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It's The Entrepreneur That Saves An Economy – Not The Fed

Authored by Mark St.Cyr,

Once again via a stunningly dismal monthly “jobs” report we were shown just how inept the Federal Reserve is in its ability to deliver a qualitative as well as quantitative resolution to one of its core mandates. Only if you use the “math” now prevalent (as well as rampant) within economics can one look at any part of it and say “the economy is creating jobs” without bursting out in laughter, or, busting out in tears.

Yet, just when one thinks it couldn’t get any worse, all one needs to hear is an explanation from one of its members as to try to explain such a pitiful report. The reason for so many without jobs? (I’m paraphrasing) “They just don’t want one.” I wish I were making that up, but sadly, that’s their assessment.

The participation rate hit a low not seen since the late 1970’s with a now whopping 94.6 million out of work. However, if one were to listen to the next in rotation tenured economics professor from _____________ (fill in your Ivy League of choice) you would think the jobs market was strong. After all, “We’re at 5.1% unemployment!” As if this was a number one could use in earnest.

This number itself has been so adulterated with adjustments even the Fed scuttled it’s policy weighting when they originally implied years back somewhere in the 6’s would make certain for a more hawkish monetary policies. Yet, the 6’s came – and went – and QE came, and stayed well past its “sell by date.”

The problem that’s taking place right now within the economy is exactly what you get when you take a free market economy and try to impose a command and control blanket over it: you smother it.

The Ivory Tower academics have no real understanding of what “free” actually entails when it’s expressed through the economy as a whole. The ability to build a better mouse trap, or, solve a previously unsolvable riddle all while charging a price two parties can both bear, profit by, and have satisfaction in the transaction does not, nor ever will take place within a command and control base. Ever.

Free markets allow for competition to find equilibrium as to provide and deliver a service or good someone will pay a fair price for. And yes, even for such an item such as a stock price.

Command and control fosters either the “State” to be the only provider, or, a fostered crony capitalism styled arrangement which is nothing more than another iteration of some communist system in prettier buildings wearing better suits. Harsh? Yes. Off point? Hardly. And that’s the problem.

The great capital formation experiment and enterprise known as Wall Street and its Exchanges, once the envy of the world, has now been transformed into nothing more than a rigged casino where Fed fueled “hot money” front runs orders in ways so egregious to the principal of fair play; walking into “a den of thieves” would be considered a step up.

Today the entrepreneur is being stifled. Yes, some will point to Silicon Valley and shout “But, but!” however, there too these issues of perversion against the entrepreneur are also made manifest. Unicorns are just that – fictional manifestations claiming to be real to anyone who’ll stay at arm’s length. (i.e., don’t get too close to the books or else!)

Here again, the reality of a market no longer primed and pumped via QE for their long-awaited IPO will find out the hard way their time for “cashing out” has come and went; further crushing many budding entrepreneurs hopes let alone the employees that took “stock options” in lieu of salary.

The funds or individual investors that were sold these fictional based realities (i.e., the can’t tun a net profit via GAAP yet via Non-GAAP they’re killing it!) who bought into the fictional hype will abandon and be far more than hesitant to invest in any future IPO’s let alone stocks in general.

If you think I’m exaggerating just look at Twitter™ or Alibaba™ for clues. For if you missed their original IPO not all that long ago, not too worry. You can buy in now for even less. And it’s just the beginning.

The real issue here is that some other good ideas that would, or could, help the economy foster business formation, encourage hiring and more will be left to dangle and rot on many a branch for discontent doesn’t take place in a vacuum – it happens throughout all sectors when confusion, disillusionment, as well as apathy sets in via mixed messaging from “central command.”

You can’t run or start a business when you can’t rely on what the rules or overarching policies going forward will be. (i.e., The cost of money will be whatever we decide today for tomorrow we might change it back) It wreaks havoc throughout the acutely connected fibers of business.

Businesses don’t stand alone – they depend on each other in differing sectors for supplies, transportation logistics, and so much more. Change a policy haphazardly, or signal a coming change only to not follow through sends ripples and shock-waves down a supply line with unintended as well as unforeseen consequences which can throw some businesses into free fall, and some into out right bankruptcy.

Business people know and understand this intuitively. Ivory Tower academics, intellectuals, and economists are not only clueless, it’s their wanton indignation of these facts that move their policies beyond destructive right into outright dangerous territory for any free market based economy.

The only one’s that can benefit from such a business environment are those that gorge and reward themselves via the availability current Fed. policy fosters. And the name for it is: crony capitalism.

Whether the Fed. wants to admit or not, that’s what their current policy and communication fosters and bolsters which is the antithesis of what the Fed. itself states as its primary objective; for there is no wage growth, no true job creation, no sustainable capital formations, and not stable markets.

The Fed. is killing the economy – not helping it. And as de facto proof I point to their own measurements of achievement. The markets, the labor participation rate, small business formation, wage growth, and on, and on. It’s all pathetic.

The Fed’s QE program has adulterated valuations so much it will be a wonder if we ever get back to a more normalized set of business values let alone their valuations and away from this calamity.

There are entrepreneurs along with CEO’s of companies who are quite literally chomping at the bit to try new or improved innovations – yet don’t dare for either their competitors are being kept alive via cheap money afforded them under current ZIRP policy, or worse, don’t dare hire or spend for who knows if the Fed. will raise out of the blue or announce some new program that runs anathema to basic sound monetary policies.

