Grasping for reasons why his multiple QEs and Fed balance-sheet-bursting policies haven't spurred economic activity, Dr. Bernanke posited a new diagnosis last week in Minneapolis. "Consumers are depressed beyond reason or expectation," the New York Times paraphrased the Fed chief as saying.
Even though unemployment is high, price inflation is up, home values are down, and many people are deep in hock, Bernanke thinks the funk that average folks are in is too deep. "Households seem exceptionally cautious," Bernanke said. "Indeed, readings on consumer confidence have fallen substantially in recent months as people have become more pessimistic about both economic conditions and their own financial prospects."
Bernanke described the business sector of the economy as "more upbeat." Exporters have benefited from a weak dollar, and investment in equipment and software has increased. What the Fed chair didn't say was that since the second quarter of 2009, "Spending on equipment and software has risen 25.6 percent in the last seven quarters, while companies' aggregate spending on employees has risen only 2.2 percent," as New York Times economics reporter Catherine Rampell explained recently.
Rampell points out that the gap between hiring and capital spending is wider than any other post-recession recovery and puts her finger on the reason. "One reason hiring has been so sluggish is that equipment and software prices have been dropping quickly, while labor costs have been rising fast."
While total compensation costs have risen by more than 3 percent, equipment and software prices have fallen by more than 2 percent.
Some of the compensation increase is a hike in the cost of benefits (healthcare). However, not coincidentally, the federal minimum-wage rate was increased from $6.55 to $7.25 an hour in 2009. Also during boom times, a number of states passed laws to index their state minimum wages to an amount exceeding the federal minimum.
In his Minneapolis speech Bernanke spoke often of the economy's "restorative forces" and "natural recovery process," claiming,
As the business cycle bottoms out and confidence returns, this pent-up demand, often augmented by the effects of stimulative monetary and fiscal policies, is met through increased production and hiring.
Bernanke figures he's done the stimulating; now consumers need to put on a happy face and confidently start spending. The idea of spending less and saving more is just plain unnatural, un-American, and most importantly un-Keynesian. Binyamin Appelbaum writes,
Economic models based on historic patterns of unemployment, wages, debt and housing prices suggest that people should be spending more money. Instead, just as corporations are sitting on their money, households are holding back, too.
Why? Well, one possibility is that Americans collectively are suffering from what amounts to an economic version of post-traumatic stress disorder.
"People are on edge waiting for the other shoe to drop," John Williams, the president of the Federal Reserve Bank of San Francisco, told the Seattle Rotary Club on Wednesday. "It's hard to have a robust recovery," he said, "when Americans are so dispirited."
Besides malinvestments, booms and bubbles create widespread hubris. In a boom, when all is going well, everyone feels smart. A rising stock portfolio means we're wise. If the value of our home rises, it is due to our acumen.
Mises wrote in Human Action that booms produce impoverishment and moral ravages.
It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration. The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application, and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions. He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse.
Far from now collectively suffering from a disorder, Americans are regaining their sanity, albeit slowly and blaming others along the way. The present uncertainty has Americans acting more vigilantly. Mises explained it is uncertainty that causes people to act: "If man knew the future, he would not have to choose and would not act. He would be like an automaton, reacting to stimuli without any will of his own."
Keynesians can call Americans depressed if they wish, but people, instead of being foolishly blinded by increasing home values and stock portfolios, are simply paying more attention to their spending habits, being more frugal and careful.
The collective disorder inflicted on Americans by the Fed's monetary pumping was bubble hubris. Wikipedia explains, "Hubris often indicates a loss of contact with reality and an overestimation of one's own competence or capabilities, especially when the person exhibiting it is in a position of power."
Now, it is the hubris running through the chairman's office at the Eccles Building that has consumers and businesses alike proceeding cautiously. While the Fed chair believes he can lower interest rates to the perfect number of basis points to cause a million positive chain reactions, ultimately leading to more people's gainful employment, that just cannot be done.
"If man is not to do more harm than good in his efforts to improve the social order," Hayek said in his 1974 Nobel Prize acceptance speech,
he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible.
Profitable businesses are letting cash build up on their balance sheets because while the Fed has lowered rates, thinking that will prod business to expand and hire, few companies have dropped hurdle rates since 2008. In other words, time preference in corporate boardrooms hasn't changed. As Morgan Stanley's Caitlin Long explains, "low visibility into true cost of capital means companies face high risk of miscalculating, which could cause a mistaken investment in projects that ultimately have a negative NPV [Net Present Value]."
The NYT's Appelbaum writes that in his speeches Bernanke tries to cheer people up, saying that the American economy has a bright future. But Appelbaum adds, "There is also the possibility, however, that the national mood is a more accurate reflection of the economic reality than any of the other, sunnier statistics."
This depression will only recover naturally when the Fed chair stifles the pep talks, stops the monetary pumping, and gets out of the way.