The Dismal Jobs Picture – and the Fed's Misguided Medicine

Can we just stop sugarcoating the issue? Dispense with the happy talk? Instead, let’s cut to the chase here: This job market sucks. Plain and simple.

By this stage in a true economic recovery, the country would be creating hundreds of thousands of jobs — month in and month out. But we aren’t. Not by a long shot!

According to the Labor Department, we’ve added an average of less than 100,000 private jobs (meaning, ex-Census hiring) a month so far in 2010. The markets will get a look at the official July figures around the same time you receive this e-mail. But I doubt it’ll show much improvement.

After all, the ADP Employer Services report out Wednesday showed yet another paltry month of job creation — just 42,000 after an even more pathetic 19,000 in June. Considering we lost a whopping 8.4 million jobs during the first phase of the recession, at this pace it would take ALMOST 17 YEARS to get back to where we were before the recession!

Moreover, the outplacement firm Challenger, Gray & Christmas said companies announced roughly 41,700 layoffs in July. That was up 6 percent from June and the third month in a row of gains.

To top it all off, initial jobless claims just jumped 19,000 to 479,000. That’s a three-month high. More than 3.9 million Americans have exhausted traditional benefits and are only receiving aid because of the emergency extensions passed by Congress.

Is it any wonder then …

• That GDP rose by just 2.4 percent in the second quarter, down from 3.7 percent in the first?
• Or that the ISM Manufacturing index dropped to a seven-month low in July?
• Or that pending home sales fell another 2.6 percent in June after a 29.9 percent implosion in May?
• Or that factory orders fell 1.2 percent in June after a 1.8 percent decline in May?

Fed’s Solution? “QE2”

In so many words, the Fed has promised to push the over-drive button on the printing presses.

Confronted with a continued drought in meaningful job creation, the Federal Reserve is threatening to do the one thing it knows how to do: Crank up the printing presses!

Federal Reserve Chairman Ben Bernanke went before the House Banking Committee in late July. He blathered on for a while about the economy, warning that high unemployment, anemic housing markets, and a reduction in the pace of inventory building could cause growth to decelerate.

Then he fired off this statement:

“We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.”

Translation: Get ready, because we’re about to start printing money willy-nilly!

Next, as if that message wasn’t clear enough, St. Louis Federal Reserve Bank President James Bullard released a paper and went on a press tour to make two key points:

1. The U.S. must avoid becoming “enmeshed in a Japanese-style deflationary outcome.”
2. To make sure, the Fed should embark on another spree of “quantitative easing” — Fed jargon for creating new money out of thin air and buying assets.

In the first leg of its response to the recession (“QE1”) the Fed bought mostly mortgage securities. In the next leg (“QE2”), Bullard recommends buying mostly Treasuries.

We’ll get a more up-to-date look at Fed thinking when the next policy meeting wraps up August 10. The post-meeting statement should tell us whether Bernanke and Bullard were able to get everyone else on board with the easy money strategy.

But here’s the thing: Dump trucks and helicopters full of free money can artificially prop up ASSET prices for a short time. But …

Trillions in Fed Funny Money isn’t
Doing Squat for the Real Economy!

The first round of massive balance sheet expansion ballooned Fed holdings from around $900 billion to $2.3 trillion (a $1.4 trillion expansion). That compares to a cumulative 593,000 private jobs that the Labor Department claims we’ve created so far in 2010.

Or in other words, it took $2.36 MILLION in new Fed funny money to help create one stinking job!

Gold could be the best insurance against the Fed’s insanity.

If that doesn’t prove the abject failure of the whole “money printing to boost employment” strategy, I don’t know what does! Yet Fed officials are about to belly up to the bar again, perhaps as early as next week.

My take?

These folks just don’t get it. What the economy needs isn’t more funny money — from the Fed OR Congress. What it needs is a long period of deleveraging to work off years of stupid investment and spending — much of which was underwritten by the Fed, mind you.

But Fed officials just don’t want to let that happen. They plan to do the same thing again, somehow expecting different results. That’s the definition of insanity, and the hallmark of mad monetary scientists who’ve lost their marbles.

My advice?

Consider laying off stocks exposed to a double-dip recession in the real economy. And look into buying some insurance, such as gold, to protect your nest egg from the Fed’s latest monetary madness!

Until next time,

Mike

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