Reposting part of a previous outline by request. The repost is requested as an outcome of the latest wage rate news within the February labor report. The wage rate increase is not being highlighted, and in some reports downplayed, by media. However, the measurable matrices inside the space between two economic engines is responding according to prior outline on the new economic dimension.
First the recap of the day’s news on labor rates:
WASHINGTON DC – With the labor market near full employment, wage growth could speed up as companies are forced to raise compensation to retain employees and attract skilled workers. A proxy for take-home pay rose a solid 0.5 percent in February.
The annual wage increase is close to the 3 percent to 3.5 percent range that economists say is needed to lift inflation to the Fed’s 2 percent target. Inflation is already firming, in part as commodity prices rise.
Rising inflation, together with a tighter labor market, stock market boom and strengthening global economy, has left some economists expecting that the Fed could increase rates much faster than currently anticipated by financial markets.
The U.S. central bank lifted its benchmark overnight rate in December and has forecast three rate increases for 2017. (link)
The critical aspect within all of the media financial reports, is an expectation that the Fed will increase interest rates as a consequence of the economic data being collected. In essence the Fed doing what it traditionally does to control economic activity.
However, CTH has proposed a rather significant divergence from this thought being carried by these cause and effect principles within the Fed. In essence, the short version is: don’t expect anything the fed does to immediately impact Main Street in the same time frames as previous. The reason there will be a delay is simply because the financial economy is too far apart from the main street economy.
This is going to be slightly unnerving for financial markets and for those who are not changing their thinking. Unnerving, because action by those engaged in monetary policy will take much longer to transfer over the divide created within the past three decades. Especially the ever widening scope of the divide in the past 20 years.
Here’s the prior discussion on the predictable lag caused by this non-discussed divide. Pay attention to the outline against the backdrop of the reports released today.
—— Previously —–
Traditional economic principles have revolved around the Macro and Micro with interventionist influences driven by GDP (Gross Domestic Product, or total economic output), interest rates, inflation rates and federally controlled monetary policy designed to steer the broad economic outcomes.
Additionally, in large measure, the various data points which underline Macro principles are two dimensional. As the X-Axis goes thus, the Y-Axis responds accordingly… and so it goes…. and so it has historically gone.
Traditional monetary policy has centered upon a belief of cause and effect: (ex.1) If inflation grows, it can be reduced by rising interest rates. Or, (ex.2) as GDP shrinks, it too can be affected by decreases in interest rates to stimulate investment/production etc.
However, against the backdrop of economic Globalism -vs- economic Americanism, CTH is noting the two dimensional economic approach is no longer a relevant model. There is another economic dimension, a third dimension. An undiscovered depth or distance between the “X” and the “Y”.
I believe it is critical to understand this new dimension in order to understand Trump economic principles, and the subsequent “America-First” economy he’s building.
As the distance between the X and Y increases over time, the affect detaches – slowly and almost invisibly. I believe understanding this hidden distance perspective will reconcile many of the current economic contractions. I also predict this third dimension will soon be discovered and will be extremely consequential in the coming decade.
To understand the basic theory, allow me to introduce a visual image to assist comprehension. Think about the two economies, Wall Street (paper or false economy) and Main Street (real or traditional economy) as two parallel roads or tracks. Think of Wall Street as one train engine and Main Street as another.
The Metaphor – Several decades ago, 1980-ish, our two economic engines started out in South Florida with the Wall Street economy on I-95 the East Coast, and the Main Street economy on I-75 the West Coast. The distance between them less than 100 miles.
As each economy heads North, over time the distance between them grows. As they cross the Florida State line Wall Street’s engine (I-95) is now 200 miles from Main Street’s engine (traveling I-75).
As we have discussed – the legislative outcomes, along with the monetary policy therein, follows the economic engine carrying the greatest political influence. Our historic result is monetary policy followed the Wall Street engine.
Investments, and the bets therein, needed to expand outside of the USA. hence, globalist investing.
However, a second more consequential aspect happened simultaneously. The politicians became more valuable to the Wall Street team than the Main Street team; and Wall Street had deeper pockets because their economy was now larger.
As a consequence Wall Street started funding political candidates and asking for legislation that benefited their interests.
When Main Street was purchasing the legislative influence the outcomes were beneficial to Main Street, and by direct attachment those outcomes also benefited the average American inside the real economy.
When Wall Street began purchasing the legislative influence, the outcomes therein became beneficial to Wall Street. Those benefits are detached from improving the livelihoods of main street Americans because the benefits are “global” needs. Global financial interests, investment interests, are now the primary filter through which the DC legislative outcomes are considered.
