Real Wages Declining in the US?

The chart above is the inflation adjusted real wages index of Japan since 1990.  Since 1999 real wages have decreased 6.51 percent.

I wonder if the US real wages index could follow the Japanese trend.

Usually real wage increase is linked to higher productivity though technological inovation and investment.

Free Lunch at the Fed For One Year?

My economics professor told me that "money always seems free in time of an economic crisis."  Although it was 17 years ago, I still remember to this day.  At that time, I did not know what it meant or at least I did not realize its implications.

Known as QE2, the Federal Reserve is serving a continental buffet to fight against deflation expectation and high unemployment.  Indirectly, the fed is supporting a cheaper dollar.  They want a favorable terms of trade, higher exports to stimulate domestic growth, and a higher stock prices.  Hopefully, the cheap money will trickle down to stimulate aggregate demand to the "man on the street".

So far, domestic and international stock market indexes around the world are up.  Investors are happy to be invited to this free buffet.  However, is it really free?

Experts argue that it will drive up prices of commodities, which eventually will rears its ugly inflationary head.  Emerging market economies are operating at full potential and employment and fear of an overheating economy.  Brazil instituted capital controls and others are finding ways to do the same.

Furthermore, the German Bundesbank President called the Fed "clueless."

Hopefully, everyone donates a little to the buffet so it is not a total economic lost.

TARP: Unemployment Benefits for Wall Street?

Although TARP did stabilize the U.S. during the financial crisis, it has paved the way for some anger from middle class America who are in a debt unloading stage.  Unless we help the middle class, the economy will not recover equally and will widen the income gap.  This is bad for America...even worse for the wealthy because economic growth will not happen unless the middle class is involved!  Capital flow will slowing leave America and will be in the emerging markets.  It is happening now! The dollar is taking a pounding.

The perception is that Wall Street and lobbyist influence have become too strong; That the middle class has been left out.  That is one reason that the "tea party" movement is becoming stronger; I surmise that incumbents in the mid-term election will lose some seats.  The consequences of the tea party movement in reversing wall street influence are still undetermined.

Global Trade Imbalance

The U.S. has been experiencing a current account deficit (external imbalance) and a growing budget deficit (internal imbalance).  There are concerns that the internal imbalance is getting out of control.  One way to resolve the imbalance is the address social security and medicare costs.  Policy makers in the Obama Administration are advocating of bending the health care cost and keeping the growth of health care in line with economic growth.

Another is the current account deficit which is reducing our GDP growth.  It is estimated the trade deficit reduces 5-8 percent of the $14 trillion GDP.  It ranges between $500-$800 billion annually.

Addressing the low growth of the current economic situation, the federal reserve embarking on a monetary expansion policy of quantitative easing and a low fed funds rate.  It has expanded various loan facilities.  On the fiscal side of the equation, Keynesian style economic policy is en vogue with massive stimulus plan.

Fighting unemployment with a monetary and fiscal expansionary policies is the proper course of action except that it is inconsistent a current account deficit. The correct policy is a tightening fiscal and monetary policies to address the current account deficit.  The inconsistent policy is tolerable in the short run, however, something has to give in the long run.

Exchange rate of the US dollar has to give.  In this case, it has to be devalued in terms of another currency.

So, expect a lot of discussion in Congress this fall about the revaluation of the Chinese RMB to address the internal and external balances of the U.S. economy.

Federal Reserve: no supeman

Recent meeting at Jackson's Hole of central bankers and economists proved that they disagree on how to support economic growth.  Trichet will continue on fiscal austerity while the US is contemplating another stimulus program.

Like I stated in my previous blog, Chairman Bernanke at the Fed is running out of options.  There is very little he can do, except for controlling expectation and mentioning words of encouragement about the economy.  Policy of buying long term treasuries will have minimal effects on economic growth.  There are other dynamics that are effecting the U.S. economy like the rising influences of China and India.

Second Estimate of 2Q GDP

"Second Estimate" 2Q GDP increased at an annual rate of 1.6% from the 1Q to 2Q.  1Q GDP increased at 3.7%.

The economy is losing some steam as we are approaching the end of the fiscal and monetary stimuli.

Many Keynesian economists like Krugman and Stiglitz are advocating for a second fiscal stimulus program.  I am not sure, under the present political environment, if the program will be popular under the mid-term election this year.

Fed Summit at Jackson's Hole

Federal Reserve Chairman Ben Bernanke will give a presentation on "Economic Outlook and the Federal Reserve's Policy Response" at Jackson's Hole this Friday.

Hopefully, he will give us some clues as to the extent of the quantitative easing with respect to the balance sheet.

Again, I think the fed is at the end of using its tool box.  There is so much monetary policy can do in this economic environment with respect to the unemployment problem.  Adding more liquidity to the economy will not do much; there is not policy traction.

The labor market is weak because the skill level of the jobs available does not match the labor force of the American workers.  Essentially the jobs that once americans can do are exported to Asia at a lower cost structure.  Americans need to upgrade theirs skills which requires time.  The transitional period is where we are now under the present economic condition.