by David Stockman, Lew Rockwell:

Thursday was a Red Letter day for that old “you don’t say!” riposte. We are referring to the obvious response to Powell’s black and white confession to the Senate Banking Committee yesterday that more people working doesn’t cause inflation.

“The relationship between the slack in the economy or unemployment and inflation was a strong one 50 years ago … and has gone away,” Powell said Thursday during his testimony before the Senate Banking Committee. He added the strong tie between unemployment and inflation was broken at least 20 years ago and the relationship “has become weaker and weaker and weaker.”

Why, yes, it apparently has disappeared entirely per the graph below.

Since the recessionary jobs bottom in 2010, the unemployment rate (brown bars) has plunged from just under 10% to a 50-year low of 3.7% at present. Yet despite the apparent massive evacuation of labor “slack” from the US economic bathtub, real weekly earnings of prime age males (purple bars) have essentially flat-lined during the last eight years.

So you could put a stake in the so-called Phillips Curve and be done with it. But actually the story is far bigger and Powell’s confession implicates much more than merely the wage/employment equation.

To wit, it actually crushes the core tenant of Keynesian central banking. Namely, that Fed policy operates largely in a closed bathtub of domestic GDP and that by raising or lowering the water level of “demand” therein, the Eccles Building can bend domestic inflation, employment and economic growth to its will.

Self-evidently, it cannot. And the reason for that starts with Powell’s incorrect claim that the relationship between wages and employment “has gone away”.

In fact, what is implicated here is the fundamental law of supply and demand, which did not mysteriously disappear into some monetary Stranger Things realm. No, it simply migrated from the Lower 48 to a planet-wide venue.

Indeed, is it not blindingly obvious that hundreds of millions of peasants have been drained from the rice paddies and villages of Asia and herded into spanking new factories funded with the cheapest credit central bankers can print?

So of course the U.S. domestic supply/demand equation has been severed per the chart above. That’s because the China Price for globally traded goods and the India Price for globally supplied services drive the geographic allocation of production and determine the marginal wage rate in the global economy.

Stated differently, the U-3 unemployment metric is about as useless as a tit on a boar. The relevant “slack” is unutilized workers in the global labor pool, and there remains plenty of them.

Stated differently, during the last 10 years of economic recovery, rising domestic demand for production and labor has leaked out of the domestic GDP bathtub into the global economy. And were domestic wages to have risen rapidly per the old Phillips Curve equation, there would have been even more production and wages shifted offshore – given that resource allocation happens on the margin in an open global economy.

In fact, there is nothing new about this demand leakage factor. Especially since Alan Greenspan’s institution of Keynesian central banking in the 1990s, the leakage factor has been growing because the Fed has refused to allow domestic financial markets to clear in the indicated deflationary direction.

Accordingly, the cost and wage gap between domestic production and venues driven by the China Price and India Price has been steadily widening. We estimate that in nominal terms, the average US wage gap with China was $10 per hour fully loaded in the late-1980s and is upwards of $25 per today.

This growing US wage/cost gap relative to offshore production is what is holding down real US wages. Yet even relatively flat real wages trends have not been enough to halt the migration of US demand to lower wage/cost foreign venues, as is more than evident in the chart below.

The chart simply indexes US imports and final sales to domestic purchasers to the base year of 1994. What it shows is that imports (purple line) have grown nearly 300% or 5.8% per annum over the past 25 years, whereas the total pool of domestic “demand” as measured by nominal sales to domestic purchasers (essentially GDP less exports and inventory swings) has risen by 195% and just 4.5% per annum.

So a materially growing share of the domestic demand pie has gone to foreigners.

The widening gap in the chart between the two lines measures the demand leakage. It’s the powerful engine of wage suppression that remains so mysterious to our monetary central planners – that is, the destroyer of the old time domestic Phillips Curve.

Of course, the chart explains a lot more than weak wages versus purportedly strong employment. It actually explains why the very idea of Keynesian demand management of the US economy is such a destructive nonstarter.

That is, in theory the Eccles Building can goose domestic demand by means of interest rate repression, which, in turn, is supposed to cause domestic sectors to borrow more and spend more than would otherwise be the case. But in a technologically and efficient transportation enabled global economy, that enhanced “demand” doesn’t necessarily bring the water-level to the brim in the domestic GDP bathtub, thereby causing wages to rise and all available domestic labor to be absorbed.

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