The Fed’s Monetary Tantrum Will Push The Economy Into Outright Deflation

Tuesday, August 1, 2017
By Paul Martin

Aug 1, 2017

It is increasingly evident that the US economy is not taking off like some predicted after the election.

President Trump and the Republicans haven’t passed any of the fiscal stimulus measures we hoped to see. Banks and energy companies have got some regulatory relief, and that helps. But it’s a far cry from the sweeping healthcare reform, tax cuts, and infrastructure spending we were promised.

Serious, major tax reform could postpone a US recession to well beyond 2020, but what we are going to get instead is tinkering around the edges.

On the bright side, unemployment has fallen further, and discouraged workers are re-entering the labor force. But consumer spending is still weak, so people may be less confident than the sentiment surveys suggest.

Inflation has perked up in certain segments like healthcare and housing, but otherwise it’s still low to nonexistent.

Is this, by any stretch of the imagination, the kind of economy in which the Federal Reserve should be tightening monetary policy?

No – yet the Fed is doing so.

Making Up for Past Mistakes
It’s partly because they waited too long to end QE and to begin reducing their balance sheet.

FOMC members know they are behind the curve, and they want to pay lip service to doing something before their terms end. Plus, Janet Yellen, Stanley Fischer, and the other FOMC members are religiously devoted to the Phillips curve.

That theory says unemployment this low will create wage-inflation pressure. That no one can see this pressure mounting seems not to matter: It exists in theory and so must be countered.

The attitude among central bankers, who are basically all Keynesians, is that messy reality should not impinge on elegant theory. You just have to glance at the math to recognize the brilliance of the Phillips curve!

It was Winston Churchill who said, >“However beautiful the strategy, you should occasionally look at the results.” Fact is, the lack of wage growth among the bottom 70–80% of workers (the Unprotected class) constitutes a real weakness in the US economy.

If you are a service worker, competition for your job has kept wages down.

It Will Backfire in a Big Way

The Rest…HERE

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