You don’t invest in cap-ex or hiring for the long-term if you don’t know what the rules might be tomorrow never-mind next year. Period.

If you want to see how and why the U.S. economy was the envy of the world along with the how and why everyone on the planet wanted the opportunity to come here and try for themselves. It can easily be done using this simple yet forgotten example or exercise:

Want an example of crony-capitalism, or, “State” run centrally commanded and controlled? Look no further than any communist or dictatorial country on the planet. What you’ll notice and can’t avoid is this: There are very few if not one sole business or supplier for any given service. The reason? You can’t compete with their favored access to either capital or permitting.

Want an example of a free market? Although they’re almost a relic, pick up any telephone book and look in the back where the businesses are located or, the Yellow Pages™. Look at how many differing as well as different options are available for any given service. Want your septic tank cleaned? There’s usually 10 or more options with names like “Steve’s” or “Dave’s” or Bill’s” and so forth. Need windows for your house? There’s probably 20 or more of those with assorted names. Many I’ll garner are also closer in proximity (as to your neighborhood) than you ever paid attention to previously. It goes on and on.

The issue today happens when “Steve, Dan, or Bill” can’t stay in business because “Conglomerate Septic Enterprises” is allowed to not only provide cheaper pricing afforded to it via relying on its stock narrative (i.e., we make Non-GAAP profits sparkle) rather than having to compete using fundamental business practices. (i.e., making a net profit via 1+1=2 math) “Steve, Dan, and Bill” find themselves either forced out or forced into liquidation only to be sucked up at bargain prices by the “conglomerate” which will finance the acquisition with “free money” available only to it and entities like it. And if it all hits the fan and begins rolling down the hill “Conglomerate” will either be “bailed out” or better yet, “bailed out and government-owned.”

This is just one example of why the economy is mired in quicksand. Entrepreneurs, as well as others are being stymied in what seems a relentless battle against academic theory rather than true business acumen. And the theory that an economy so large, so complex, so diverse as that of the U.S. can be fine tuned, manipulated, and more by some appointed committee that for all intents and purposes never held a position in that economy except for some academic based position is not just maddening – it’s lunacy!

The Fed needs to stop its meddling. Stop trying to add one more extension to their already over extended Rube Goldberg inspired monetary policies and get the hell out-of-the-way.

If the Fed is going to do something – do it. If you’re going to say something for clarity – say it – then stop talking. If you’re going to set and announce publicly an objective (such as hitting a specific target value like 6.1 unemployment et al) once it gets hit – do what you stated. Other than that, all the mumbo-jumbo clarifying classifiers for clarity regurgitated one Fed. speaker after another will do nothing more than increase the tension on the economies “parking brake.” Not release it.

Entrepreneurs can and will find ways as to navigate conditions and produce the much wanted as well as needed business formations that bolster a growing environment for business. However, what they won’t do is put their livelihoods on the line where bankruptcy and more can be around every business day when not only do rules change near daily – but goal posts get pulled up and moved at whim.

Adherence to timelines and narratives of an imperfect policy are sometimes far more important than tinkering and dabbling daily in some ill-fated quest for policy perfection.

The Fed keeps approaching the economy from the viewpoint of a “tinkerer.” Maybe a little more of this, or a little less of that here, or there. Maybe just an adjustment here, or there, and sooner or later it will run like a finely tuned machine. It won’t. That’s the job for the entrepreneur – not the Fed. And the more they “tinker” after every misstep or miscalculation; the more their policy and approach would make even Rube Goldberg blush for the complexity to such a straight forward task.

As I’ve stated many times it’s an open question where both sides have a legitimate argument for the Fed’s original insertion into the markets during the 2008 crisis. However, what is not an open question is their resolve to continue and pump trillions of dollars to incentivize Wall Street’s predator class to find ways of adulterating the capital formation process while forcing savers, retirees, and more to question why every-time they take out their wallet a bulls-eye or laser dot suddenly appears on it from the shadows.

The markets are beginning to show just how tall and flimsy this house of cards built on QE quicksand has grown. And the coming shifting sands have only just begun with onerous consequences for everyone involved. And this all could have been avoided in my opinion if the Fed. had relinquished its insertion into the markets back years ago and had let the markets rise and fall on their own to find its equilibrium.

Entrepreneurs and ideas thrive in that type of environment. Exactly what we so desperately need. Yet, instead, all we have is this crony styled, unicorn imagined monstrosity of all that’s unholy to true business principles.

I’ll finish with one last thought which I’ve been pounding the desk (as well as keyboard) for years to anyone that would listen. However, now I don’t think it needs to be said – it’s coming to fruition in vivid detail I’m afraid sooner as opposed to later which no one will be able to avoid.

“Markets right themselves with pain… That’s Capitalism.

 

Back room manipulation to avoid that pain only increases the severity of it down the road.”

If one cares to see just how much pain might be in the near future, all one needs to do is look at a chart of one’s favorite major index. For it’s not a pretty picture of health by any stretch of the imagination even if viewed through rose-colored glasses.

The Fed has created a playing field where now even Unicorns are going to come up lame to only limp past greener pastures on their way to IPO heaven and quite possibly – straight to the glue factory.