On Rhetoric, Civic life, Gender, and Cynicism

It took a littler longer than usual for the Bureau of Labor Statistics to publish its monthly jobs report since it was shutdown during the infamous government shutdown. The jobs report for September, once it was finally released on Tuesday, was disappointing for the most part. The unemployment rate feel to 7.2%, but only about 148,000 jobs were added to the economy (keep in mind that it requires around 250,000 new jobs a month to keep up with the increasing population and labor force). This wasn’t exactly unexpected, but it is still nonetheless disappointing because it further reveals sluggish economic growth. If you were watching the stock market Tuesday, you may not have known the jobs report was so depressing. Both the S&P 500 and the Dow Jones increased .57% and .49% respectively. Why did the stock market do so well despite dismal news on economic output? I’ll give you a hint: it has to do with the Fed. So then, how will the Fed’s policy change according to this news? I’ll give you another hint, it won’t.

To Wall Street investors, a poor jobs report may have been beneficial because it hinted the Fed will continue its bond-buying program. I’ve explained before how this is beneficial for investment and economic output, but I’ve decided to quickly expand on that today with one of the simplest economic graphs: the money market graph. Below is a basic money market graph that shows the quantity of money in circulation in an economy (the x-axis). The diagonal line within the graph represents the demand for money. The straight vertical lines are the amount of money supplied in the economy. In the U.S. economy, this number is largely controlled by the Federal Reserve. This graph expresses exactly what occurs each month under the Fed’s bond-buying program. The Fed dumbs money into the economy ($85 million monthly), increasing the amount of money supplied (Sm). Increasing the money supplied shifts the diagonal line rightward to Sm2. Immediately after this occurs, the demand for money has not changed, so the intersection between the amount supplied and demanded can be seen as E1 (before bond buying) and E2 (after bond buying).

As we move from E1 to E2, the price, or the cost of borrowing money (the interest rates) decreases. This is exactly why investors love the Fed’s bond-buying program. Because the amount of money supplied is increasing at a constant rate, the interest rates are being held low (demand would increase eventually, but the supply continues to be shifted rightward). This makes it cheap for investors to borrow money and put it into the stock market or, as the Fed hopes, into new business and enterprise to stimulate growth.

So long as the economy is sluggish, the Fed will continue on with its massive bond-buying program and interest rates will be low. This is largely why the stock market did so well on Tuesday despite the poor jobs report. Investors feel assured that the Fed will continue the bond-buying program and interest rates will continue to be low, and so the stock market expressed this optimism. It certainly seems odd that optimism can generate from dismal news, but indeed this is what we experienced. Pessimism is revived when we consider that so few are actually borrowing money to invest in new business and enterprise that would create jobs and expand the economy. Investments in the stock market give businesses more money to potentially do so, but they simply aren’t now, so the news is dismal yet again.