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Groundhog Day: Foreshadowing Inflation?

The Past, Present, and Future of US Economy


Last Updated: 03/01/2018 9:16 am

Last month, there was genuinely good news for the economy. On February 2, the Labor Department released its job report. It said, "200,000 jobs were added to the economy...which was stronger than expected, and the unemployment rate stayed at 4.1 percent—the lowest since 2000." Even better than that, "average hourly wages grew 2.9 percent from a year ago—the largest increase since June 2009."

At last, finally, the long, slow, dragging recovery was finally reaching ordinary people.

The reaction of the stock market was instant!

There was a mini-crash. The very same day.

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The crash that began on February 2, Groundhog Day, moved in a wave around the world, and continued, down, up, down, into the following week.

If you read, listened to, or watched the financial or popular media, it was made to seem like an abstract financial affair. As was reported and analyzed as happening in the narrow band width of stocks, investors, data points, and central bankers.

Those events—though transitory—should tell us something far more radical.

1. The richest of the 1% require the economic suppression of the 90%. It's practically an equation. A gain by the 90% = a decline for the 1% (or 0.1% or 0.01%).

2. Great gains for the top—as manifested in the financial sector—are at odds with growth of the "real economy."

The Financial Times Lexicon defines the "real economy" as "the part of the economy that is concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets."

3. Economists and commentators in the financial press see any gains for normal people as an instant and genuine threat that should be countered.

4. Bubbles that benefit the financial sector and the super-rich are invisible to those same commentators. Even if they look just like the last bubble, except much bigger.

A 2.9% improvement in wages averages out as just nine cents an hour. That sounds quite moderate. Especially after a decade and a half of stagnation for everyone but the very top. Nonetheless, investors reacted like plantation owners getting news of a slave revolt over in the next county.

Barron's, the business magazine, asked the obvious question, "Why would wage growth, which is clearly a good thing for workers and the overall economy, be such a bummer for investors?"

Then Barron's gave the answer. Wage growth could mean inflation is back. "Once again, this is 'good news' for workers, but it hints that wage inflation is taking hold, and that can be 'bad news' for the stock market," wrote Gorilla Trades market strategist Ken Berman. Larry Hatheway, chief economist at GAM Investments and head of GAM Investment Solutions, called inflation "the biggest risk for markets in 2018."

Economists and everyone in finance believes that inflation is to be desperately feared. Even more specifically, they're all certain that the Federal Reserve believes the same thing. Any sign of rising prices or salaries—as slight as the shadow of Punxsutawney Phil, the celebrity groundhog—can be a harbinger that inflation is coming. If the Fed reads it that way, they will hike up interest rates to "cool off the economy."

There is something very weird about this.

The Federal Funds Rate had been less than 1% for almost nine years, from 2008 to 2017. At the start of February 2018, it had only gone up to 1.42%. Short of an allowance from your parents, that's as close to free money as you can get. The rates were kept low because of a belief in "monetarism." It's best described as the Three Bears Theory. If there's too little money in the economy, there's recession, too much and there's inflation, but if it's just right, everyone gets their porridge. It comes from Milton Friedman. He said the Crash of 1929 only turned into the Great Depression because the of the failure of the Fed to pump money into the system.

Lesson learned. The Feds opened the gates and let the money flow. The theory said that the flood of cheap money to the banks would have them making low-cost loans for investments, which would create jobs. The actuality was the bankers were saved, Wall Street boomed, the rest of America got the Great Recession.

Just two days before the mini-slump, Donald Trump bragged about how the Dow Jones Average had gone over 26,000 for the first time. That really was huge.

To understand how big, back in 2009, when the crash hit bottom, the Dow Jones Average was 6,547. It's gone up 400%.

It's possible to argue that it's misleading to measure from valley to peak. Before the Crash, in April 2008, when the market was at highest, the Dow was just short of 13,000. In relation to that, the market of January 2018, had slightly more than doubled.

Had the "real economy," the one where people work and make things, doubled? Or quadrupled? If the "real economy" had not quadrupled or even doubled, how did the stock markets grow that much?

The answer is simple. Inflation. Virtually unlimited funds were made available to a very small sector of society. As a group, they primarily wanted a single thing: investment products. More money chasing an unchanged number of goods is a classic definition of inflation.

This kind of inflation is extremely dangerous. It led to the Crash of 1929 and the Great Depression, to the Crash of 1987 and the Reagan-Bush Recession, to the Dot.Com Bubble and Crash and the first Bush recession, and most recently the Crash of 2008 and the Great Recession. Yet it is, apparently, invisible.

There appears to be zero inclination to stop it. Indeed, the Trump tax cuts are guaranteed to exacerbate it and after this hiccup, they will.

At the same time, an increase in employment, and especially a wage hike, is something to be feared. That kind of inflation hurts bankers. It's noticed instantly. It is expected that something has to be done to keep the 90 percent doing better. Even if it means slowing down the stock speculators, too. Which essentially puts finance in permanent opposition to the real economy doing well.

Our economy has moved to a place in which top-down class war, the rich against the rest, has become silently institutionalized, treated as normal, and even necessary.

The original print version of this article was titled:
"Groundhog Day: Foreshadowing Inflation?"

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