This week's biggest economic show occurs Wednesday when Fed chair Ben Bernanke steps in front of the cameras
for the Fed's first-ever news conference. The question on everyone's
mind: Will the Fed signal it's now more worried about inflation than
Much of Wall Street thinks inflation is now the biggest threat to the
US economy. As has been the case in the past, the Street is dead wrong.
The biggest threat is falling into another recession.
The most significant economic news from the first quarter of 2011 is
the decline in real wages. That's unusual in a recovery, to say the
least. But it's easily explained this time around. In order to keep the
jobs they have, millions of Americans are accepting shrinking paychecks.
If they've been fired, the only way they can land a new job is to
accept even smaller ones.
The wage squeeze is putting most households in a double bind. Before
the recession, they'd been able to pay the bills because they had two
paychecks. Now, they're likely to have one-and-a half, or just one, and
Add to this the continuing decline in the value of the biggest asset
most people own -- their homes -- and what do you get? Consumers who won't
and can't buy enough to keep the economy going. That spells recession.
Why doesn't Wall Street get it? For one thing, because lenders always
worry more about inflation than borrowers -- and, in general, the
wealthier members of a society tend to lend their money to people who
are poorer than they are.
But Wall Street's inflation fears are also being stoked by several specifics.
First are price upswings in food and energy. The Street doesn't seem
to understand that when most peoples' wages are dropping, additional
dollars they spend on groceries and at the gas pump means fewer dollars
they have left to spend in the rest of the economy. Rather than cause
inflation, this is likely to lead to more job losses.
The Street is also worried that the Fed's easy money policies are
pushing the dollar down and thereby fueling inflation -- as everything we
buy abroad becomes more expensive. But if wages are stuck in the mud
and everything we buy abroad costs more, Americans have even fewer
dollars to spend. This also spells recession, not inflation.
Finally, the Street worries that if Democrats and Republicans fail to
agree to a plan to cut the budget deficit, the credit-worthiness of the
United States as a whole will be in jeopardy -- causing interest rates
to rocket and inflation to explode. Standard & Poors, the erstwhile
credit-rating agency, has already sounded the alarm.
The Street has it backwards. Over the long term, the deficit does
have to be tackled. But not now. When job growth remains tepid, when
wages are dropping, and when the value of most households' major asset
is declining, government has to step in to maintain overall demand.
This is the worst possible time to cut public spending or reduce the money supply.
The biggest irony is that the Street is doing wonderfully well right
now, in contrast to most Americans. Corporate profits for the first
quarter of the year are way up. That's largely because corporate
payrolls are down.
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Payrolls are down because big companies have been shifting much of
their work abroad where business is booming. The Commerce Department
recently reported that over the last decade American multinationals
(essentially all large American corporations) eliminated 2.9 million
American jobs while adding 2.4 million abroad.
What the Commerce Department didn't say is the pace is picking up. In
2000, 30 percent of GE's business was overseas and 46 percent of its
employees; now 60 percent of its business is outside the U.S., as are 54
percent of its employees. Over the past five years, Oracle added twice
as many workers overseas as in the US; 63 percent of its employees now
Corporations are simultaneously finding ways to cut the pay of their
remaining U.S. workers -- not just threatening job losses if they don't
agree to the cuts, but also automating the work or sending it to
non-union states. (The Wall Street Journal's editorial page, an
unremittingly reliable barometer of Street thought, argued earlier this
week that such states offer workers the freedom to choose whether to
join a union -- in reality, the freedom to lose even more bargaining
power and be forced to accept even lower wages.)