La Jolla Bank was quite a nasty one, with the assets only apparently worth around 53.27 cents on the dollar. Quite a painful affair, as that is after the bondholders and shareholders have already been wiped out financially. Considering that the FDIC had to kick in another $1.9 billion or so to make the failed bank whole is very telling as well: the U.S. banking system is not in pretty shape.
In fact, it's in horrible shape. Over the two-plus years since the beginning of the ongoing Depression, the recoverability of banks is only 57 cents on the dollar. This means that, if the entire banking system were to be immediately liquidated, in some Keynesian nightmare come alive, the market value of all assets would see a 40% haircut or so - and that is a best-case. Of course, such a liquidation is not going to happen all at one, but it is certainly happening piecemeal, as the FDIC steadily dismantles the small-to-medium sized banks in the U.S. Such as the other three banks which the FDIC closed this week, representing only a bit over $586 million all together. We will bet dollars to doughnuts (we'll even make the doughnuts, mind you) that there are quite a few more La Jolla Banks out there, than the FDIC's closure patterns might suggest.
Be that as it may, the stress information given by our analysis of the States' shares of the total cost to the FDIC for bank closures is quite enlightening. Overall, those States which have suffered bank closures are actually not all that badly off, relative to population. The six States listed in the report (Alabama, Georgia, Nevada, California, Florida, Illinois) are really the only States which are even remotely out of line with statistical expectations - i.e. how close their share of the total cost is, to their share of the total U.S. population.
The rest, interestingly enough, are lower - at times, much lower - than the State's population would suggest. Now, that of course could be because some State banking systems are healthier than others, such as North Dakota's. However, that would suggest the United States is not in, overall, terrible shape. We would object very strongly to such an intimation, because all economic indicators we'd care to consult are showing exactly the opposite.
Unemployment has increased year-over-year in all 50 States and the District of Columbia, for example. According to the Federal Reserve, assets of nonfarm nonfinancial corporations have shrunk year-over-year by 7% in the third quarter of 2009; household and nonprofit assets fell by 5.3%; if we pretend that private entrepreneurs are meaningful anymore, nonfarm noncorporate business assets collapsed by 13.8%. Is the picture grim enough, yet, dear Reader? We don't feel we need to continue to make the point: banks are reliant upon the health of the rest of the so-called economy. That economy is taking a face-plant, ergo banks are not in good straits.
Bank closures, to summarise, should not only be accelerating, but they will be getting worse. Since that factor is not apparent in the short-term of our present data set, we suspect that the FDIC has a modus operandi which has nothing to do with safe-guarding the health of the banking system, nor protecting depositors.
Rather, it seems more plausible that the FDIC is carrying on some sort of psychological management of the U.S. public. This assertion arises from our observation that the closures which the FDIC perform appear to be planned around some calculation of weekly assets, and perhaps total estimated cost to the FDIC. We can't necessarily prove this, of course, but it is our opinion on the matter.
The end of such a psychological management, at least from the perspective of both the banking system, and the Federal Government, is to keep the Citizenry from panicking. The last thing which both the Government and banks want right now is a full-scale bank run, as that would be a very difficult thing to have in concert with the 'ongoing recovery' incantations of the press.
* * *
This week's project for us will be to integrate pre-Depression (i.e. before December of 2007) bank closure data into our analysis. Our intention is to see the changes in recoverability over the early 2000's, leading up to the Depression.
Showing posts with label unemployment. Show all posts
Showing posts with label unemployment. Show all posts
Saturday, February 20, 2010
Wednesday, July 22, 2009
Economic Stress Report
We've just gathered sufficient data to provide an update on the Economic Stress Report we introduced last month. According to our analysis method, the following States are on our watch list. We present them here in order of highest to lowest severity:
South Dakota
Ohio
Kansas
Arizona
Washington
New York
Maryland
Florida
Alabama
Connecticut
Of those States on our watch list, the following have suffered bank closures - another sign of economic stress - since December 2007:
South Dakota (1 closure)
Kansas (3 closures)
Washington (2 closures)
Maryland (1 closures)
Florida (5 closures)
With this information, we've updated our predictions from our last post:
One: the list has seen some reshuffling since our last post, but the star of the show is still South Dakota. We take this opportunity to do our happy victory dance: the State, as we predicted it would, recently suffered its first bank closure of the 2007 Depression. However, we strongly suspect that many, many more closures are in store for the State. When that will happen is anyone's guess, but we can't think of one good reason why South Dakota won't be seriously hit by both bank closures and general economic distress. Using Florida as the benchmark, South Dakota should have seen around twenty bank closures already.
