Tag: economics

The incredible shrinking labor force

The BLS is engaging in the customary statistical shenanigans to produce an artificially low unemployment rate. Zerohedge explains:

While by now everyone should know the answer, for those curious why the US unemployment rate just slid once more to a meager 5.9%, the lowest print since the summer of 2008, the answer is the same one we have shown every month since 2010: the collapse in the labor force participation rate, which in September slid from an already three decade low 62.8% to 62.7% – the lowest in over 36 years, matching the February 1978 lows. And while according to the Household Survey, 232,000 people found jobs, what is more disturbing is that the people not in the labor force, rose to a new record high, increasing by 315,000 to 92.6 million!

In other words, if the BLS wasn’t monkeying with the labor force participation rate but left it at the peak level from 1998 to 2000, the unemployment rate would be 11.7 percent. Instead, we are expected to believe that in a disinflationary economy, people are actually LESS interested in working.

The cost of foreign interventions

Take these numbers and cram them down the throats of everyone who declares the USA absolutely has to intervene in the latest round of Levantine slaughter:

By the end of the year, Congress will have appropriated more money for Afghanistan’s reconstruction, when adjusted for inflation, than the United States spent rebuilding 16 European nations after World War II under the Marshall Plan.

A staggering portion of that money — $104 billion — has been mismanaged and stolen. Much of what was built is crumbling or will be unsustainable. Well-connected Afghans smuggled millions of stolen aid money in suitcases that were checked onto Dubai-bound flights. The Afghan government largely turned a blind eye to widespread malfeasance. Even as revelations of fraud and abuse stacked up, the United States continued shoveling money year after year because cutting off the financial spigot was seen as a sure way to doom the war effort.

As the Pentagon winds down its combat mission there at the end of the year, it’s tempting to think of the Afghan war as a chapter that is coming to an end — at least for American taxpayers. But, as things stand, the United States and its allies will continue paying Afghanistan’s bills for the foreseeable future. That commitment was solidified Tuesday as the American ambassador in Kabul and Afghanistan’s security adviser signed a bilateral security agreement that will keep a small contingent of NATO troops there for at least two years.

The United States and NATO partners recently agreed to spend $5.1 billion a year to pay for the army and police, until at least 2017. Western donors are expected to continue to give billions more for reconstruction and other initiatives, recognizing that Afghanistan won’t be weaned off international aid anytime soon. In fact, the government appears to be broke.

The actual figure is $109 billion. That is nearly $1,000 per taxpayer. And what did you get for your money? It’s one thing to say “we must do this” or “we must do that”. But then, recollect that it’s going to cost you over $1,000 in order to feel good about pretending to prevent one group of murderous foreigners from killing another group of foreigners, who not infrequently were previously murdering the other group.

And, of course, that doesn’t count the $42.50 you’ll be spending every year on the Afghan army and police. Or the social and economic costs of importing the inevitable allies and refugees to the USA and settling them there.

The myth of austerity

The Geneva Report observes that the global economy is more awash in debt than during the financial crisis of 2008:

Contrary to widely held beliefs, the world has not yet begun to delever. Global debt-to-GDP is still growing, breaking new highs. Figure 1 shows the evolution of total debt (excluding the financial sector) for our global sample (advanced economies plus major emerging market economies). While there was a pause during 2008-09, the rise of the global debt-GDP ratio recommenced in 2010-2011.  Data in the report also show that debt-type external financing (leverage) continues to dominate equity-type financing (stock market capitalisation).

The chart they provide on global debt-to-GDP makes it perfectly clear how much worse the debt situation has gotten. There is actually 20 percent more global debt-to-GDP during this period of supposed “deleveraging” than there was when the crisis began.

There is definitely some funny business going on in the economic statistics. As you may know, I track the Fed’s L1 report, and I noticed an anomaly in the most recent report. Whereas the non-financial corporate credit sector was reported at an all-time high of $9.6 trillion in Q1-2014, in Q2 it rapidly declined to $7.4 trillion. But this decline was eliminated from the past data through historical revisions, thus hiding what would otherwise be a bigger decline in total credit market debt outstanding ($1,860 billion) than we saw from Q1-2009 through Q1-2010 ($948 billion).

This suggests that the inevitable transformation from credit disinflation to credit deflation may have already begun.

