Recovery!

The 0.2% decline in U3 unemployment isn’t necessarily the good thing it is commonly assumed to be:

Mara Proctor used to design limestone hearths and columns for luxury homes near Kansas City, drawing on her college education and six years of training. These days, she’s leading customers around a store that sells sculptured snowmen and Santa figurines. It isn’t by choice. Until a few weeks ago, Proctor was among the record 5.9 million Americans who have been jobless for at least six months. Now she belongs to a subset of that group: Out-of-work professionals and managers, engineers and teachers who have turned, in desperation, to holiday-season jobs as sales clerks.

Retailers report a surge in applications this year from professionals who had never applied for such jobs before.

As Pat Buchanan points out, it is insane to import 1.5 million immigrants when tens of millions of citizens are already out of work. Or rather, it is insane to do so if you have any interest at all in the well-being of the citizenry. On the other hand, since education is deemed to be so important, it’s obviously beneficial to the buyers of sculptured snowmen to have such a highly trained saleswoman at their service.

This is also the result of the higher education bubble. I don’t remember who said it, but he was correct in pointing out that expanding higher education to the masses doesn’t mean that you won’t have sales clerks any more, it simply means that you’ll have sales clerks with PhDs. As always, it’s about the supply and demand, and impoverished immigrants will always win out over middle class Americans for the simple reason that they will accept a lower wage. One thing the Ricardians always fail to recognize is that the benefit to the overall economic system from free trade does NOT accrue to those parties who were previously at an overwhelming advantage.


Sander’s sensible move

This is one of the few times you will ever see me speak well of a socialist politician’s actions:

U.S. Senator Bernie Sanders said on Wednesday that he was placing a hold on Ben Bernanke’s nomination for a second term as Federal Reserve chairman, a move that could slow the confirmation process. If the hold is not withdrawn, the move by Sanders, an independent from Vermont, means that Senate leaders will not be able to bring up the nomination for a vote by unanimous consent. Instead, they may need to garner 60 votes in order to consider the nomination.

There is no question that Bernanke should not be reconfirmed. He is a charlatan cut from precisely the same cloth as the fraudulent Climategate “scientists”, who are claiming to be saving the world from global warming in much the same way that Bernanke claims to have saved the USA from a second Great Depression. He didn’t, he hasn’t, he has only made the situation much worse through his bankers-first policies of extend and pretend.

Mike Shedlock presents a dialogue that is a great case against Bernanke:

Bernanke: For many Americans, the financial crisis, and the recession it spawned, have been devastating — jobs, homes, savings lost. Understandably, many people are calling for change.

Mish: Ben, the reason people are calling for a change is that you and the Fed wrecked the economy. You did not see a housing bubble, nor did you foresee a recession. I would also like to point out your selective memory loss about your role in bailouts.

Bernanke: Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

Mish: No Ben, we need a system that works differently. You have proven beyond a shadow of a doubt that you and the Fed are incompetent and cannot be trusted. Ben, here is a compilation of your own statements made from 2005-2007 proving you have no idea what you are talking about.

Understand that the Federal Reserve system is going to collapse at some point regardless of what action is taken by the Congress. But Fed’s end will be much less catastrophic to the U.S. economy if it is intentionally and deliberately shut down as happened with each of the three previous American central banks than if it is left alone to collapse under the weight of its horrific economic contradictions. Denying a second term to Bernanke would be small first step towards winding down the current monetary system and replacing it with something more stable.

And when even something as flimsy and rife for abuse as a pure paper government currency is more stable, you know the present system can’t possibly survive.


WND column

The Dire Sign of Dubai

In 2007, the international financial elite knew very well that there were serious problems with the world’s largest banks. Perfectly good loans were being called, long-standing corporate relationships were being cast aside for short-term benefit and there was a palpable perception of something wicked on its way. While news of the so-called credit crunch was duly reported by all the major newspapers, few outside the financial world had any idea that consequences such as the meltdown of 2008 were rapidly approaching.

But if you knew what to look for, it was fairly obvious that something big and ugly was developing, which was why I wrote that “the United States was fast approaching an interesting juncture” in my WND column published March 24, 2008. In a similar manner, what appears to be the minor matter of a Dubai-based corporation requesting a six-month moratorium on its debt payments looks very much like a warning that the next stage in the global financial crisis will be upon us soon.