Two: we still expect that Maryland is going to be hit hard by both unemployment and bank closures. Again using Florida as a benchmark, Maryland should have experienced about five bank closures. Considering the State's mere placement on our analysis, we would be very surprised indeed if at least something bad doesn't happen. The safety net of Government spending can only last so long; when both the Federal and State Governments are finally forced to curtail their spending, Maryland is going down hard and fast.
It seems we might be able to provide updates approximately monthly, but the duration might be longer or shorter, depending on how our data accumulation progresses.
South Dakota
Ohio
Kansas
Arizona
Washington
New York
Maryland
Florida
Alabama
Connecticut
Of those States on our watch list, the following have suffered bank closures - another sign of economic stress - since December 2007:
South Dakota (1 closure)
Kansas (3 closures)
Washington (2 closures)
Maryland (1 closures)
Florida (5 closures)
With this information, we've updated our predictions from our last post:
One: the list has seen some reshuffling since our last post, but the star of the show is still South Dakota. We take this opportunity to do our happy victory dance: the State, as we predicted it would, recently suffered its first bank closure of the 2007 Depression. However, we strongly suspect that many, many more closures are in store for the State. When that will happen is anyone's guess, but we can't think of one good reason why South Dakota won't be seriously hit by both bank closures and general economic distress. Using Florida as the benchmark, South Dakota should have seen around twenty bank closures already.
Two: we still expect that Maryland is going to be hit hard by both unemployment and bank closures. Again using Florida as a benchmark, Maryland should have experienced about five bank closures. Considering the State's mere placement on our analysis, we would be very surprised indeed if at least something bad doesn't happen. The safety net of Government spending can only last so long; when both the Federal and State Governments are finally forced to curtail their spending, Maryland is going down hard and fast.
It seems we might be able to provide updates approximately monthly, but the duration might be longer or shorter, depending on how our data accumulation progresses.
Tuesday, July 7, 2009
Mass Unemployment + Heavy Debts = Ruin
In the USA, household debt as a percentage of household income is at an all-time high. At the same time, for most households, income is falling - making the debts more onerous. For a significant minority, long-term unemployment or underemployment means income has collapsed and the debt burden is overwhelming - usually resulting in default and bankruptcy.
We have been reading many 'horror stories' about people who had good jobs, but lost them and were unable to replace them, and then drowned in their debts. These people are no longer at the fringes of society, but just another form of 'normal'.
We are beginning to see the human side of this Depression as a series of millions of little catastrophes. Lives that were until recently lived more or less conforming to the typical American Consumer Lifestyle: House, Car, Stuff - complete with mortgage, car loan, and credit card balances. Then income loss leads to wipe out: getting behind on bills, letting them go, and then the repo men take it all away.
It's hard to guess how many will follow this path, but we suspect about half the population. It's going to create a very different America. Luckily for the powers-that-be, most will probably just blame themselves.
We have been reading many 'horror stories' about people who had good jobs, but lost them and were unable to replace them, and then drowned in their debts. These people are no longer at the fringes of society, but just another form of 'normal'.
We are beginning to see the human side of this Depression as a series of millions of little catastrophes. Lives that were until recently lived more or less conforming to the typical American Consumer Lifestyle: House, Car, Stuff - complete with mortgage, car loan, and credit card balances. Then income loss leads to wipe out: getting behind on bills, letting them go, and then the repo men take it all away.
It's hard to guess how many will follow this path, but we suspect about half the population. It's going to create a very different America. Luckily for the powers-that-be, most will probably just blame themselves.
Wednesday, July 1, 2009
Inflation Coming Soon?
We hold up USA Today as the ultimate sign of what is not, in fact happening. If the rag says to do one thing, we know it's a bad idea; if it says that something is happening, we know it isn't. Which is, as an aside, how we expect to know the bottom of the 2007 Depression is in: USA Today will be screaming that the end is near and everyone is going to die... metaphorically speaking.