The cults of faux science

Jenkins, Thiele, and Douthat need not worry. There is no deficit of cults these days, they simply tend to sell themselves in the “science” market rather than the “religion” market. As Steve Sailer observes correctly, this is hardly new:

Today, for example, it seems obvious that Freudianism was a cult, but it was treated with immense respect in post-WWII America. Vladimir Nabokov had the aristocratic self-assurance to scoff publicly and repeatedly at Freud, but how many other men of reputation dared?

For example, few called Stephen Jay Gould a cult leader, but the man who told his followers — “Say it five times before breakfast tomorrow; more important, understand it as the center of a network of implication: ‘Human equality is a contingent fact of history’” — can perhaps be understood as the type of soothsayer who tries to hijack the prestige of science for his own anti-scientific purposes in the tradition of Sigmund Freud, Karl Marx, Ayn Rand, and L. Ron Hubbard.

Indeed, how can one possibly look at either the global climate change cult or the “marriage equality” cult or the magic geography cult or the politically correct pinkshirts and conclude that people are any less disinclined to believe in bizarre and obvious nonsense than 100 or 200 years ago? To say nothing of Keynesianism, which is quite literally nothing more than Freudian concepts applied to economics.

It’s a little surprising that no one ever notices the link between Freud and Keynes, but this is most likely because it seems almost no one besides me ever seems to bother actually going back to read the original source, The General Theory of The General Theory of Employment, Interest and Money rather than a) an Austrian critique or b) a Neo-Keynesian extrapolation.

Even those few who get it, such as the author of “Keynes on the Relation of the Capitalist “Vulgar Passions” to Financial Crises” (PDF), don’t seem to trace the Freud-Keynes link back to its source. Consider:

“It is shown that, generally speaking, the actual level of output and employment depends, not on the capacity to produce or on the pre-existing level of incomes,
but on the current decisions to produce which depend in turn on current decisions to invest and on present expectations of current and prospective consumption. Moreover, as soon as we know the propensity to consume and to save (as I call it), that is to say the result for the community as a whole of the individual psychological inclinations as to how to dispose of given incomes, we can calculate what level of incomes, and therefore what level of output and employment, is in profit-equilibrium with a given level of new investment; out of which develops the doctrine of the Multiplier….

The fundamental psychological law, upon which we are entitled to depend with great confidence both a priori from our knowledge of human nature and from the detailed facts of experience, is that men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income.”

Keynesianism is nothing more than applied Freudianism. And considering the spread of its current influence, combined with the tens of millions of adherents to other, equally ridiculous false sciences, it should be clear that there is no deficit of cults these days, they just don’t have the common decency to give themselves ridiculous appellations and keep a safe distance away from sane people anymore.

Systemic corruption at the Fed

The fact that the Federal Reserve is the primary culprit in the credit disaster that is the U.S. economy – the current credit demand gap is $30.2 trillion – is no secret to any regular reader of this blog. But the egregious way in which the Fed employees have blithely gone about breaking the law is a little startling:

That (ed: the public’s glazed-eye look when you speak of financial reform) may very well change today, for today — Friday, Sept. 26 — the radio program “This American Life” will air a jaw-dropping story about Wall Street regulation, and the public will have no trouble at all understanding it.

The Fed encourages its employees to keep their heads down, to obey their managers and to appease the banks. That is, bank regulators failed to do their jobs properly not because they lacked the tools but because they were discouraged from using them. For instance, in one meeting a Goldman employee expressed the view that “once clients are wealthy enough certain consumer laws don’t apply to them.” After that meeting, Segarra turned to a fellow Fed regulator and said how surprised she was by that statement — to which the regulator replied, “You didn’t hear that.”

The US economy is entirely corrupt and is run solely for the benefit of the bankers. This has always been the case, but it should have been entirely obvious to everyone after Ben Bernanke “rescued” the housing market by giving money to the banks rather than to the homeowners.

And Karl Denninger corrects the report, pointing out that bank regulators were not discouraged from using their regulatory tools, but were fired if they did their jobs and used them.