UPDATE – Karl Denninger notes the irony of an Arab government being more free market-oriented than the USA:

Dubai’s government said it hasn’t guaranteed the debt of Dubai World, the state-controlled holding company struggling with $59 billion in liabilities, and that creditors must help it restructure.

“The company received financing based on its project schedule, not a government guarantee,” Abdulrahman Al Saleh, director general of the emirate’s Department of Finance, said in an interview with Dubai TV, when asked whether the government was backing the debt. “Lenders should bear part of the responsibility.”


Dubai and debt-deleveraging

I expect the fears of a Dubai World default to be the first indication of many debt-deflationary shocks to come. The reason for what would appear to be a big overreaction to what is a relatively small problem is that everyone who is anyone in the financial world is thinking that if the legendary sovereign fund of Dubai can’t afford to service its debts, then who possibly can?

On Wednesday, Dubai World, the government investment company behind some of the emirate’s most ambitious projects, said it was seeking to delay repayment on a tranche of its debt.

The company has $60bn (£35.9bn) of liabilities from its various companies including Nakheel, the property firm behind the Palm Jumeirah, the world’s biggest artificial island, and the Nakheel Tower, the world’s tallest building at 1km high. It also owns DP World, the ports operator that bought P&O Ferries. Nakheel is due to make a $3.52bn Islamic bond repayment, plus charges, on December 14. The company also unveiled a restructuring programme, to be headed by Aidan Birkett, Deloitte’s managing partner for corporate finance.

Traders feared that the request for a six-month standstill was a sign that the Dubai Government was struggling with its other debts – and that the full impact of the financial crisis globally may not yet be over.

As I wrote at the beginning of RGD, it is not over. It has only begun. It may be worthwhile to remember that Austria’s Creditanstalt bank didn’t declare bankruptcy until May 1931, 19 months after Black Tuesday. It has been less than 14 months since the U.S. Congress created the Office of Financial Stability in order to establish the Troubled Asset Relief Program.


“Mandatory reading”

Steveo reviews RGD on Amazon:

Nagging doubts about the economy? You can either trust those same bought & paid for priestly economists that the government trots out every day or you can read Vox Day’s book, “The Return of the Great Depression” and find out what’s in store.

On a tangential note, the FDIC is now reporting what I was saying six months ago. The DIF is insolvent and the reserve ratio is officially negative. Based on their third-quarter figures, actual losses are still exceeding estimated losses, but by a ratio closer to 1.5 than the 1.95 reported in 2008 and the first quarter of 2009. I suspect the reason for this declining ratio is not due to the assets of the banks that failed in the third quarter being in better shape, but because the recognition of actual losses to the FDIC are being delayed through the increasing use of loss-share agreements with the banks taking over the assets of the failed banks.


Am I that good?

Or are they just that predictable?

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.8 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent. The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 3.5 percent (see “Revisions” on page 3).

You may recall my warning that the 3.5 percent figure in the Advance report would be revised downward on the day it was published. Now, according to the BEA’s newly revised estimate, only 1.3 percent of GDP growth was NOT provided by Cash for Clunkers. So, if you consider the even larger stimulus provided by the $8k housing credit, which is not separately accounted for, it is quite obvious that economic activity is still contracting even if the GDP statistic is not. This won’t be the last revision for 3Q09… and I’m not talking about the scheduled third report, formerly known as the Final one, either.

UPDATE – And in the “Why I should never be allowed on the radio” category, we have tonight’s performance on a national show. I explained how the economic pain of a contraction shouldn’t be confused with the actual cause of the problem by using the analogy of a sexually transmitted disease. Halfway through, I stopped and said “Okay, that’s probably a terrible analogy.” The host concurred and said that he preferred to compare a contraction to chemo. In retrospect, I don’t think that actually works as well, however, because the salient point is that the damage is actually done during the good times and the resulting pain is merely the natural consequence of the damage.


