The most recent employment report revealed 279,000 new jobs (including revisions to prior months), and an unemployment rate of just 3.6%, which is a 50-year low. Lest anyone think that this month was an anomaly, the last 12 months have registered about 2.6M new jobs (click to enlarge).
Over the last two years, the Federal Reserve, still using economic paradigms from decades ago, assumed that when unemployment goes below 5.0%, inflation would emerge. With this expectation, they proceeded on two economy-damaging measures : raising the FF rate and Quantitative Tightening (i.e. reversal of Quantitative Easing, to the tune of $50B/month).
As the Fed raised the Fed Funds rate all the way up from the appropriate 0% to the far-too-high 2.5%, the yield on the 10-year note is still 2.1%, resulting in a negative yield curve. Similarly, inflation continues to remain muted, even after $23 Trillion and counting of worldwide QE, as I have often pointed out.
Yet, the Federal Reserve STILL wanted to raise interest rates, in direct violation of their own supposed principles regarding both the yield curve and existing inflation. They were exposed as looking at only one indicator : the unemployment rate. Their actions reveal that they think that a low unemployment rate presages inflation, and no other indicator matters.
Now, for the big question : Why do they think any UE rate under 5.0% leads to inflation, and why are they getting it so wrong now?
The answer is because back in the 1950-80 period, too many people having jobs led to excess demand for materially heavy items (cars, houses, etc.). In those days, there was far too little deflationary technology to affect traditional statistics.
Today, people still buy these things, but a certain portion of their consumption (say, 2%) comprises of software. Software consumes vastly less physical matter to deploy and operate, and never 'runs out of supply', particularly now in the download/streaming era. If Netflix had 10 million new people sign up tomorrow, the cost of servicing them would be very little, and the time spent to sign up all of the new customers would also be negligible. This is not hard to understand at all, except for those who 'know so much that isn't so'. The Federal Reserve has over 600 PhDs, but if they all just cling to the same outdated models and look at just ONE indicator, having 600 PhDs is no better than having one PhD (and, in this case, worse than having zero PhDs).
But alas, the Federal Reserve, (and by extension, most PhD macroeconomists) just cannot adjust to this 21st-century economic reality, even if they cannot explain the lack of inflation, and are incurious about why this is. They are afflicted with a level of 'egghead' groupthink the likes of which exceeds what exists in any other major field today. When this happens, we are often on the brink of a major historical turning point. Analogous situations in the past were when the majority of mechanical engineers in the 1880s insisted that heavier-than-air flying machines large enough to carry even a single human were not possible, and when pre-Copernican astronomers believed the Sun revolved around the Earth.
The percentage of the total economy that is converging into high-tech (and hence high-deflation) technologies is rising, and is now up to 2.5-3.0% of total world GDP. This disconnect can only widen.
President Trump, seeing what is obvious here, has not just pressured the Federal Reserve to stop raising rates (which they were about to do in late 2018, which would have created the inverted yield curve that they supposedly consider to be troubling), but has recently said that the Fed should lower the Fed Funds rate by 1%, effectively saying that their last four rate hikes were ill-considered. He rightfully flipped the script on them.
Now, normally I would be the first to say a head of state should not pressure a central bank in any way, but in this particular case, the President is correct, and the ivory-tower is wrong. The correct outcome through the wrong channel is not ideal, but the alternative is a needless recession that damages the financial well-being of hundreds of millions of people, and destroys millions of jobs. He is right to push back on this, and anyone who cares about jobs must hope he can halt and reverse their damage-causing trajectory.
In this vein, I urge everyone who is on board with the ATOM concepts, and who wishes to avoid an entirely needless recession, to send polite emails to the Federal Reserve Board of Governors, with a request that they look at the ATOM publication and correct their outdated grasp of monetary effects from liquidity programs, and the necessity of modernizing the field of macroeconomics for the technological age. The website via which to contact them is here :
This is how a version of UBI will eventually happen. We, of course, call it something better : DUES (Direct Universal Exponential Stipend).
The question is, when least expected, such a leader will emerge (probably not in the US), to transition us to this era of new economic realities. It will certainly be someone from the tech industry (the greatest concentration of people who 'get it' regarding what I have just elaborated above). Who will be that leader? A major juncture of history is on the horizon. All roads lead to the ATOM.
Related ATOM Chapters :