That is all a bit arch, of course, but you get the idea. As a for-profit company of popular persuasion, USA Today and other information sources have to amend what they publish in order to maintain mass appeal. The public at large does not want to read or hear especially gloomy news, which is probably why our Depression Gazette will never hit the big time. USA Today, as long as enough people feel it provides the desired style and quality of information, will continue to limp along.
Limping along, however, does not make what the company prints actually accurate. And in that vein, we present this article from USA Today, which spews some very impressive fallacies about the nature of inflation. We recommend reading the article with popcorn, as it is quite a laugh, but we'll take on some of the most egregious errors.
"If inflation does hit, it won't be this year, barring a major jump in oil prices or a drastic change in government philosophy." We wonder how oil prices cause inflation. Additionally, according to ShadowStats.com, the Federal Reserve is printing physical money (i.e. growth in the M1 Money Supply) with abandon. That trend is about as iron-clad a guarantee of inflation, at some point in the future, as one can get. Indeed, the USA Today writer himself writes "The ultimate cause of inflation is an unwarranted increase in the money supply."
"...Unemployment... [is] 9.4% now and widely expected to break above 10% this year."Again according to ShadowStats.com, unemployment is cooking at well over 20% and rising sharply. We personally expect to see 25% unemployment be a reality sometime very soon, if that level has not been hit already. That's not to say that particular non-fact is necessarily the writer's fault, though: it's an artifact of the purposefully inaccurate and under-reporting nature of Government statistics.
The best part, though, was this:
So instead, we would like to take a trip to reality for a moment and provide an example: Zimbabwe. Zimbabwe's economy has not been truly 'humming' since it was a colony of the British Crown (pre-1965). In fact, it has been in negative 'humming' since 2000 (source), and official unemployment in the nation is now a horrifying 94%. Yet this nation is experiencing an inflation rate so high it is effectively meaningless: 231 million percent annualised. It is lunacy - or perhaps misinformation - to say that inflation requires a 'humming economy' to take place. Zimbabwe is chilling proof of the total untruth of such an assertion.
These errors we've expounded upon, plus a few more, are shockingly out of character with the rest of the article, which is fairly sober and accurate. The writer seems to be going out of his way to drive home his fallacious definition of inflation, and we can only wonder why. Whatever the case, though, we take this as a sign for the contrarians: inflation this way comes. And soon.
That is all a bit arch, of course, but you get the idea. As a for-profit company of popular persuasion, USA Today and other information sources have to amend what they publish in order to maintain mass appeal. The public at large does not want to read or hear especially gloomy news, which is probably why our Depression Gazette will never hit the big time. USA Today, as long as enough people feel it provides the desired style and quality of information, will continue to limp along.
Limping along, however, does not make what the company prints actually accurate. And in that vein, we present this article from USA Today, which spews some very impressive fallacies about the nature of inflation. We recommend reading the article with popcorn, as it is quite a laugh, but we'll take on some of the most egregious errors.
"If inflation does hit, it won't be this year, barring a major jump in oil prices or a drastic change in government philosophy." We wonder how oil prices cause inflation. Additionally, according to ShadowStats.com, the Federal Reserve is printing physical money (i.e. growth in the M1 Money Supply) with abandon. That trend is about as iron-clad a guarantee of inflation, at some point in the future, as one can get. Indeed, the USA Today writer himself writes "The ultimate cause of inflation is an unwarranted increase in the money supply."
"...Unemployment... [is] 9.4% now and widely expected to break above 10% this year."Again according to ShadowStats.com, unemployment is cooking at well over 20% and rising sharply. We personally expect to see 25% unemployment be a reality sometime very soon, if that level has not been hit already. That's not to say that particular non-fact is necessarily the writer's fault, though: it's an artifact of the purposefully inaccurate and under-reporting nature of Government statistics.
The best part, though, was this:
If you're worried about inflation rearing its ugly head soon, relax... You don't get inflation in an economy that's as slack as this one... Inflation just isn't going to happen in this economy.Oh, where do we start, dear Reader? How do we assail such a monument to stupidity? To say that inflation cannot happen except in a 'humming economy' is like saying... oh gods, we don't know! Words fail us utterly!
