“If dishonest money begets dishonest accounting, it also begets dishonesty and corruption in every aspect of life – from the boardrooms of the big bankers down to the lowest economic agent”
This week was spent reacting to two bits of new information. First, the inflation rate came in higher than expected, at 2.1%, and then the GDP figure for the first quarter was adjusted to one much lower than expected: minus 2.9%.
Ms Yellen dismissed the higher inflation reading as “noise”. But among the hullabaloo of lying statistics and misleading figures, it is very hard to distinguish noise from meaningful signals. Besides, we know that the Fed chief is as deaf as a post. And other inflation readings are much higher; according to the formula used by the feds in 1990, the true measure of inflation is 6%, not 2%.
At this rate, the drop in GDP is much greater than the feds admit. Nominal economic activity must be reduced by the inflation rate in order to arrive at a real rate of economic growth. Nominal growth for the first quarter was 0.8%. Had the 6% measure been used, the fall-off would have been minus 6.8% – which might have gotten investors’ attention.
But Wall Street digested the news with little discomfort. Neither gas pains nor indigestion resulted. The drop in GDP was attributed to bad weather and other ‘one off’ events. The inflation reading was simply ignored. Neither really mattered, because investors have figured out that the economy is no longer of any importance to stock prices. What matters is credit. As long as credit is available at below-inflation rates, the hustlers will use it to goose up stock prices, using buybacks, buy-outs, M&A, and other tricks.
Investment in new plant and start-up businesses, meanwhile, declines. You might think that industrious, forward-thinking entrepreneurs would use cheap credit to build new businesses. Apparently not.
Productivity declined at a 3.5% rate in the first quarter, six percentage points below the average rate of growth. That too is subject to an inflation adjustment. Had the 6% CPI figure been applied, the real rate of productivity decline would have been a catastrophic 7.5%.
The rate of new start-ups is also running about 30% below the average annual rate in the 1980s. Big, well-established players can borrow at low rates and use the money to push up their own stock prices. Start-ups, on the other hand, often can’t get money at all.
Not only does this help explain low levels of employment, it is also a major factor – according to professors Prescott and Ohanian, writing in yesterday’s Wall Street Journal – contributing to the drop in productivity. Without new businesses, new plant and equipment, new technologies, and new business models, productivity drops.
The blame for all these economic aches and pains may be laid on the Fed. Its easy-money policies have created an easy-money attitude throughout the financial world. Investors want fast, easy profits – from stock market manipulations – rather than from the long, hard work of capital investment.
Corrupt money leads to a corrupted economy.