement in consumer spending.

But the Fed abhors declining prices and rising wages. Or even stable prices and stable wages. Instead, it has chosen the insidious combination of inflation in goods and services and deflation in real wages. And it has been vocal about its policies. The result is a creeping impoverishment of the middle class: 46.2 million Americans live in poverty, more than ever, the Census Bureau reported in September. No wonder that the Michigan Consumer confidence index dropped to 57.5 and that the expectations sub-index to 47, the lowest in 31 years. So, don’t expect the middle class to rev up the economy.

Finally a good number … on the surface: Housing starts shot up 15% from August to a seasonally adjusted annual rate of 658,000 “±13.7%”—for a sense of proportion, this is down from a peak of 2.3 million starts in January 2006. But every unit built only prolongs the housing nightmare. Its cause: 19 million vacant units, according to the Census Bureau. While reasonable minds might quibble with that number, everyone agrees that the inventory of vacant units is huge. And the healing process—household creation, which has nearly ground to a halt—will take along time.

In other parts of the economy, early warning signs are also flashing. Capital One, one of the largest credit card issuers in the US, reported that 30-day delinquencies were rising—consumers are getting strung out again. Two days ago, the Empire State Manufacturing index came in at -8.5, in negative territory for the fifth straight month. On a very dark note, its future general business conditions sub-index, which measures expectations, fell to its lowest level since February 2009, the depth of the financial crisis. International business travel has fallen off a cliff at the end of August. And ominously, inbound port traffic is down, probably due to declining expectations for holiday sales.

Government deficit spending, an economic stimulus, filled the holes for the last ten years, but now, the economy is addicted to it, and even a $1.3 trillion deficit—8.7% of GDP, in line with Greece’s deficit!—isn’t enough anymore to keep it growing. Despite all the posturing by Congress and by the White House about cutting the budget, and despite the silly theatrics around the debt ceiling, spending in fiscal 2011 actually rose 4.2% to $3.6 trillion. With receipts of only $2.3 trillion, 36% of the entire budget was borrowed money. It makes the Eurozone debt crisis look benign.

The “advantage” the U.S. has over the Eurozone is a central bank that is willing and able to print whatever it takes to monetize the deficit, and to do so at negative real yields. It’s financial repression that will demolish fixed-income investors and workers alike, but it enables Congress and the White House to continue their fiscal policies to the detriment of the real economy.

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