Why Easy Money Doesn’t Cut It—70 Years of Proof

America’s industrial economy didn’t just get up and migrate to China, Mexico and other low-cost venues because capitalism willed it. Nor did wealth massively shift to the top of the economic ladder in recent decades owing to the unbridled free market.

To the contrary, American capitalism has been deeply corrupted by bad money and the capture of the nation’s central bank by Wall Street speculators and money-shufflers. In the process, the main street economy has been severely impaired and once steadily rising middle class living standards have stagnated badly. To wit, since 1990---
  • The net worth of the top 1% (purple line) is up by $40 trillion or +800%.
  • The number of high-paying manufacturing jobs (black line) has shrunk by 5 million or -27%.
Net Worth of Top 1% Versus Manufacturing Employment, 1990 to 2023

In light of these baleful trends, RFK hit the nail on the head when he recently observed that,
“Made in America” used to mean made by the companies and middle-class workers that form the backbone of this country. But America’s industrial sector has moved abroad in search of lower costs. Today, Wall Street and the Fed run the show, printing trillions of dollars we don’t have and then speculating on the outcome. The result is that the middle class has evaporated, our economy is highly financialized, and the dollar is held afloat by America’s military might.
Yes, American industry and jobs moved abroad in search of lower costs, but what fueled that disastrous off-shoring flight was two erroneous propositions that have become axiomatic gospel at the Federal Reserve. To wit, the notions that—
  • Moderate but persistent inflation (e.g. @2%) is an economic elixir that fuels higher levels of growth, jobs and macroeconomic performance.
  • Fed suppression of interest rates enables higher domestic investment levels, thereby fostering rising wealth and living standards over time.
Both propositions are dead wrong!

Excessive, cumulative domestic inflation is why America lost its industrial base and also why the burned-out zones of Flyover America are now populated with very angry MAGA hats. At the same time, artificially cheap interest rates and ultra-low bond yields are the mother’s milk of Wall Street speculation, not a stimulant to productive investment on main street.

What has happened over the past half century, therefore, is that lagging investment in productive assets on main street has retarded productivity growth, even as the Fed’s pro-inflation policies have pushed nominal wages and other domestic production costs steadily higher. As a consequence, the difference between nominal wage growth and productivity offsets---unit labor costs--- have soared by nearly 350% (3.0% per annum) since 1971.
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