Money printing inflates asset prices, which is a boon for large corporations and the rich. Simultaneously, asset price inflation depresses business start-up and expansion opportunities by increasing their risk. Entrepreneurs must pay more for assets, and cheaper interest rates are unable to ameliorate higher prices; hence, many new businesses are never started.
This is important because small businesses are responsible for most of the job growth in the United States. Current Fed policies, while helping the rich, are actually causing the labor recession particularly at the lower end of the market. The labor market will not improve until the money printing ceases allowing asset markets to clear at lower prices. In the meantime, Wal-Mart will continue to struggle.
“Wait a second,” you say, “this talk of a labor market recession is crazy. Initial unemployment claims dropped to 320,000 for the latest week, which is the lowest level since before the Great Recession. The mainstream media is telling me that this signifies strength in the labor market.”
Initial claims have fallen, but so is income. Wages decreased 0.5% from June to July based on lower hourly rates and fewer hours. As long as the labor market remains sick, the prospects for vast majority of Americans remain bleak. Just ask Wal-Mart.
The financial press has become increasingly Fed-centric in the past few years. Examining the chart above, you can see why this has occurred. The Fed’s actions have clearly lifted stock prices, but the Fed is not the sole market mover. Every bad day in the market since May has been blamed on the taper tantrum, but there are other factors influencing the market. S&P 500 revenues are flat at best and may even be decreasing at this juncture in the business cycle, but bulls have little reason to fret. As long as the money printing continues, the market will continue its fitful rise.
Cheap liquidity in Europe has had a similar effect in the Eurozone labor market, as the Fed’s action have had in the United States. Easy money policies have temporarily saved the bacon of the banks and sovereigns, but at the cost of astounding youth unemployment rates. Hey, at least they saved the euro.