Systemic decay and the decline of democracy

Since History failed to end, Francis Fukuyama is writing new books. His latest one actually sounds pretty interesting:

Fukuyama’s most interesting section is his discussion of the United States, which is used to illustrate the interaction of democracy and state building. Up through the 19th century, he notes, the United States had a weak, corrupt and patrimonial state. From the end of the 19th to the middle of the 20th century, however, the American state was transformed into a strong and effective independent actor, first by the Progressives and then by the New Deal. This change was driven by “a social revolution brought about by industrialization, which mobilized a host of new political actors with no interest in the old clientelist system.” The American example shows that democracies can indeed build strong states, but that doing so, Fukuyama argues, requires a lot of effort over a long time by powerful players not tied to the older order.

Yet if the United States illustrates how democratic states can develop, it also illustrates how they can decline. Drawing on Huntington again, Fukuyama reminds us that “all political systems — past and present — are liable to decay,” as older institutional structures fail to evolve to meet the needs of a changing world. “The fact that a system once was a successful and stable liberal democracy does not mean that it will remain so in perpetuity,” and he warns that even the United States has no permanent immunity from institutional decline.

Over the past few decades, American political development has gone into reverse, Fukuyama says, as its state has become weaker, less efficient and more corrupt. One cause is growing economic inequality and concentration of wealth, which has allowed elites to purchase immense political power and manipulate the system to further their own interests. Another cause is the permeability of American political institutions to interest groups, allowing an array of factions that “are collectively unrepresentative of the public as a whole” to exercise disproportionate influence on government. The result is a vicious cycle in which the American state deals poorly with major challenges, which reinforces the public’s distrust of the state, which leads to the state’s being starved of resources and authority, which leads to even poorer performance.

Where this cycle leads even the vastly knowledgeable Fukuyama can’t predict, but suffice to say it is nowhere good. And he fears that America’s problems may increasingly come to characterize other liberal democracies as well, including those of Europe, where “the growth of the European Union and the shift of policy making away from national capitals to Brussels” has made “the European system as a whole . . . resemble that of the United States to an increasing degree.”

Fukuyama’s readers are thus left with a depressing paradox. Liberal democracy remains the best system for dealing with the challenges of modernity, and there is little reason to believe that Chinese, Russian or Islamist alternatives can provide the diverse range of economic, social and political goods that all humans crave. But unless liberal democracies can somehow manage to reform themselves and combat institutional decay, history will end not with a bang but with a resounding whimper.

The chart below may show the problem with Fukuyama’s thesis. Notice the big postwar spike in percentage of world GDP as measured in purchasing power from 1940 to 1950; that is the consequence of the USA having the only industrial base unharmed by WWII. Since then, it’s been all downhill, while China appears to be returning to its previous pre-18th century dominance. My sense is that by looking more at ideological systems than at the makeup of the people utilizing those systems, Fukuyama may be missing the more relevant points. But since I haven’t read his new book yet, I cannot say if that is actually the case or not.

Immigration and unemployment

Think this just might be one reason why there are so many people unemployed and underemployed these days?

The number of foreign-born individuals holding jobs in the United States hit a recorded high of 24,639,000 in August, according to data from the Bureau of Labor Statistics (BLS). The BLS has been tracking the number of foreign-born workers annually since 2005 and monthly since 2007. The BLS does not distinguish between foreign-born individuals who are in the United States legally and those who are here illegally.

Meanwhile, there are 9.6 million unemployed Americans, also according to the BLS. This doesn’t count all the people who have stopped looking for work. Now, while it is true that there is probably not a perfect match between the skills employers are seeking and the skills possessed by the nearly 10 million unemployed Americans, but it should be obvious that with 2.6 employed foreign-born workers for every unemployed American, mass immigration has a) significantly reduced American wages, and b) prevented the U.S. economy from reaching full employment.

The economy is not a zero-sum game. But it is also not a game where mathematics is entirely irrelevant.

Economists and politicians have blithely assured the various publics that immigration is good for national economies for decades. The problem with this assumption is that it is an observable fact that despite experiencing the greatest mass immigration in Western history, the Western economies have been in the doldrums for 15 years.

The end of comparative advantage

As I have repeatedly pointed out for several years, David Ricardo’s Law of Comparative Advantage has been shown to be based upon false assumptions. Now the mainstream economists are beginning to recognize this:

David Ricardo’s Theory of Comparative Advantage has broken down after 200 years, or so I learned at the Lindau forum of Nobel laureates in Bavaria.