"A lot of the worries about immediate inflation are examples of financial illiteracy," says David Wyss, chief economist for Standard & Poor's. "You won't get inflation until the economy gets back, and that's at least five years out."... To get to inflation... you need a humming economy, and the [U.S.] economy is barely breathing.
So instead, we would like to take a trip to reality for a moment and provide an example: Zimbabwe. Zimbabwe's economy has not been truly 'humming' since it was a colony of the British Crown (pre-1965). In fact, it has been in negative 'humming' since 2000 (source), and official unemployment in the nation is now a horrifying 94%. Yet this nation is experiencing an inflation rate so high it is effectively meaningless: 231 million percent annualised. It is lunacy - or perhaps misinformation - to say that inflation requires a 'humming economy' to take place. Zimbabwe is chilling proof of the total untruth of such an assertion.
These errors we've expounded upon, plus a few more, are shockingly out of character with the rest of the article, which is fairly sober and accurate. The writer seems to be going out of his way to drive home his fallacious definition of inflation, and we can only wonder why. Whatever the case, though, we take this as a sign for the contrarians: inflation this way comes. And soon.
Sunday, June 21, 2009
Introducing the Economic Stress Report
We've developed a method of measuring economic stress by State within in the United States. We believe it is fairly accurate, but it is, at the very least, not doctored or focus-group tested for maximum warm-fuzzy-feeling-ness. Our method is a secret, but it is tied to each State's percentage share of the total U.S. population.
Related to that, our depth of data is presently not sufficient for us to analyse the economic condition of some of the States in the Union. In the coming weeks we expect our data quality to improve, and concurrently our ability to analyse these States.
With that, we officially launch our Economic Stress Report. On our stress watch list are the following States, in order of most to least distressed:
South Dakota, Maryland, Arizona, Hawai'i, North Carolina, Ohio, Connecticut, Oregon, New York, Florida, and Georgia.
Our of those States, the following have suffered bank closures - another measure of stress - since December 2007: Maryland (1), North Carolina (2), Florida (5), and Georgia (11). Based on this information, we have several predictions to make:
One: unemployment in Maryland is going to "unexpectedly" spike in the coming months. Although the State is touted as having strong support from the Federal Government, and currently is experiencing unemployment below the national average, it has ranked second place in our analysis, so we suspect the Government-supported economy will begin to fail catastrophically. Additionally, more bank closures in the State should be forthcoming.
Two: numerous bank closures should be imminent in South Dakota, as it is the most distressed State in our analysis. Considering Georgia has suffered eleven closures, proportionally South Dakota should have seen over one hundred closures this far into the Depression. Why there have been no closures in South Dakota is a mystery as it is an important banking centre - especially for credit cards, but we posit that the longer there are no closures, the worse the eventual collapse of the State's banking system will be.
Three: Arizona, Hawai'i, Ohio, Connecticut, Oregon, and New York should all be seeing bank closures in the near future. Florida and North Carolina should also see additional bank failures, if Georgia is to be taken as a benchmark.
We are uncertain how rapidly we will be able to provide updates on the Stress Report. However, at present we suspect not less frequentlly than monthly. Rest assured we will keep you updated.
Related to that, our depth of data is presently not sufficient for us to analyse the economic condition of some of the States in the Union. In the coming weeks we expect our data quality to improve, and concurrently our ability to analyse these States.
With that, we officially launch our Economic Stress Report. On our stress watch list are the following States, in order of most to least distressed:
South Dakota, Maryland, Arizona, Hawai'i, North Carolina, Ohio, Connecticut, Oregon, New York, Florida, and Georgia.
Our of those States, the following have suffered bank closures - another measure of stress - since December 2007: Maryland (1), North Carolina (2), Florida (5), and Georgia (11). Based on this information, we have several predictions to make:
One: unemployment in Maryland is going to "unexpectedly" spike in the coming months. Although the State is touted as having strong support from the Federal Government, and currently is experiencing unemployment below the national average, it has ranked second place in our analysis, so we suspect the Government-supported economy will begin to fail catastrophically. Additionally, more bank closures in the State should be forthcoming.
