Fed Lowering Interest Rates Will Do Little To Fix Our Ills

Years ago before the "Bernanke has all the answers" era, many of us criticized Japan for failing to own its problems. In many ways, the Fed has put America and the global economy on a path that mirrors the same unsuccessful path taken by Japan. This path avoided real reform and bailed out the very people that caused many of Japan's problems leading to "lost decades" of growth. It is difficult to reconcile the two points of view where we have people calling for more rate cuts while others claim the economy is strong and healthy. It should be noted that much of the rising GDP comes from government generated spending whether from direct purchases or fueled by money people receive from entitlement programs or government assistance. We should question how much a couple of quarter-point drops in interest rates will really make when many consumers are completely disconnected from fed rates and paying 18% APR or more on charge-cards.

When I look about my area I find a fair amount of construction but sadly it is the wrong kind. Little of it is being done by small business or independent local investors. When peeking behind the curtain we find most construction is being driven by government spending or cheap Wall Street money. The new restaurants and other commercial concerns are generally reaching into low-interest rate loans that are unavailable to the average local business. In fact, this puts small local firms at a huge disadvantage to their bigger brethren and often moves them towards closing their doors as in "going out of business." It does not help that government, by way of the United States Postal service, is busy stabbing businesses in the back by delivering Amazon packages below cost and even on Sunday as well as delivering packaged from China at a huge discount to what American companies must pay. 

This is also true in housing where few of the new apartment construction funds are generated locally and the building is no-longer based on real need but centered around the whims of huge real estate companies. Roughly 80% of new apartment construction is now for the high-end luxury market. The government holds huge responsibility for a rising share of our housing problems in low-income situations because its policies avoid dealing with the problems causing shortages such as the growing number of tenants that are irresponsible. Again the government and Wall Street money is driving this train. While retailers close and large buildings go empty across the land new buildings are being put up on speculation and bogus public-private partnerships are plowing vast sums of money into the economy on projects geared to compete with those we are already putting out of business.  

This means we are at the point where at best we should expect slow economic growth for as far as the eye can see. The mal-investment flowing from these forces tends to push out and destroy sustainable and profitable private investment. How can the independent small businessperson or concern compete against such a stacked deck? Still, this sort of false economy generally lacks staying power and dies of its own accord. Pushing on a string is a term that describes the resistance that builds up against a poorly crafted plan. The Fed simply lowering rates falls into this category and will only fuel the asset bubble we have witnessed in stocks.

It is important to remember the recent slowdown is coming at the end of a historically long bull market. The latest job numbers showed that the U.S. created 75,000 jobs in May, much weaker than estimates. In addition, the new numbers reduced some of the gains from April. To many investors, this new data confirms the economy is slowing and signals the Federal Reserve is more likely to consider reducing rates. The big question is how effective such a cut would be to the real economy which lives outside government and Wall Street.

I continue to contend that it might be wise to throw out all the current ideas on what generates inflation. A great deal is going on in the global economy and it will have a major effect on currency values going forward. The relationship of a currency's values directly tied to inflation as we know it. Years ago changes were made in the formula used to measure inflation that resulted in reducing the number. This was done in order to avoid cost-of-living adjustments for Social Security recipients and the payment of COLA adjustments in contracts. Since the measures of inflation have been skewed it is difficult to gauge just how much buying power we have lost over the years.

Those in power over the years have also tinkered with the producer price index which is used to deflate nominal GDP in order to measure real economic growth.  In order to obtain a valid estimate of how much real output has increased, it is necessary to deflate the nominal measure of GDP by removing price increases.  When inflation is underestimated, then real GDP becomes overestimated. When John Williams of Shadowstats adjusts the real GDP measure for what he calculates is a two-percentage-point understatement of annual inflation, he shows that truth that there has been very little economic growth since 2009 and the economy remains far below its pre-recession level in 2008. 

The GDP is a very poor indicator of growth. It is bloated by factors such as soaring healthcare cost, a ballooning military budget, and wasteful government spending. At some point, both investors and the public will realize that central banks can only do so much through printing money and lowering interest rates. America continues to spend nearly $3,333 more than it takes in each year per man woman and child. Such deficits were unheard of in the past and are unsustainable. Most of this money finds its way into the economy as "poorly crafted subsidies" that push data higher and create the false illusion all is well. The bottom-line is much of the world may well be looking at a version of the "Japan Syndrome" with stagflation. This translates into years of slow growth coupled with inflation or a protracted period of stagflation.