Mr. Bernanke, Do We Now Need More Monetary Stimulus?

Includes: SPY
by: John M. Mason

Well, the August 2012 unemployment rate has been released. Unemployment for the month remained above 8 percent, coming in at 8.1 percent.

Is this enough new information for the Federal Reserve to step in and engage in another round of monetary easing?

The Board of Governors of the Federal Reserve System has its monthly meeting scheduled for next Wednesday and Thursday, September 12 and 13.

Is this news on the unemployment rate sufficient to tilt the majority of monetary policy makers over from "wait and see" to "we need to act now"?

The financial markets seem to want this to happen.

Look at what happened on Thursday, September 6 when the President of the European Central Bank, Mario Draghi, indicated that "it [the ECB] was prepared to use its most powerful tool-its printing press-to save the euro."

Financial markets in America and Europe followed the Draghi announcement with a dramatic rise.

The Federal Reserve seems to be searching for a reason to act, knowing that it must be careful that any action it takes could be interpreted as an effort to help President Obama get re-elected.

The problem is that the unemployment rate dropped despite the disappointingly poor news that the United States added only 96,000 people to the employment ranks in August, substantially below the 125,000 that were expected.

The news of this shortfall was reinforced by two other pieces of information. First, the number of workers gaining employment in June and July were reduced from the figures that were released a month earlier. The slower "work gain" only underwrites the weakness in the labor markets.

Second, however, and more damaging, was the fact that 368,000 people left the workforce in August.

Thus, the unemployment rate fell in August from the July figure because the size of the workforce shrank.

These two pieces of information just add support to the fact that the serious problems we are facing in the labor market are of a secular nature and not just of a cyclical nature.

Fed Chairman Ben Bernanke stressed in his recent speech in Jackson Hole, Wyoming, that the unemployment problem was a cyclical problem. He spent time trying to justify his position on this issue to set the stage for possible further monetary easing on the part of the Federal Reserve.

As I stated earlier, I believe that Bernanke's position on this is wrong!

I believe that the new data on the situation in the labor market re-enforces my argument that the situation is a secular one and not just a cyclical one.

The problem here is one of under-employment and not unemployment. The Department of Labor has a number that provides more information on the situation in the labor market. It attempts to capture this idea of under-employment in a ratio labeled U6. This number includes not only the unemployed, but people that have left the work force and people who are employed part time but would like to be employed full time.

The U6 measure of underemployment jumped a full percentage point in August, and now stands at 16.2 percent of the workforce.

My own guess places under-employment at about one out of every five Americans of working age! A large part of the workforce is not trained for the jobs that employers are looking to fill.

Under-employment is not going to be reduced by just cyclical attempts to put people back to work! To reduce the under-employment, we now have we need education, re-training, and patience.

This is a problem of long-term growth. It is not a short-term cyclical problem that short-run monetary stimulus -- or fiscal policy -- can solve.

And, to continue to do what we have been doing for the past fifty years -- stimulate the economy with constant applications of credit inflation -- will just make the situation worse over time. Continued governmental fiscal and monetary policy that just inflates credit got us where we are today. It is not what will get us out of the situation we are in. Putting people back into work in "legacy" jobs just doesn't solve the unemployment problem these days.

Yet, Mr. Bernanke believes that the situation is only a cyclical one, and can be combated by more monetary ease.

The response of financial markets to the stance taken by the ECB was very positive.

And, the response to the latest U.S. employment numbers?

At the time that this article was written, the market was flat, showing little enthusiasm one way or the other.

I believe that the financial markets will be "on hold" until they see what the Fed is going to do at its meeting next week.

If the Fed moves on to more monetary easing, the stock market will rally. If the Fed stays where it is, I believe that the stock market will decline slightly.

Regardless of whether or not the Fed creates another round of monetary easing, the longer-term picture is one of rising prices. Given all the reserves that the Fed has injected into the economy, the picture of the future is one of rising inflation. In short, prices are going to increase in the future.

This will be good for the stock market in the intermediate term, but not in the longer-term. Corporations will benefit from rising prices, as revenues will rise relative to expenses in the early stage. However, they will suffer over time as productivity declines and corporations turn their attention to the benefits of financial leverage and financial risk taking.

All that another short-run injection will do is just confirm what we will have to face in the future.

And, regardless of whether or not the Fed creates another round of monetary easing, the future growth of real GDP will be roughly the same as it is now, and unemployment will remain at a level that is higher than we would like it to be.

Furthermore, any change that the Fed might bring about in the economic numbers will occur far after this Fall's presidential election is over.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.