Two: numerous bank closures should be imminent in South Dakota, as it is the most distressed State in our analysis. Considering Georgia has suffered eleven closures, proportionally South Dakota should have seen over one hundred closures this far into the Depression. Why there have been no closures in South Dakota is a mystery as it is an important banking centre - especially for credit cards, but we posit that the longer there are no closures, the worse the eventual collapse of the State's banking system will be.
Three: Arizona, Hawai'i, Ohio, Connecticut, Oregon, and New York should all be seeing bank closures in the near future. Florida and North Carolina should also see additional bank failures, if Georgia is to be taken as a benchmark.
We are uncertain how rapidly we will be able to provide updates on the Stress Report. However, at present we suspect not less frequentlly than monthly. Rest assured we will keep you updated.
Tuesday, May 19, 2009
The Herbert Hoover Award
Unlike the popular phrase would have it, History never repeats itself; rather, History will be eerily parallelled. For example, the 2007 Depression does not repeat the 1929 Depression, but it is closely related. Instead of President Herbert Hoover talking about permanent prosperity, the present has President Barack Obama talking about the work needed to bring back permanent prosperity. Close, indeed, but not an exact repeat.
In honour of that parallelism, we present the Herbert Hoover Award. This Award will be given weekly to the individual (or group) which demonstrates ignorance of History by repeating the painfully obvious mistakes of the past. Without further ado, let us now turn to this week's winner of the Herbert Hoover Award! Presenting (drum-roll):
In honour of that parallelism, we present the Herbert Hoover Award. This Award will be given weekly to the individual (or group) which demonstrates ignorance of History by repeating the painfully obvious mistakes of the past. Without further ado, let us now turn to this week's winner of the Herbert Hoover Award! Presenting (drum-roll):
Illinois Governor Patrick Quinn
In a recent speech before the City Club of Chicago, Governor Quinn said that massive budget cuts were in store for the State, unless the legislature agrees to a 50% hike in the income tax.
Congratulations, Governor Quinn. Your trophy is in the mail.
In a recent speech before the City Club of Chicago, Governor Quinn said that massive budget cuts were in store for the State, unless the legislature agrees to a 50% hike in the income tax.
"It’s no fun whatsoever to propose higher taxes on anyone, whether it’s families or business, but if we don’t do this, if we don’t repair our state and get it back in order we will regret it till kingdom come.” [source]Apparently Governor Quinn is not aware that raising taxes during a depression, a credit crisis, rising unemployment, and social discord is a very bad idea. According to these excellent graphics from iTulip, the United States is suffering from a sharply rising unemployment rate. Illinois is not immune to the effects of the Depression. We have no doubt that, if this 50% income tax hike is passed, the citizenry of the State will suffer all the worse.
Congratulations, Governor Quinn. Your trophy is in the mail.
Thursday, May 7, 2009
USPS as Canary
The official story these days is that the U.S. economy is nearing 'the bottom' of the recession. This article from Bloomberg reports the latest unemployment estimates showing that fewer people were newly unemployed in April than in March is being heralded as somehow 'good news'. This particular expert quote from the article is especially giddy (complete with typo):
The United States Postal Service reported another dismal quarter. The demise of the nation's third largest (and most ubiquitous) employer seems to be flying under the radar. The real shocker in the story is a 15% drop in volume over the last year. Rationalisations aside, the USPS is the canary in the coal mine reflecting a significant drop in economic activity.
If Americans are receiving 15% less mail, they are probably doing a lot of other things 15% less too. Eating out 15% less maybe? Kentucky Fried Chicken and Pizza Hut sales are down 14%.
“We’re seeing a very clear bottoming pattern,” said John Herrmann, chief economist at Herrmann Forecasting in Summit, New Jersey. “This holds out the possibility that the fiscal stimulus, along with consumers resuming more normal spending patters [sic], will lift the economy into positive growth in the second half.”We wonder how tens of millions of 'consumers' with vastly reduced incomes are going to find the wherewithal to be 'resuming more normal spending patterns' in just a few months time!
