The Fed’s “Inflation Target” is Impoverishing American Workers

Redefined Terms and Absurd Targets

At one time, the Federal Reserve’s sole mandate was to maintain stable prices and to “fight inflation.”  To the Fed, the financial press, and most everyone else “inflation” means rising prices instead of its original and true definition as an increase in the money supply.  Rising prices are a consequence – a very painful consequence – of money printing.

Be that as it may, the common understanding of inflation as rising prices has always been seen as pernicious and destructive to an economy and living standards.  In the perverted world of modern economics, however, the idea of inflation as an intrinsic evil has been turned on its head and monetary authorities the world over now have “inflation targets” which they hope to attain.

America’s central bank is right in line with this lunacy. According to the Fed’s “May minutes”, it wants

“A temporary period of inflation modestly above 2 percent [which] would be consistent with the Committee’s symmetric inflation objective.”*

Translated into understandable verbiage, the Fed wants everyone to pay at least 2% higher prices p.a. for the goods they buy.

Yes, by some crazed thinking US monetary officials believe that consumers paying higher prices is somehow good for economic activity and standards of living!  Of course, anyone with a modicum of sense can see that this is absurd and that those who espouse such policy should be laughed at and summarily locked up in an asylum!  Yet, this is now standard policy, not just with the Fed, but with the ECU and other central banks.

US true broad money supply TMS-2 since 1986 - 2018

- Click to enlarge

US true broad money supply TMS-2 since 1986. The domestic US money supply has increased by a stunning USD 7.85 trillion since 2008, or more than 150%. This was the by far largest ten-year surge in the US money supply of the entire post WW2 era. Naturally, there have been enormous effects on prices, they have just not shown up in CPI yet. This is in the nature of the process: new money always enters the economy at discrete points and propagates from there. One can certainly see the effects on asset prices, from stocks to real estate (the bubble in RE prices has in the meantime also been resurrected in its entirety). When and to what extent CPI statistics will be affected is not preordained. Experience shows that this tends to happen with a considerable lag. Note also: while money does clearly have a purchasing power that is diminished by money printing,  the “general level of prices” is actually a fiction. It cannot be “measured” or “calculated”, as that would require a constant with which to measure it. Since both the supply of and demand for money and the supply of and demand for goods and services fluctuate, no such constant exists in the real world.  [PT]

Economic Quackery

The baneful consequence of this economic quackery is being felt by American workers as admitted by the Labor Department.  Instead of spurring expansion, inflation is eating into and depressing wages:

“For workers in production and non-supervisory positions, the value of the average paycheck has actually declined in the past year.  For those workers, average real wages – a measure of pay that takes inflation into account fell – from $22.62 in May 2017 to $22.59 in May of 2018.”**

While the decline in nominal wages is not significant, the manner in which the government now calculates inflation has been skewed to understate its impact.  Under the previous calculation, the current US inflation rate is probably closer to 5%. [ed note: different baskets of goods and services are relevant for different people; the “average” of CPI is essentially relevant for no-one. The de facto impossible calculation was frequently altered in the past several decades, with the aim of lowering the government’s COLA expenses – i.e., inflation adjustments to various non-discretionary entitlement spending items – PT]

Wage stagnation is not new.  Average real wages peaked more than 40 years ago and have fallen in real terms ever since.  Not surprisingly, the drop in wages in real terms began soon after the US went off the last vestiges of the gold standard in 1971.

As sound theory has long ago demonstrated, the idea of economic growth through money printing is absurd.  Increases in living standards and real wages can only come about through savings, investment, and capital accumulation.

Workers who have superior tools and equipment are obviously more productive than those that do not. Yet, capital goods have to be produced and production takes place over time.  Savings allow for funding the production process.

Real wages – Top: weekly wages; Bottom: hourly wages

- Click to enlarge

Real wages – Top: weekly wages of production and non-supervisory workers deflated by CPI; Bottom: hourly wages of the same group of workers deflated by gold prices. Note: weekly earnings are also adjusted by hours worked per week, which have decreased from 38.8 hours in 1965 to 33.8 hours today. Nevertheless, hourly wages deflated by CPI also remain well below the peak attained in the late 1960s. The stark reality is probably better illustrated by deflating wages by gold prices, as this is a market-based indicator. If one uses the true money supply as the deflator, the decline is even larger. [PT]