For more than a year, the Federal Reserve ignored myriad warning signs and continued to pump money into the economy. The result was the onset of robust economic growth and increased demand, especially in the labor market, which ushered in high inflation for decades. But as the Fed raises rates belatedly, the veil falls, and financial markets with it.
Oscar Wilde’s “The Picture of Dorian Gray” offers a striking parallel to our situation. The novel’s eponymous protagonist has a portrayal that ages and decays while remaining young and vibrant. But his health is only an illusion, while his portrait—hidden from view—contains the truth.
The massive injections of liquidity by the Fed have created a mirage of economic health. Large nominal gains in corporate profits, asset values and even wages have made the economy look healthy. But after adjusting for inflation caused by excessive money creation, these economic numbers are disappointing at best and negative at worst.
This adjustment for inflation is the true picture of the economy, much like the portrait of Dorian Gray. It lays bare all the sins of the past. As evidence, in the first quarter of this year, the economy grew nominally at a robust annual rate of 6.5%, but after adjusting for inflation, it really fell by 1.4%.
As reality sets in in the financial markets, investors continue to sell off. Stocks continue to fall, with stocks experiencing the most consecutive weeks in the red since the Great Depression and recording their worst losses since the panic-driven sell-off at the start of the pandemic.
Inflation robbed consumers of their purchasing power, causing savings to be depleted, consumer debt to rise and expectations of future spending to plummet. It turns out that corporate profits won’t keep rising forever, because the sins of the Fed have finally caught up with everyone.
Creating trillions of dollars out of thin air certainly gives the economy a temporary boost. But that easy money and cheap credit is addictive with painful withdrawal symptoms, which the nation is experiencing right now as markets grapple with the true picture of the economy. This only exacerbates the boom-bust cycle rather than smoothing it out.
Since the Fed can’t actually create growth, let alone wealth, the best it can do is play the man behind the curtain, creating the chimera of money-fueled growth. instead of the real McCoy. This is precisely what we have seen for a year and a half, what one could call the economy of Dorian Gray. In its errant quest to sustain the onset of growth, the Fed has brought the real economy to the brink.
The Fed’s excuse for fueling this inflation over the past 18 months has been its “dual mandate”, under which it aims to simultaneously maintain stable prices and the amorphous goal of full employment. Flooding financial markets with liquidity for more than a year has created a seemingly robust labor market, creating such demand for labor that unfilled jobs are at a record high of 11.5 million and nominal wages are increasing rapidly.
However, like other sectors of the economy, the real labor market is not as healthy as it appears. Prices are rising faster than wages, which clearly makes workers worse off today than 18 months ago.
And as it created extraordinary amounts of money to support full employment, the Fed effectively served as the implicit financing arm of a Congress that recklessly avoided its fiscal duties and relied on the hidden tax of inflation to pay for trillions of dollars in unfunded spending.
For those who previously sounded the alarm on this inflationary incubus, it is a vain victory. There is no joy in seeing the fruit of impolitic policies that impoverish one’s fellow citizens. But the reality is that these effects have been hidden for years in a portrait out of public view.
EJ Antoni is a regional economics researcher at the Heritage Foundation’s Data Analysis Center and a senior fellow at the Committee to Unleash Prosperity. Charles Beauchamp is a professor of finance at Mississippi College.
Tribune Content Agency