Central banks are incapable of saving economies or creating growth. The only thing a central bank can do is create inflation. These market manipulators set forth on a journey seven years ago to save the world by engaging in massive monetary manipulation, euphemistically called Quantitative Easing (QE), and a Zero interest rate policy known as (ZIRP).
As I could have told them before they started, all this easy money will fail to create viable growth. The economy, held back by massive debt levels, initially clocked in at 0.2% for the first quarter. This number is set to be revised down to negative territory due to a huge increase in the trade deficit during March. And the second half isn’t setting up to be much better either.
But the Fed was successful in re-inflating the housing and equity bubbles and also creating another new massive bubble in the bond market.
Despite tepid growth, most at the Fed have become anxious to wave the “Mission Accomplished Banner” and to move towards interest rate “normalization”. Ceremoniously, they have set goals for the economy to reach in order to begin that long journey: unemployment around 5% and inflation at 2%.
As the Fed’s luck would have it, discouraged would-be workers have dropped out of the labor force and have found it more profitable to sit home than to work, which has allowed the unemployment rate to approach the Fed’s target. The unemployment rate has finally returned to the 2008 bubble level of 5.4%. But when we look at the Employment to Population ratio it is nowhere near where it ought to be. (59.3% today, down from 63.3% prior to the Great Recession.)
Employment to Population Ratio: Source BLS
But those at the Fed stand determined to never let real data points get in the way of the narrative that printing money saved the economy. In fact, San Francisco Fed President, John Williams, was recently touting a new way to calculate GDP that he called GDP plus. It appears when you take out everything he defines as “noise”, first quarter GDP would have come in at exactly 1.7%. Perhaps a better term would be GDP minus: GDP minus all the things we wish didn’t happen in the economy this quarter.