There is a natural disconnect. (more)
Here is an example of the resulting impact as felt by consumers:
♦ TWO ECONOMIES – Time continues to pass as each economy heads North.
Economic Globalism expands. Wall Street’s false (paper) economy becomes the far greater economy. Federal fiscal policy, specifically political policy, follows and fuels the larger economy. In turn the Wall Street benefactors pay back the politicians.
Economic Nationalism shrinks. Main Street’s real (traditional) economy shrinks. Domestic manufacturing drops. Jobs are off-shored. Main Street companies try to offset the shrinking economy with increased productivity (the fuel). Wages stagnate.
Now it’s 1990 – The Wall Street economic engine (traveling I-95) reaches Northern North Carolina. However, it’s now 500 miles away from Main Street’s engine (traveling I-75). The Appalachian range rises up during the DotCom boom and is the geographic wedge further enhancing the divide (a metaphor for ‘trickle down’ fractured).
By the time the decade of 2000 arrives – Wall Street’s well fueled engine, and the accompanying DC legislative attention, influence and monetary policy, has reached Philadelphia.
However, Main Street’s engine is in Ohio (they’re now 700 miles apart) and almost out of fuel; there simply is no more productivity to squeeze.
From that moment in time, ’00, and from that geographic location, all forward travel (all economic policy under Clinton/Bush) is now only going to push the two economies further apart. I-95 now heads North East, and I-75 heads due North through Michigan. The distance between these engines is going to grow much more significantly with each passing mile/month….
However, and this is a key reference point, if you are judging their advancing progress from a globalist vessel (filled with traditional academic economists) in the mid-Atlantic, both economies (both engines) would seem to be essentially in the same place based on their latitude.
From a two-dimensional linear perspective you cannot tell the distance between them.
It is within this distance between the two economies, which grew over time, where a new economic dimension has been created and is not getting attention. It is critical to understand the detachment.
Within this three dimensional detachment you understand why Near-Zero interest rates no longer drive an expansion of the GDP. The Main Street economic engine is just too far away from policy to gain any substantive benefit.
Despite their domestic origin in NY/DC, traditional fiscal policies (over time) have focused exclusively on the Wall Street, Globalist economy. The Wall Street Economic engine was simply seen as the only economy that would survive. The Main Street engine was viewed by DC, and those who assemble the legislative priorities therein, as a dying engine, lacking fuel, and destined to be service driven only….
Within the new 3rd economic dimension, the distance between Wall Street and Main Street economic engines, you will find the data to reconcile years of odd economic detachment; AND simultaneously find a trail of evidence for future predictions.
Here’s where it gets really interesting. Understanding the distance between the real Main Street economic engine and the false Wall Street economic engine will help all of us to understand the scope of an upcoming economic lag; which, rather remarkably I would add, is a very interesting dynamic.
Think carefully about these two engines doing a turn about and beginning a rapid reverse. Federal economic policy, via Trump, now focuses on assistance to the previously down-played economic engine that drives the middle class.
GDP can, and in my opinion, will, expand quickly. However, any interest rate hikes (fiscal policy) intended to cool down that expansion -fearful of inflation- will take a long time to traverse the divide.
Additionally, inflation on durable goods will be insignificant – even as international trade agreements are renegotiated. Why? Simply because the originating nations of those products are going to go through the same type of economic detachment described above.
Those global manufacturing economies will first respond to any increases in export costs (tariffs etc.), by driving their own productivity higher as an initial offset, in the same manner American workers went through in the past two decades. The manufacturing enterprise and the financial sector remain focused on the pricing.
♦ Inflation on imported durable goods sold in America, while necessary, will ultimately be minimal during this initial period; and expand more significantly as time progresses and off-shored manufacturing finds less and less ways to be productive. Over time, durable good prices will increase – but it will come much later.
♦ Inflation on domestic consumable goods ‘may‘ indeed rise at a faster pace. However, it can be expected that U.S. wage rates will respond faster, naturally faster, than any fiscal policy because inflation on fast-turn consumable goods become re-coupled to the ability of wage rates to afford them.
The fiscal policy impact lag, caused by the distance between federal fiscal action and the domestic Main Street economy, will now work in our favor. That is, in favor of the middle-class.
Within the aforementioned distance between “X” and “Y”, a result of three decades traveled by two divergent economic engines, is our new economic dimension….
“We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment,” said the platform released by the Republican National Committee. (link)