The United States Postal Service reported another dismal quarter. The demise of the nation's third largest (and most ubiquitous) employer seems to be flying under the radar. The real shocker in the story is a 15% drop in volume over the last year. Rationalisations aside, the USPS is the canary in the coal mine reflecting a significant drop in economic activity.
If Americans are receiving 15% less mail, they are probably doing a lot of other things 15% less too. Eating out 15% less maybe? Kentucky Fried Chicken and Pizza Hut sales are down 14%.
Monday, April 13, 2009
Too Many Obligations, Too Few Resources
Within the OECD nations, at all levels of society - from the household, to business, to government - obligations have been piling up for years: debts, pensions, social programmes - to name a few. Clearly, these obligations can only be met with continual economic growth. But what happens when anticipated growth fails to materialise?
This question is hardly academic. Virtually everyone and every institution is struggling with the fact of a less than expected actual income slamming into financial obligations. The general consensus is that this is a crisis, a mere interruption of the norm of perpetual growth. Once the crisis is passed, like a fever, economic health (a.k.a. growth) will return.
Our opinion departs from the general consensus. We expect growth to become the interruption in the general economic routine. It will become even more difficult for individuals or enterprises to amass wealth. The present uncertainty of employment and profit will continue and be normal.
In such an environment the notion of taking on any obligations is questionable. There will be an enormous cultural lag for the realisation of this however. Expect to see a lot of bad decisions to be made over the coming years: investments made with the expectation of a return to a prosperity that never comes.
Economic actors - everyone, that is - need to learn the new rules of economic life in a world turned upside down. We don't know them - no one does - but we could hazard a few guesses: you must live on half (or less) of your income; much of what comes in is not true income but a windfall and must be treated as such; never borrow money; investments must be recovered from cash flow in a very short time frame - perhaps three or four years for low-risk endeavours, perhaps one or two years for risky ones; all investments are riskier than they used to be.
At present, society is following a set of economic rules completely at variance with our guesses of the new rules. The transition to new rules will nevertheless be made, no matter how impossible it seems at the moment.
This question is hardly academic. Virtually everyone and every institution is struggling with the fact of a less than expected actual income slamming into financial obligations. The general consensus is that this is a crisis, a mere interruption of the norm of perpetual growth. Once the crisis is passed, like a fever, economic health (a.k.a. growth) will return.
Our opinion departs from the general consensus. We expect growth to become the interruption in the general economic routine. It will become even more difficult for individuals or enterprises to amass wealth. The present uncertainty of employment and profit will continue and be normal.
In such an environment the notion of taking on any obligations is questionable. There will be an enormous cultural lag for the realisation of this however. Expect to see a lot of bad decisions to be made over the coming years: investments made with the expectation of a return to a prosperity that never comes.
Economic actors - everyone, that is - need to learn the new rules of economic life in a world turned upside down. We don't know them - no one does - but we could hazard a few guesses: you must live on half (or less) of your income; much of what comes in is not true income but a windfall and must be treated as such; never borrow money; investments must be recovered from cash flow in a very short time frame - perhaps three or four years for low-risk endeavours, perhaps one or two years for risky ones; all investments are riskier than they used to be.
At present, society is following a set of economic rules completely at variance with our guesses of the new rules. The transition to new rules will nevertheless be made, no matter how impossible it seems at the moment.
Monday, March 23, 2009
Unemployment versus Contraction
We were reviewing the statistics at Shadowstats - a service that reports relatively honest economic data for the USA - and noticed a 19% unemployment rate (ouch!) and a 4% rate of GDP contraction (bad, but not that bad). Two points immediately leapt up: one, there is a fairly wide divergence; and two, this is divergence in an opposite direction from the Great Depression.
The divergence points to the chronic unemployment and underemployment that exists in the US. Even at the peak of the economy in 2000, approximately 12% of the workforce was redundant. If GDP is to contract in this Depression as much as in the Great Depression (50%), and unless there is to be 60% or more unemployment, more currently employed workers are going to have to take reduced hours or rates of pay.
The nation is faced with a highly problematic scenario. At some point in the not-too-distant future, the Federal Government will have exhausted its borrowing power to maintain welfare payments and its own operations. We have discussed in prior posts how both welfare payments and government salaries will have to be cut. We expect these to be cut through price inflation.
