In the face of ten percent unemployment Google is giving all its employees a ten percent raise. While at first this might seem to defy logic, in fact it reflects the reality that unemployment is not spread evenly throughout the labor force.
While most of the unemployed are unskilled or low skill workers, there is a sufficient shortage of highly skilled workers that Google is forced to pay more to try to combat the recruitment of its people by other high-tech companies.
What does this have to do with The Fed? Bernanke is deliberately goosing the money supply, partly in an attempt to inflate asset values, especially stocks. This is supposed to make consumers feel richer so they will spend more, creating more demand for goods and services, hence more jobs. Also, the cheaper dollar will make US goods cheaper for other countries, thus increasing exports and, again, creating more jobs.
The problem with the first part of this strategy is that much, if not most, of our jobless rate is a direct result of the real estate crash, which shows no signs of a quick recovery in spite of historically low mortgage rates. Increasing the money supply beyond the level justified by current rates of economic growth creates inflationary expectations. This causes investors to demand higher interest rates on mortgages to offset the diminished purchasing power they will suffer on the invested capital.
It is true that it may stimulate more home-buying interest for the same reason – expectation of rising prices due to inflation. The trouble there is that most people who can afford a home already have one. Home ownership rates, now near 67%, are still 2-3 percent higher than the long-term average. Trying to increase that percentage is exactly what got us into this mess in the first place. Also, appropriately, mortgage loan qualification requirements have become much tighter – no more one-hundred percent loans with no proof of income.
As for the second strategic objective, increasing exports, this will work for a while. The danger is that we risk stealing production from other nations, causing them to drive down the value of their currencies, too. The result could be a devastating currency war and world-wide recession or worse. We are doing the same thing that we are accusing the Chinese of doing, which they are.
Further, we are risking the dollars status as the reserve currency of the world. Loss of that status would greatly reduce the world demand for dollars, likely touching off a ruinous hyper-inflation here at home.
