Chart Of The Week: They Really Don't Know What They Are Doing Version

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Given it is payroll Friday, it has to be a chart related to the futility of focusing on the headline number. There is any number of ways with which to accomplish this, but it serves well to highlight the relationship already presented in my view of this specific view of the payroll report. Economists often claim that the participation problem isn't really a problem because of demographics, and when they don't make the claim they just ignore it altogether.

In August 2014, Janet Yellen spoke about the challenges this unique labor environment would present as the FOMC contemplated "full employment" as a real possibility.

Estimates of slack necessitate difficult judgments about the magnitudes of the cyclical and structural influences affecting labor market variables, including labor force participation, the extent of part-time employment for economic reasons, and labor market flows, such as the pace of hires and quits. A considerable body of research suggests that the behavior of these and other labor market variables has changed since the Great Recession. Along with cyclical influences, significant structural factors have affected the labor market, including the aging of the workforce and other demographic trends, possible changes in the underlying degree of dynamism in the labor market, and the phenomenon of "polarization"-that is, the reduction in the relative number of middle-skill jobs.

She adds nothing about the huge, yawning overall lack of recovery, just hints at why it isn't the Fed's fault that the recovery when it does get to full might not be as full as in the past.

In a greater sense, the issue isn't recovery at all - it is depression. Using that word immediately conjures defensiveness, particularly since this supposedly is and has been the "best jobs market in decades." The two are not mutually exclusive (setting aside an overwhelming amount of evidence that it has not, actually, been the "best job market in decades"), as we saw in the middle 1930's. The word depression itself is misunderstood as if it means continuous contraction at a rate greater than a typical recession.

If recession as a normal and healthy part of the business cycle is a temporary deviation, a depression is a more than temporary deviation that lingers for a long time. And because it remains for so long it creates a number of structural and economic problems that are not related to recession or the business cycle. Long-term unemployment, for example, can be a permanent drag on economic efficiency as skills erode and it gets harder for those out of work to rejoin the labor force (inflexibility of the labor pool). There are also financial and monetary considerations along these lines, including the anchoring of inflation expectations in ways that are ultimately destructive.

The FOMC will vehemently deny that long-term inflation expectations have even changed, but there is a great deal of obvious disingenuousness to their claim (picking only surveys of "professional forecasters" who get their forecasts either from the Fed, indirectly, or the same models that the Fed uses). The UST market and its yield curve would beg to differ on this score (as would market-based inflation forwards) and its track record in economic terms is in a separate league from either the FOMC or "professional forecasters."

A great many people, including many "experts" and certainly all policymakers, still do not recognize the difference. As I wrote earlier Friday:

But as the lack of recovery and further monetary policy failures all over the world have proved, the Great Recession was never a recession. It was a test of monetary knowledge and proficiency, and unfortunately for the world economy and all its inhabitants the Federal Reserve, the one outfit charged by superseding law in the Federal Reserve Act of 1913 with safeguarding the dollar, had by June 2000 defaulted on all competencies to and about it.

The big, overriding problem for economists and policymakers (redundant) is that they stopped caring about money. The point of my column was that legally they were once forced to, but as elements of Humphrey-Hawkins expired in 2000 the Fed threw up their hands figuring it was no longer a useful area of study - and not because they had figured it all out, but rather because it was far too complicated even by then! That led the Fed, coupled with mistaking the dot-com bubble for a new level of prosperity through higher long run productivity, to completely abandon competency in money at that start of the 21st century. It has been all downhill since.

That is exactly how Alan Greenspan rationalized it in June 2000:

This is not to say that money is not relevant for the economy. For a central bank to say money is irrelevant is the deepest form of sin that such an institution can commit.

The problem is that we cannot extract from our statistical database what is true money conceptually, either in the transactions mode or the store-of-value mode. One of the reasons, obviously, is that the proliferation of products has been so extraordinary that the true underlying mix of money in our money and near money data is continuously changing. As a consequence, while of necessity it must be the case at the end of the day that inflation has to be a monetary phenomenon, a decision to base policy on measures of money presupposes that we can locate money. And that has become an increasingly dubious proposition.

Nobody should ever presuppose the Fed can locate money anymore because it is obvious that they haven't been able to and still can't, even though legally they are bound to do so. None other than Alan Greenspan outright admitted it at the very moment it would start to truly matter. To cover up what was essentially the most disastrous policy choice of the past eighty years, they now have no choice but to defend the indefensible; to claim in whatever small ways (like headline payroll numbers) that the recovery is awesome and the 15 million or so "missing" workers just don't make any difference when there is absolutely no doubt that they do.

The world has had a money problem for a very long time and it is nothing like what the vast majority of people, including all the "experts" and policymakers, think.

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