Krugman and the babysitting coop

Paul Krugman loves to use the story of the baby-sitting coop told in an article published by Joan and Richard Sweeney in the Journal of Money, Credit, and Banking in 1978 and has repeatedly recycled it, all the while failing to understand that it is a very poor analogy for the American economy and that the lessons he draws from it are false. I have updated and modified it to explain what is actually going on in the U.S. economy as well as to show why Krugman’s proposed solution – print more money – cannot possibly work:

Twenty years ago I read a story that changed my life. I think about that story often; it helps me to stay calm in the face of crisis, to remain hopeful in times of depression, and to resist the pull of fatalism and pessimism….

A group of people (in this case about 150 young couples with congressional connections) agrees to baby-sit for one another, obviating the need for cash payments to adolescents. It’s a mutually beneficial arrangement: A couple that already has children around may find that watching another couple’s kids for an evening is not that much of an additional burden, certainly compared with the benefit of receiving the same service some other evening. But there must be a system for making sure each couple does its fair share.

The Capitol Hill co-op adopted one fairly natural solution. It issued scrip–pieces of paper equivalent to one hour of baby-sitting time. Baby sitters would receive the appropriate number of coupons directly from the baby sittees. This made the system self-enforcing: Over time, each couple would automatically do as much baby-sitting as it received in return. As long as the people were reliable–and these young professionals certainly were–what could go wrong?

Well, it turned out that there was a small technical problem. Think about the coupon holdings of a typical couple. During periods when it had few occasions to go out, a couple would probably try to build up a reserve–then run that reserve down when the occasions arose. There would be an averaging out of these demands. One couple would be going out when another was staying at home. But since many couples would be holding reserves of coupons at any given time, the co-op needed to have a fairly large amount of scrip in circulation.

Now what happened in the Sweeneys’ co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple’s decision to go out was another’s chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.

In short, the co-op had fallen into a recession.

Since most of the co-op’s members were lawyers, it was difficult to convince them the problem was monetary. They tried to legislate recovery–passing a rule requiring each couple to go out at least twice a month. But eventually the economists prevailed. More coupons were issued, couples became more willing to go out, opportunities to baby-sit multiplied, and everyone was happy.

Later in the article, Krugman goes on to explain how the coop’s “central bank” can manage the coupon supply to prevent couples intent on staying in from accumulating too many coupons and acquire coupons on loan if they found it necessary to go out more often than they’d planned. But what he fails to anticipate is the situation where the coop board has provided lots and lots of coupons to the various couples in anticipation of their future use for an extended period of time. In short, he fails to account for the possibility that the “recession” is not caused by a coupon shortage, but rather by the limits of babysitting demand.

There are three limits to the demand for babysitting coupons, one physical, one practical, and one psychological. The physical limit is that a couple cannot possibly make use of more than seven evenings-worth of coupons per week since that is the maximum number of evenings they can go out and leave the children home. The practical limit is the financial resources the couple has to spend on going out, and the psychological limit is based on the amount of the couple’s desire to actually spend evenings with their children. If, in a given time period, any of these three limits are exceeded by the amount of the coupons distributed or loaned out to the couple, the couple will not make use of them regardless of how many more coupons they are given. Therefore, it should be obvious that any decline in the amount of going out that is based on one of these three limits of demand cannot be solved by simply distributing more coupons for babysitting.

In fact, for the coop, the correct policy prescription is to do exactly the reverse of what Krugman is recommending. Not only should more coupons not be distributed, but all coupon distribution should stop so that people can use up the coupons they have. Coupons given out on loan should be either repaid or simply cancelled; more coupons can be distributed once people have used up their existing supply and actually require more babysitting.

Note: the fact that babysitting coupons are less fungible and important to the coop than money is to a national economy means that one cannot concoct an example of the Austrian business cycle utilizing this analogy. The coupon supplier is not causing the problems here; they are exogenous to the coupon supply. But, this invocation of the material and immaterial limits of demand should demonstrate that Krugman’s analogy is not necessarily relevant to the present economic situation, and to the extent that it can be shown that the American consumer has exceeded the limits of his demand, it shows that his conclusions are demonstrably inapplicable.


Where is the money?

