Due to the heroic efforts of the Austro-friendly Post journalist, Gregory Bresiger, I was quoted in his article “Price Is Wrong”. But of course space constraints and other considerations ensure that the one’s complete response to the questions posed rarely make it past the editors, so herewith is the full text of my remarks.
The economy is experiencing a weak recovery that is being driven mainly by QE2, which is simply a euphemism for Fed money printing. The unemployment rate remains stubbornly high and job growth is far below the average job growth that we have seen during recoveries from past severe recessions such as the 1974-1975 and 1981-1982 recessions (240,000/per month versus 400,000/per month). Also the average duration of unemployment set a record high of 39 weeks earlier this year. The 45.5 percent of the unemployed who have been out of work for more than 26 weeks is also a record high. Real GDP growth is remarkably weak for a recovery from a severe recession. Yet, I believe, even this weak recovery is ultimately unsustainable, because of its inflationary origins. Signs of inflation are all around us, with headline CPI rising at an annualized rate of 3.4 year to date in May compared to 1.4 percent for 2010. Commodity prices have gone through the roof in the last year and are turning up in consumer prices for gasoline, food and so forth. Since August 2010 when the Fed announced it would implement a second round of quantitative easing, we have seen a stock market boom that is not based on substantial improvements in the fundamentals. In particular there appears to be a bubble forming in the high tech sector, where in the past year prices of tech IPOs have jumped by an average of 19 percent on the first day. There is also a bubble-like run up in the prices of farmland in the U.S. Midwest where prices have increased at double-digit rates last year. Growth in monetary aggregates such as MZM and M2 are starting to pick up again and are running at annualized rates between 5 and 7 percent.
The bottom line is that we are experiencing a false, inflation-driven recovery. When it is finally unable to ignore the signs of inflation any longer,the Fed will raise interest rates and terminate QE2 (scheduled to end this month). At that point the economy will begin to stagnate like the Japanese economy of the 1990s and we will face a protracted period of extremely slow growth and high unemployment. This will compound the problem of getting our runaway deficits under control. The alternative to this grim scenario is even worse: if the Fed persists in its inflationary policy then it will usher in galloping inflation like the U.S. experienced in the 1970s combined with high unemployment–and I do not think that price and wage controls will be too far behind.