This Especial Disaster

By David Stockman  |  September 21, 2018

Most of the people in Johnstown never saw the water coming; they only heard it; and those who lived to tell about it would for years after try to describe the sound of the thing as it rushed on them.

– David McCullough, The Johnstown Flood (1987)

The S&P 500 Index and the Dow Jones Industrial Average made new highs this week for the first time since January.

The yield on the benchmark 10-year U.S. Treasury note has been above 3% for a solid week now. That hasn’t happened since May.

And the Federal Reserve is all set to raise its key interest rate by another quarter-point next week. Odds still favor one more move this year.

All is well. All is well…

Except, all is not well.

Real wage growth ground to a halt in August – as in nichtsnada… nothing.

The year-over-year Consumer Price Index was 2.89%. Wage growth for workers came in at 2.80%.

Indeed, since December 2015, inflation has gobbled back every bit of wage gain.

You don’t get zero real wage growth in a healthy, growing economy. The very proposition defies the laws of supply and demand.

As the astute Jeff Snider recently noted, “It doesn’t matter how low the ‘unemployment rate’ goes.”

What matters is growth of wages and income. Without those things, there is no economic recovery.

Let’s take a look at that “official unemployment rate.” The Bureau of Labor Statistics calls it “U-3.”

In December 2000, the U-3 unemployment rate fell to 3.9%. That’s the last time before this summer that the jobless rate was below 4%.

The labor force participation rate back then was 67.3%. Today, the labor force participation rate is 62.7%.

As Snider also wondered, where are the missing 16.5 million workers?

Well, they’re part of the comprehensive unemployment rate. It was 34.6% at the turn of the century. Today, it’s 40.0%.

That’s not awesome, even in the abstract. It means there are 47 billion more unemployed labor hours than there were in December 2000…

Right now, that surge of unutilized labor is an especial disaster. That’s because we’re on the cusp of the Baby Boom retirement wave.

During the next 40 years, the population 65 and older will double from 50 million to 100 million. The cost of the retirement based Welfare State is fixing to explode.

Every available man-hour that can be mobilized to generate output and pay taxes will be needed to prevent U.S. fiscal accounts from collapsing.

The entire system – financial, economic, political, and social – is subject to withering disruption.

Consider the fact that the federal tax take today is about 16.5% of gross domestic product (GDP). That’s an all-time non-recession-year low.

Now, think about the fact that’ll have to rise to 20% to 25% within a decade so we have any hope of forestalling national insolvency.

The future includes “normalized” – or “higher” – interest rates and bond yields.

Corporate America blew the “recovery” in so many ways.

Rather than investing in new plant, equipment, and people, it raised balance-sheet debt by upwards of 40% to fund stock buybacks.

Meanwhile, today’s “awesome” earnings are an epic aberration. It’s the result of those buybacks and the cheap carry cost of corporate debt owing to the Fed’s foolish experiment with “ZIRP” and “QE.”

Now, it’ll be servicing far higher debt at much higher normalized interest rates.

The future also includes higher taxes.

Setting aside the drastically more intense political conflict it’ll take to get there, higher taxes will further clobber long-term profit growth.

Of course, it’ll only really be felt on Main Street.

Monetary central planning has created massive inflationary incentives to offshore high-value production and jobs. It’s also turned Corporate America’s C-suites into dens of predatory financial engineering.

This phony economy offers no reason to buy a falsified stock market.

Don’t worry, though: I’ll be here to talk you through and down from these highs.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR