To determine whether the Federal Reserve adds value to the United States, or not, one would need to compare statistics from before and after the Federal Reserves’ inception on December 23, 1913. Unfortunately, most data that exists for analysis is provided by the Federal Reserve itself, so data sets are disparate until 1913 when the Federal Reserve was formed, but studies have been done and data published prior to 1913.
Some stated goals of the Federal Reserve are to control inflation, unemployment, and the business cycle – so lets take a look at how they have done.
Using data from the National Bureau of Economic Research NBER, business cycle peaks and troughs have been recorded since December 1854. Looking at the data prior and post the Federal Reserve, it would appear that the frequency has slightly decreased, but the duration and volatility has increased of the business cycle.
|St. Dev. (Years)||1.55||2.64|
Unemployment would appear to have gotten worse under Fed control, with the average rate increasing, as well as the volatility of the rate, provided the pre-1913 data is legitimate.
A graph of inflation rate data for the U.S. was obtained from Wikipedia, and it shows that the Fed has eliminated deflationary periods, which would have naturally countered inflationary periods, thus evening out prices over time.
The effect of never having deflationary periods can clearly be seen by the CPI index pictured below, with the steep increase in CPI beginning in unison with the ceasing of deflationary periods from above. The CPI has increased 261% since 1979 (i.e., 68.5 to 247.6, 3.44% CAGR)
This is a double edged sword for companies, because despite their sales increasing due to inflation, their Cost of Goods Sold (COGS) will also increase as seen by the Producer Price Index (PPI). The PPI has increased 147% since 1979 (i.e., 79.2 to 195.8, 2.41% CAGR).
Another piece to this puzzle is population growth, because consumption (quantity of sales) will increase with population. The U.S. population has increased 44% since 1979 (i.e., 225mm to 323mm, 0.96% CAGR).
A companies sales growth can approximately be attributed to:
And their COGS growth approximately:
Inflation is good then for companies since it increases their prices faster than their COGS. See example below since 1979.
|Sales (CPI)x(Population)||(1+3.44%)(1+0.96%)-1 = 4.43%|
|– COGS (PPI)x(Population)||(1+2.41%)(1+0.96%)-1 = 3.39%|
|= Gross Profits||4.43%-3.39% = 1.04%|
Do wages match inflation? This would be required to make constant inflation tolerable. As can be seen with the real wages graph below, real wages have remained flat since 1979 (i.e., only 5.67% growth, from 335 to 354, 0.15% CAGR), meaning that wage growth has kept up with inflation.
It would appear that the Fed is not improving the unemployment rate or wage condition of the people, but rather guaranteeing perpetual sales and profit growth for Corporate America via continuous inflation, which is good for America and its people overall.
As seen as well with the Great Recession, the Fed purchased the toxic Mortgage Backed Securities literally by printing money (Bank Notes), which kept the U.S. and World out of a Great Depression. Their balance sheet reflects the increase in Notes and “assets“, which will eventually have to unwind. This will add recessionary headwind to the economy, but they can hopefully unwind this in a controlled fashion that will not destabilize the economy.
At the time of this post we are now 8.6 years into the recovery since the 2007-2009 recession, with the typical cycle only lasting 5.2 years, so we are overdue for a correction (i.e., another recession). The dot.com bubble extended the recovery cycle which finally crashed in 2001 after a 9-year run, followed by the real estate bubble that extended the next business cycle to 10.7 years, until the mortgage backed securities and credit default swaps crashed in 2007. This latest expansionary cycle is growing dangerously long, and will probably result in another very large and long recession, which has been the trend of the last two recessions.
The spreadsheet used for the business cycles and unemployment can be downloaded here.
A PDF of this post can be downloaded here.
©2018 Ben Etzkorn