Why Federal Reserve Policies Are Dangerous Claptrap

We promised to take up an important theme. True to our word, we will do so.

The subject is wages. And we are digging in. On the surface, we lament the lack of any forward progress in US hourly compensation over the last half century.

Deeper down, in the clay and subsoil, we wonder how it is possible that the world’s richest and most technologically advanced economy ever, operating during a 50-year period that included the invention of the Internet…the triumph of capitalism in China and Russia…and a landing on the moon — that is the most bountiful half-century in human history — failed to make its most important component parts better off.

And at the bedrock level, we find the explanation: Fed policies are dangerous claptrap.

Quackery and incompetence

Yesterday, we described and illustrated the quackery and incompetence behind the US Federal Reserve’s economic forecasts. Clearly, it never knows what is coming. Today, we show what its policies have wrought.

Let’s begin with a conclusion: Thomas Piketty is wrong about the way the world works. He sees the working man…and the investing man…competing for the material rewards of a capitalist society.

As an old-fashioned lefty, he presumes the man with overalls will always get the short end of the stick. The working man has only the time on his hands and the sweat on his brow to offer his employer. Generation after generation, he has no more time or sweat than he had in the time of Jacob and Ishmael.

Capital, on the other hand, compounds…year after year…growing larger by the day…with more and larger factories.. darker and more satanic mills.

Piketty even gives a number — on page 356 of his tome — for the rate at which capital annually compounds: 4.5%.

As Jim Grant of Grant’s Interest Rate Observer helpfully points out, this is mathematically absurd. If wealth had compounded at that rate from the time of Christ until today, we would all be bazillionaires. Instead, capital compounds…and then gets whacked by bear markets, depressions, wars, and central bank policies.

In fact, there is no competition between capital and labor. Both benefit, according to relative scarcity and abundance of what they have to offer, from each other’s contributions.

Cheating the working man

The capitalist puts up the resources. The working man turns them into something worth more — thanks to the value of his own time — than the resources he had to work with.

The richer the capitalist, the more pairs of skillful hands he needs to help him fructify his wealth. And the more the laborer has to work with — a backhoe, for example, rather than a shovel — the more new wealth he can create.

Generally, capitalists and laborers get wealthier, or poorer, together. When they don’t, something is wrong.

Read the rest of this article at The Daily Reckoning