How The Fed Monkey-Hammered The Middle Class, Part 1

RFK hit the nail on the head once again. 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.

“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 is an economic elixir that fuels higher levels of growth, jobs and macroeconomic peformance.
• Fed suppression of interest rates enables higher 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, unit labor costs (black line) have soared by nearly 350% (3.0% per annum) since 1971, but those drastically inflated wage costs didn't end up as real purchasing power for workers.

Instead, just one-third of the growth in unit labor costs translated into real hourly compensation gains (purple line). And even then, these gains translated to a very modest 0.96% per annum increase during this 53-year period.

So American workers experienced the worst of all possible worlds: Good jobs got off-shored in their millions, even as workers fortunate enough to retain their jobs ended-up on a treadmill, chasing living costs in an endless cycle of rising wages and soaring prices. Index Of Unit Labor Costs Versus Real Hourly Wages, 1971 to 2023

The gap between the two lines in the above chart was obviously caused by too much inflation and too little productivity improvement.  In turn, both of these adverse trends needs be laid at the doorstep of the Fed.

The Fed's financial repression policies have steadily reduced the net national savings rate. That means that investment in economic efficiency and productivity has taken a back seat to financial engineering and Wall Street bubbles fueled by speculators who have been flooded with abundant capital and limitless, cheap carry-trade debt.