On Saturday, after one of the worst year-opening weeks for the stock market in many years, Myles Udland at BusinessInsider.com complained that "The stock market is having a nightmare start to 2016 and it's all the Fed's fault." This sentiment is apparently widely held in the media. At NationalInterest.org on Tuesday, Christopher Whalen wrote that "the Fed created the current unstable market situation by keeping dollar interest rates too low for too long," and now "is out of step with other major central banks ... causing markets an extra degree of anxiety."
This morning, Jay Somaney at Forbes.com complained about "the foolish and self-serving move made by our Federal Reserve last month ... (of) raising rates and then continuing to yap off about 4 more rate hikes this year." In other words, the complainers really want near-zero rates, apparently in perpetuity, and cower in fear at anything resembling market-based capital allocation. This caused CNBC's Rick Santelli to warn that the U.S. is in danger of going down the ugly road Japan has travelled for two decades.
Japan is still technically known as the Land of the Rising Sun. The reality is that its economy has become the Land of the Perpetual Keynesian Malaise.
Santelli warned the media whiners who are afraid of their own shadows late this morning that if they get their way — and perhaps today's rise in U.S. markets indicates that they are getting their way — they won't like the ultimate result:
Transcript (bolds are mine):
RICK SANTELLI: I can't tell you how many different articles, interviews, have come to the point that, finally, who's to blame for all of this volatility? The Fed, for raising rates. "Unelected officials" ruining the party, taking away the punch bowl.
Well, there's something to be said for that logic, but in a slightly different way. The FOMC Committee (Federal Open Market Committee) and the notion that a small group of people should control the price of money in this country, or in any small group around the world, I think that ought to be under review.
But the issue isn't what's going on. Reality is hitting. We can't point to the Fed as responsible directly for this. The party had to end.
The Fed's responsible in one regard: Zero interest rate policy was a response to a crisis, but they kept it there long after the crisis. That's the issue. And I declare that the "age of transparency" should be dead. Because it didn't turn out that we had glasses to see what was going on. What we actually had was a television. And every time things weren't the picture they wanted us to see, they changed the channel -- whether it was employment, the rate of unemployment, it all changed.
But more important, how many times today have you heard smart guests say, "Well, 292,000 wasn't really the jobs number, when you look at this aspect, and this aspect, and the Household Survey, and temporary workers, and the holidays. It was really hardly anything."
You know who we should hear that from? The Fed. And all along we haven't heard that from the Fed. So they created their own beef stew in this instance.
But Pillar #1, in terms of deflationary issues, just think Japan, how past its prime these ideas are. In Japan, an island with virtually no resources, and they're worried about falling commodities? They want to correct that? Oh man, that's a little strange.
And Pillar #2, we've just gone over it. In terms of the employment scenario, if you're not honest about it, once you actually have to do something about what you portrayed on the employment scene, if it isn't accurate, it's of your own making.
All along The Fed, if they were focused on employment, should have been honest about the quality and true quantity of jobs.
If we are rallying because The Fed is retreating, we certainly will turn into Japan.
There is one other element at play here: Either the Fed has either been systematically deceived by the Obama administration's Bureau of Labor Statistics, or (more likely, in my view) it has gone along with the deception.
I maintain that if Census Bureau workers out in the field who compile the raw data which forms the foundation of the Household Survey were allowed to speak their minds confidentially, they would tell us that the nation's unemployment rate is far higher than the officially reported 5.0 percent. (I spoke in detail to one such person who firmly believed that in late 2014; others are welcome to contact me in strictest confidence.)
Why? It seems very likely that BLS during the Obama administration has subtly changed how it classifies those who are looking for work, and is now excluding from the workforce millions of Americans who are supposedly not looking aggressively enough.
Those who have been following BLS's monthly employment reports know that over 94 million U.S. adults are now considered to be not in the labor force. That number is 9 million higher than it was at the end of 2011, when the official unemployment rate was 8.5 percent. During those four years, the civilian workforce (people with jobs plus people who are considered unemployed) has only grown by 4 million, even though the adult population has grown by over 11 million.
There are some justifications for a larger "not in labor force" figure. Many Baby Boomers have officially retired and stopped working. Unfortunately, the disability rolls have exploded. College enrollment has proven tempting, even for people who really shouldn't be there, because of easily available student loans.
But even after weighing those factors, and even after considering the welfare system's disincentives (with 45 million Americans still on food stamps, you can't ignore that problem), it simply doesn't make sense that there are only 7.9 million Americans unemployed while tens of millions of others are supposedly sitting on their hands at home saying "Woe is me" and not genuinely looking for work.
The unemployment rate is very sensitive to small reductions in the "not in labor force" figure. If only 3 million of the 94 million Americans considered "not in the labor force" really are looking for work with a decent level of aggressiveness and should have considered part of the labor force, December's official unemployment rate would now be 6.8 percent. If that number should have been 6 million, it would be 8.5 percent:
There is one very simple justification for contending that the unemployment rate is artificially low: Wages aren't going up. Why? Because there's still a lot of slack in the labor force, and plenty of competition for most available jobs. The Fed and Janet Yellen should know this, but haven't acknowledged it, confusing market observers who, as Santelli noted, clearly understand that the employment situation isn't as rosy as the government claims it is. To be clear, this shouldn't have stopped the Fed from raising rates, but the Fed's failure to acknowledge the weakness is leading many people in the press and on the trading floors to insist that the Fed shouldn't raise them until things get better.
As to Santelli's main point, he's exactly right. If the Fed doesn't return the economy to a market-driven interest rate environment, our own malaise will continue, and we will become a super-sized version of Japan. The markets, in rising today, seem to believe that the Fed might blink. The press is encouraging the Fed to blink. Let's hope it doesn't.
Cross-posted at BizzyBlog.com.
