Tuesday, August 10, 2010

Raising the price of each other's haircut

The Federal Reserve announced today that they will again start buying longer term Treasury bonds. This move is intended to pump money into the market to keep the supply of bonds from growing and sending the markets into a steep decline. They say that they are buying “only” ten billion a month hoping this will head off runaway deflation. The Fed is also going to keep interest at near zero for the foreseeable future. Low interest rates are starting to create a burden on senior citizens who are receiving almost nothing on their savings while receiving no cost of living adjustment on Social Security either as there is technically no inflation.

The Commerce Department says that productivity is down almost 1% overall and while the that sounds like bad news for corporations, for main street it could be good news if it’s true. This would mean that wages are up or at least there could be more hiring going on and this is reflected as more payroll for the amount of goods and services produced hence lower productivity. That is if this isn’t  just a glitch in the numbers as the Commerce Department tries to revise all the inaccurate numbers left behind by the Bush Administration.

The bad news is that manufactures inventories continue to edge up at the time of year when products should be shipped in anticipation of the fall shopping season. Indeed the dollar volume of products sold by wholesale distributors is down 0.7%.

Retail sales are off as the overall savings rate has been going up and you might assume it’s the people with disposable income that aren’t spending it, the poor don‘t have much choice. The top 5% of American income earners account for 37% of consumer outlays and the bottom 80% of earners account for just 39%. Get that? The top 5% spend almost as much as the bottom 80%. Indeed the top tier has the money with the top 10% capturing 50% of all the income in the country. That ratio is from 2007 and it likely getting worse as incomes for the working poor decline.

But the really bad news is that in an economy that is 70% consumer spending (remember we don’t make anything, we order fries with that) this new American Plutonomy (or economy of the rich) that the rich have in fact been spending their savings. Their saving rate (rich people’s) is down from 26% in 2008 to a negative 7% in the first quarter of this year and there are signs they are cutting back sharply and that‘s a problem.

If the productivity numbers are really down and income for the great unwashed masses is really going up this would offset the problem. But this is probably just a glitch in the numbers since unemployment is so high, wages continue to be driven down. It’s true some better paying jobs in the auto industry and stimulus created jobs in construction are on the increase. The emergency funding the Republicans failed to defeat in Congress will maintain 180,000 teachers as well as 180,000 police and fire department jobs but most of these people earning good pay are already currently working.

We need some good old fashioned wage inflation like Alan Greenspan spent his entire career fighting so that we aren’t dependent on the Plutonomy to provide the spending. Of course this isn’t going to work without jobs making something of value. It doesn’t really work any better to have the bottom 80% spending more on imports from China than it does having the top 2% buying more imports from China. The so-called service economy of giving each other haircuts does not make up for it in the end.   www.prairie2.com