Wednesday, December 10, 2014

Central Banks Have Failed Because They Can't Push Wages Higher

You can print all the money you want, but it will never boost wages to keep up with prices.

Central banks have been pursuing two goals for the past six years: ignite inflation and an expansion of debt that will supposedly generate "growth." Despite squandering trillions of dollars, yen, yuan and euros, central banks have failed to ignite sustainable inflation or growth.

There's nothing mysterious about their failure: you can't get "good" inflation or growth if wages are stagnant or declining.

The central banks don't bother to distinguish between "good" and "bad" inflation: any and all inflation is considered not only wonderful but essential to propping up the Ponzi scheme of debt-dependent consumption, a dynamic I described in Central Banks Create Deflation, Not Inflation.

"Good" inflation is wages rising faster than prices. When wages rise faster than consumer prices, households have more money to spend on consumption, and it's progressively easier for them to pay down debt and support additional borrowing.

"Bad" inflation is prices rising while wages stagnate. In "bad" inflation, prices keep rising as central bank money-printing devalues the currency, but wages don't rise along with prices. As a result, wages decline in real terms, i.e. purchasing power.

In Japan, where the central bank and government have struggled for years to generate price inflation as the means to "re-start growth," wages have fallen by 9% in real terms since 1997. (source:Voodoo Abenomics: Japan's Failed Comeback Plan Foreign Affairs)

I explain this in further depth in Inflation Is Not "Growth" (July 23, 2014).

These charts reflect the stagnation of American wages and household incomes.

Real household income has declined across the entire income spectrum:


Meanwhile, the purchasing power of wages is in steady decline:

The point is that lowering interest rates to zero and issuing unlimited free money for financiers to generate asset bubbles has had a negative effect on wages and household income. This is not accidental or bad luck--central bank money-printing and bond-buying have not had any positive effect on wages because they cannot possibly have any positive impact on wages.

In effect, central banks have been trying to pound nails with a handsaw: they don't have the tools to counteract the deflationary influences of labor surplus. Wages are stagnating/declining not because money isn't cheap enough or assets aren't high enough; wages are in structural decline due to three factors:

1. Global wage arbitrage: everybody is competing with everyone else globally for work that is tradable or that can be commoditized

2. Costly human labor is increasingly replaceable with software and robotics

3. The rising costs of labor overhead (social welfare taxes, healthcare, etc.) push employers' costs higher even as employees' paychecks stagnate or shrink.

These are global factors, affecting employers everywhere from the U.S. to China. No amount of liquidity or free money can reverse these structural trends.

Frantic voices can now be heard suggesting central banks issue free money directly to households. Considering central banks have stolen hundreds of billions of dollars in interest from saver-households in the past six years, there is a painful irony in these calls for free money to households, now that free money for financiers has failed so catastrophically.

free money giveaway won't fix anything; all it would do is give households the means to pay down a bit of debt or make interest payments on subprime auto loans for another month or two. Free money giveaways are not a substitute for earned income.

Debt jubilees won't work either, as all the debt that proponents want to cancel is an asset to somebody else--and often that "somebody" is a public or private pension fund or another worker's 401K retirement fund.

The game has been lost, but central bankers are still on the field, wandering around in disbelief that their unspeakable powers to issue money and credit have failed. You can print all the money you want, but it will never boost wages to keep up with prices. 








Laura Y.



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