Tuesday, August 22, 2006

Economic Theory at Work


You will note that now that the Fed has stopped raising interest rates, that unemployment has started creeping up and economic growth has started creeping down.

Unemployment for July 2006 was 4.8% compared to 4.6% in June 2006, 2nd Quarter growth comes in at 2.5% whereas 1st Q was 5.2% (rates annualized for both Qs). What this means is that employers are hiring less as they think that the demand for their goods wont be as great as it was a half-year ago cause prices and output arent rising as much.

See, the issue is that the Fed decreasing the rates in the first place created un-natural growth. Money supply (Fed rates) go up-and-down, the economy goes up-and-down. See the connection? If we removed the cyclical monetary policy we would remove the cyclical economy and have real natural growth instead of money-based growth. Output and jobs are real, money is not; you cant eat it and you cant sleep with it. Let the real economy be real and Human Action will survive and prosper.

Most economists think the natural rate of unemployment (eg all those who have jobs want them and those that dont are looking for better ones eg are unemployed because they want to be) is around 5% so we still arent in any kind of trouble. But anyway Workers always dreams of the best.