Here’s something I wish I’d been able to devote some space in RGD. Where is all the stimulus money? Where is the TARP money? Consider the non-defense Federal expenditures plus Federal investments in the most recent GDP report.

3Q08 $344.7 billion
4Q08 $355.4 billion
1Q09 $356.0 billion
2Q09 $362.1 billion
3Q09 $368.4 billion

So, according to the GDP reports, non-defense government spending has increased only $23.7 billion despite the fact that we know $700 billion was spent in the banking and automotive bailouts and at least $336 billion was spent in the Bush and Obama stimuli to date. Where is it? Why does it not show up in the GDP reports as government expenditures or anything else? Even if items such as the automotive bailouts are considered loans, it should have showed up as expenditures by Chrysler and GM. And moreover, the $100 billion in TARP loans to bailed-out corporations that went bankrupt should be written off as an expenditure since they’re never going to be repaid.


Unreliable retail numbers

Karl Denninger explains why the “positive” retail numbers reported today are, in fact, nothing of the kind:

We start with one store in the world that has net sales of “100”.

Store #2 opens with sales of 10. Half of that is new activity, half comes from Store #1. First month shows a sales report of “95”, a decrease. But in the next month Store #2’s numbers come online, the “95” is revised to the (true) 105, and Store #2s numbers (which have climbed to 60, while Store #1 has lost share and now also has an amount of 60) are all reportable. Net activity is now accurate at 120 and the previous month is revised to the (true) net 105.

Store #1 and #2 both are operating with sales of 60. Store #2 fails, and half of its business goes to Store #1. In the month it fails Store #1 shows an increase and Store #2’s numbers are DROPPED ENTIRELY, since it did not report. This is not revised. We now report a “50% increase” in retail activity, which is total crap – we really had a 25% net decrease for the current month. But the revision to the previous month does get posted, and depresses the previous month’s numbers.

Did this just happen?

The August to September 2009 percent change was revised from -1.5 percent (±0.5%) to -2.3 percent (±0.3%).

Oh, it did! Now we know where the revision to the previous month came from – stores closed in the present month and their sales loss was intentionally dropped from the current month.

Of course, it’s relatively easy to tell if the retail sales numbers are cooked or not. If the state sales tax numbers are falling while “retail sales” are increasing, then it’s obvious that the model is an inherently unreliable one.


WND column

Fallacy of Recovery

A one-time skeptic of fiscal stimulus, [German chancellor] Ms Merkel plans what amounts to a third stimulus package worth about € 7 billion ($10.4 billion), starting on January 1st.
– The Economist, Oct. 31, 2009

The mainstream media is full of reports of economic recovery and an end to the recession of 2008, even though the Business Cycle Dating Committee of the National Bureau of Economic Research has not yet spoken its official word on the matter. The significant rise in the stock markets and a single advance GDP report has been enough to convince nearly every economist and financial analyst that the worst is past, that 10.2 percent unemployment is a lagging indicator, and that the primary concern at hand is now too much monetary and fiscal stimulus leading to inflation.

Read the rest of the column at WND
Karl Denninger at the Market Ticker appears to have reached the same conclusion. Note that I wrote my column prior to reading his post To the Barkers: Answer This Question:

“The recession ended in June”: Dennis Kneale

“The recession was definitely over in September”: Any one of a number of people.

Ok. Let’s say that I accept all this at face value, even though while driving through my definitely-beach-oriented local town here this afternoon I noted even more closed-and-gone storefronts than there were a couple of weeks ago, and last night at the local open-air mall, although the evening was absolutely gorgeous, you could have fired a 155mm Howitzer down the “main drag” without killing anyone – because there was almost nobody there, and literally not one shopping bag was in evidence.

I simply have to ask the pundits and the carnival barkers, of which CNBC is the worst (but certainly not the only sinner) the following – why do we need any of these programs if in fact the economy is growing again:

Something clearly isn’t adding up. So, who is more likely to be correct? The skeptical economists looking at the evidence and seeing that nothing fundamental has changed or the mainstream economists utilizing the very same models that didn’t let them see a recession coming in the first place? And furthermore, if the models are known to be unreliable, then how does it make any sense to put faith in an estimate that is constructed on the bases of those models?