Many private sector organisations will be facing the task of whether to cast redundant workers into a fraying social safety net, or 'sharing the pain' by cutting hours accross the workforce. Self-employed persons will be facing involuntary 'part-time' status. Price inflation will also deliver pay cuts to the private sector.
The course the nation takes to adjust the population to lower economic output will have a decisive impact on how orderly the adjustment is. The more desperately 'turf' is defended and groups attempt to clutch onto their income, the greater the polarisation of income and the potential for social disruption. If there is a consensus to 'share the pain' - even if through inelegant methods such as inflation and higher taxes on the remaining productive elements - there is less potential for acute stife. Unfortunately, the more coercively the pain-sharing is achieved, the more long-term harm is done to the economy: inflation distorts investment decisions, and taxation inhibits productivity.
Clearly, the nation is still sufficiently affluent to handle some economic abuse - but there is a limit to how much. We are not optimistic that there is any collective will to institute a sounder basis for economic development. Alert individuals, on the other hand, will find even in a less benign environment adequate possibilities of prosperity.
The divergence points to the chronic unemployment and underemployment that exists in the US. Even at the peak of the economy in 2000, approximately 12% of the workforce was redundant. If GDP is to contract in this Depression as much as in the Great Depression (50%), and unless there is to be 60% or more unemployment, more currently employed workers are going to have to take reduced hours or rates of pay.
The nation is faced with a highly problematic scenario. At some point in the not-too-distant future, the Federal Government will have exhausted its borrowing power to maintain welfare payments and its own operations. We have discussed in prior posts how both welfare payments and government salaries will have to be cut. We expect these to be cut through price inflation.
Many private sector organisations will be facing the task of whether to cast redundant workers into a fraying social safety net, or 'sharing the pain' by cutting hours accross the workforce. Self-employed persons will be facing involuntary 'part-time' status. Price inflation will also deliver pay cuts to the private sector.
The course the nation takes to adjust the population to lower economic output will have a decisive impact on how orderly the adjustment is. The more desperately 'turf' is defended and groups attempt to clutch onto their income, the greater the polarisation of income and the potential for social disruption. If there is a consensus to 'share the pain' - even if through inelegant methods such as inflation and higher taxes on the remaining productive elements - there is less potential for acute stife. Unfortunately, the more coercively the pain-sharing is achieved, the more long-term harm is done to the economy: inflation distorts investment decisions, and taxation inhibits productivity.
Clearly, the nation is still sufficiently affluent to handle some economic abuse - but there is a limit to how much. We are not optimistic that there is any collective will to institute a sounder basis for economic development. Alert individuals, on the other hand, will find even in a less benign environment adequate possibilities of prosperity.
Wednesday, December 3, 2008
Is The Media Crying Wolf?
Since the present epoch is 'The Information Era,' and the economy is the big story of the moment, there is now abundant commentary on the "Deepening Recession." The question of whether the world may be in for a depression has now hit the mainstream.
Given the mainstream media's poor track record of appropriate attention to what is truly relevant, legitimate questions arise: "Is this recession thing just media drum-beating - a 'media event'?" Is the economy even that bad? Or are things actually much worse? Could it just be that it was a bad downturn, but now that it is getting so much press, one can figure the worst is actually over?
Our opinion is that things are actually much worse, and that the bad news will be 'spoon fed,' and not so much as a result of some sinister conspiracy as from the cycle of denial, confusion and slow recognition of conditions as they are.
The essence of the 2007 Depression, like depressions before it, is falling income - whether through pay cuts, unemployment, or lower returns on investments. Falling income sets off a vicious cycle of economic contraction as households spend and save less, tax receipts fall, and organisations invest less - further reducing what will become others' income.
An economist whom we admire, a Mr. Williams, presents a strong case that the USA has been in recession since 2000, and that government statistics to the contrary are unreliable. You may read more about this at his website. If the USA has indeed been contracting economically for the past seven years, then the apparent prosperity was most definitely a bubble. Its crashing down now is only the reality that a shrinking economy cannot support exaggerated consumption.
There is a great deal of productive capacity in the human race and its artifacts. Income is flowing from this capacity, but one must learn to live within and not beyond one's means. When this story is the top of the news, then you will know the worst is over.
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