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The developed
world's central banks are now foolishly preparing for a full assault on their
respective currencies in an attempt to lower unemployment rates. Spurring
these central bankers into action is persistently anemic markets and
employment data, which they believe can be rectified by creating inflation.
U.S. jobs
data showed that the Non-farm payroll report for July produced 163k jobs.
That sounds ok at first glance. However, the Household Survey conflicted with
the Establishment Survey, in that it concluded 195k net individuals actually
lost their jobs last month; and that the unemployment rate ticked higher to
8.3%. Americans continue to leave the workforce--150k left last month--while
our unemployment rate has now been above 8% for the last 41 months. That
stubbornly high and rising unemployment rate will likely cause Mr. Bernanke
to announce QE III in September.
Taking a look
over in recession-ravaged Europe, the unemployment rate in Spain rose to
24.6% in the second quarter of 2012, which was an all-time high since records
were kept starting in 1976. That has already caused Mr. Draghi
to promise an unprecedented and unlimited bond buying scheme that will
necessitate hundreds of billions in freshly printed Euros--just for starters.
Adding to the
fears of weak growth and increased joblessness are the depressed stock
markets around the globe. The Shanghai Composite Index is down 13% in the
last 3 months. The Nikkei Dow has shed 15% in the last 4 months. And Spain's
IBEX has plunged 21% in just 5 months.
So Bernanke
and Draghi have threatened to unload a massive debt
monetization and inflation strategy to get people back to work. That all
sounds great and wonderful, except the total disregard for a currency's
purchasing power is one of the reasons behind those long unemployment lines.
If one
doesn't know their history, you might be duped into believing money printing
has a chance to reduce unemployment. In fact, all central bankers need to do
is open their eyes and see what is going on around them to understand their
folly.
Spain's
unemployment rate, which has soared from 9% in 2008, to just below 25% today,
hasn't stopped inflation from rising. Spanish inflation rose 2.2% YOY in
July, and that was up from 1.8% in the month prior. That's not runaway
inflation by any means. However, it is certainly not deflation either.
According to the philosophy of today's central bankers, having one quarter of
your workforce in perpetual siesta should bring about massive deflation. Which, of course, must be fought with the full force of the
printing press. But all that accomplishes is to bring rising prices
along with the misery of being unemployed. The saddest part is that the ECB
launched their LTROs in December 2011 and March 2012. Therefore, the full
inflationary impact from these programs is only just beginning to be
realized.
The history
of the U.S. shows the same results. Our inflation rate reached its apex in
1980 at 13.5%. According to those who place too much faith in counterfeiting,
that should have brought with it full employment. But the unemployment rate
was a lofty 7.2% at that time and reached 10.2% within the next two years.
The truth is
that destroying the purchasing power of your currency serves to increase the
unemployment rate. That's because it erodes the impetus to save and invest,
robs the middle class of its standard of living and leaves the economy in
ruins. Economic growth comes from stable interest rates, low inflation and a
sound currency. Persistent money printing erodes all of the basic principles
of a strong Economy.
What you
eventually end up with is a chronically weak currency, intractable inflation,
onerous tax rates, a sovereign debt crisis and a depressionary
economy.
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