The theory published in 1817 has been a guiding principle of free trade, taken as a given by every student of economics in the modern era. It has served us well, but just as Newton’s theories ran into limits and were overtaken by Einstein’s relativity, comparative advantage no longer explains the world.

Under Ricardo’s model, inequality was supposed to narrow within countries as globalisation accelerated exponentially in the Nineties. Instead it is getting wider….

Ricardo described a world where free trade in goods was opening up, but
labour markets remained largely closed. This is no longer the case.
Globalisation bids up the wages of high-skilled engineers or software
analysts towards international levels wherever they live.

The Nobel laureates at Lindau aren’t willing to give up on globalization yet (although they should), but the cracks in the economic wall are showing as they express their fears that it is “going horribly wrong”. But it’s not going wrong. It’s going the only way it could possibly have gone.

Free trade is incompatible with national sovereignty. International
labor mobility is incompatible with the very existence of nations. And the heterogeneous populations are economically detrimental and a material barrier to the growth of capital and national wealth. I shall repeat my core argument against free trade, which I first articulated in 2012 following a quasi-debate with Gary North:

1. Free trade, in its true, complete, and intellectually coherent
form, is not limited to the free movement of goods, but includes the
free movement of capital and labor as well. (The “invisible judicial line” doesn’t magically become visible when
because human bodies are involved.)

2. The difference between domestic economies and the global
international economy is not trivial, but is substantive, material, and
based on significant genetic, cultural, traditional, and legal
differences between various self-identified peoples.

3. Free trade is totally incompatible with national sovereignty,
democracy, and self-determination, as well as the existence of
independent nation-states with the right and ability to set their own
laws according to the preferences of their residents.

4. Therefore, free trade must be opposed by every sovereign,
democratic, or self-determined people, be they American, Chinese,
German, or Zambian, who wish to preserve themselves as a free and
distinct nation possessed of its own culture, traditions, and laws.

“It’s a greater depression”

Now who could possibly have ever seen this coming five years ago?

Europe hasn’t recovered, because it hasn’t let itself. Too much fiscal austerity and too little monetary stimulus have, instead, put it more than halfway to a lost decade that’s already worse than the 1930s.

It’s a greater depression.

And as the latest GDP numbers show, it’s not getting any less so. Indeed, the eurozone as a whole didn’t grow at all in the second quarter. Neither did France, whose economy has actually been flat for a year now. Germany’s economy fell 0.2 percent from the previous quarter—and that after revisions revealed it had quietly gone through a double-dip recession in early 2013. Though that’s still much better than Italy: Its GDP also fell 0.2 percent, but its triple-dip recession has now wiped out all growth since 2000. The closest thing approximating good news was that Spain’s dead-cat bounce recovery continued with 0.6 percent growth. But it still has 24.5 percent unemployment.

But it’s a little misleading to just call this a depression. It’s worse than that. Europe is turning Japanese. The combination of zombie banks, a rapidly aging population and, most importantly, too-tight money have pushed it into a “lowflationary” trap that makes it hard to grow, and is even harder to escape from.

A greater depression. A Great Depression 2.0, some might say. The same is true of the USA, by the way, the main difference is that the Fed and the Administration are more able to closely collude on statistical shenanigans that disguise the fact that the U.S. economy is in a deeper depression of greater magnitude than the Great Depression of the 1930s.

Using GDP to determine whether the economy is growing or contracting is like attempting to use a map to determine if you have reached your destination without bothering to look outside to see where you are. A map written by a thief who doesn’t want you to get where you are going.

Argentina defaults

So much for the strategy of preventing a foreign sovereign from defaulting through claiming sovereignty over its bonds:

At the stroke of midnight last night, Argentina officially defaulted on $29 billion worth of debt. It was the eighth time in its history, and the second time in 13 years, that Argentina told its foreign creditors it would not pay its bills.

But this time was different, and rather bizarre. When Argentina last defaulted, in 2001, it had roughly $80 billion worth of debt it couldn’t pay back. It was, at the time, the biggest sovereign-debt default ever. This time, Argentina—Latin America’s third- or fourth-largest economy, depending on who you’re asking—had the money on hand to pay a $539-million bill due by close of business on Wednesday. It didn’t make the payment, and as a result has now technically defaulted on the entire $29 billion it owes international creditors.

The defaults are still pretty small. But a fair amount of new credit will have to be issued to make up for that $29 billion contraction.