The job market recovery fared even worse than expected in March. This is bad news for job hunters, but it’s equally bad for your savings, since continued monetary stimulus might lead to runaway inflation.
When the unemployment rate declines, even by a little bit, it should be good news. But when it declines because people are leaving the workforce in record numbers, it’s not.
The U.S. Bureau of Labor Statistics reported that the unemployment rate is now 7.6%, down from 7.7%. But this 0.1% drop is due to 663,000 people leaving the labor force in March. A record 90 million Americans are no longer even looking for work. The labor force participation shrank to just 63.3% – its lowest level since 1979.
Those no longer participating, of course, include retiring baby boomers. While it’s a great sign that these folks are finally comfortable enough to retire, they are also switching from funding entitlement programs to using them. Expect added strains on Medicare and Social Security soon as the ratio of active workers to retirees shrinks.
Fewer people looking for jobs at least reduces the competition for the meager number of new jobs. The dismal unemployment numbers also all but guarantee that the Federal Reserve Board’s quantitative easing program continues, putting us in danger of runaway inflation. With QE, the Fed buys bonds in a bid to pump money into the economy and to keep down interest rates, because the purchases pump up bond prices, which move inverse to yields.
The Fed says that QE won’t end until the unemployment rate is down to 6.5%, which should be a modest goal, since it was between 4% and 5% for years until the Great Recession began in 2007. But three rounds of easing plus a similar maneuver called Operation Twist had little affect on the unemployment rate. And yet the Fed plays this dangerous game, risking inflation just to inflate stock prices.
Failure to halt quantitative easing can eventually result in higher inflation, and could even lead to hyperinflation. QE continues because all of that bond buying is indeed keeping interest rates low and allowing Congress to continue spending, adding about $1 trillion or so to the deficit each year.
“Our debt levels have grown so high that the only politically acceptable way to deal with them is to inflate the currency,” according to Jeff Clark of Casey Research. “Politicians and central bankers have no incentive to stop, and thus will continue until disastrous price inflation emerges. Just because it hasn’t occurred yet doesn’t mean it won’t.”
“Other political solutions simply aren’t realistic,” Clark writes. “There is no amount of politically acceptable increase in tax revenue or austerity measures that can meet existing and future obligations. Printing money is the only viable solution.”
At Least We’re Not Japan
Meanwhile in Japan, where government spending and bond buying have an even more dramatically dismal impact, the country is committing financial hara-kiri.
Japan’s central bank just got a new boss, Haruhiko Kuroda. He is one of the least inflation-averse central bankers in the world. And that is why the government tapped him for the job. Japan suffered from deflation for decades. This is anathema to the country’s exporters. Every time the yen rises against the dollar, for instance, their cars are less competitive in the U.S.
The promise of more inflation is great for Japan Inc., and Japanese stocks rallied as the Bank of Japan started its asset-purchases to fight deflation. But inflation is not so great for Japanese who struggle to save, only to see their yen plunge in value in the future. Their electric bills are already higher as they rely on imported fossil fuels to make up for the nation’s retreat from nuclear power. Since energy commodities are priced in dollars, electric bills are going to rise even higher as the yen weakens.
Even as the Japanese monetary stimulus begins, it looks like the BOJ has little control over the huge swings in bond yields. The Fed should take heed.
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Brenda P. Wenning is president of Wenning Investments LLC in Newton, Mass.
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