Tag: economics

35-year employment low

The average annual labor force participation rate hit a 35-year-low of 63.2 percent in the United States in 2013, according to data from the
Bureau of Labor Statistics (BLS). The last time the average annual labor force participation rate was
that low was in in 1978, when it was also 63.2 percent. Jimmy Carter was
president then.

What is often forgotten in the reporting of the economic statistics is that the statistics are merely an approximation of the economic situation; they are the map and not the territory. GDP doesn’t actually exist, and the “growth” that it represents was designed as a way to provide planners a means of determining how best to intervene in the economy. The decline in the labor force participation rate gives the lie to both the false GDP and false U3 unemployment statistics, both of which are heavily manipulated in a misguided attempt to provide a falsely positive perspective.

The contractionary effect of the increasing lack of participation in the labor force is compounded by the fact that the doubling of the female labor force means that many of the younger women now in it are considerably less productive than the older men they have replaced. Throw in the subsequent consequence of delayed marriage and fewer children, and it is readily apparent that the US economy cannot recover in the next 20 years.

Generation debt-slave

The unprecedented growth in student and federal debt still hasn’t been enough to boost Z1 out of credit disinflation:

Time reports that American students and grads were carrying $1.08 trillion in student loan debt at the end of 2013. This compares to just $253 billion a decade earlier. Aggregate debt grew 10% in the past year alone. By comparison, overall debt grew just 43% in the last decade and 1.6%
over the past year.’ About 70% of students graduate with some amount of
debt, and the average amount owed is $29,400.

This should finish off the housing market once and for all, barring mass Chinese immigration. That $1.08 trillion now represents 1.9 percent of total credit market debt outstanding and a whopping 8.3 percent of total household debt. Most of it is going to be defaulted, or rather, would have been had that not been made illegal by Congress and the Bush administration.

No house until 36

It’s hard to blame the millenials for living in their parents’ basement when they were suckered into taking out student loans on which they cannot, unlike previous generations, default. Karl Denninger spells out the math:

You mean the $500 a month student loan payment is half of a decent first-time homebuyer payment — or more?

Well, yes.  Never mind that $500 a month x 12 months = $6,000 a year saved toward a down payment, and if you put 20% down (which you should) then four years of that savings would make it possible for you to buy a $120,000 house.

Financing $96,000 @ 5% for 30 years gives you a P&I on that $120,000 house of…. $513.21, or awfully close to that student loan payment.

In other words you forego the ability to buy the house by taking the student loan debt.

And for how long do you forego it?

10 years, plus four more to build the down payment, or 14 years post-graduation.

If you graduate in four years (ha!) you’re 22, so this means you’re not buying a house until you’re 36.

The Law of Unintended Consequences strikes again. The mortgage banks are complaining about the collapse in demand for mortgage debt because indebted graduates and non-graduates can’t afford to take on the debt required to buy a house.

Everything is as my modification of the Austrian Business Cycle predicted. The limits of demand are the limits of CREDIT.

Famous last words

“We have been watching closely the recent volatility in global
financial markets. Our sense is that at this stage these developments do
not pose a substantial risk to the U.S. economic outlook.”
– Jane Yellen, Fed Head

She even sounds like Bernanke back in 2008. And, just in case it wasn’t completely obvious, we have the reassurance that the desperate money pumping will not end until the entire system collapses too.

“The Committee has emphasized that a highly accommodative
policy will remain appropriate for a considerable time after asset
purchases end.”

I’ll bet it has. After all, we’re only looking at a $29 trillion credit demand gap. The thing is, even from a Keynesian perspective, one should be able to discern that we are in a giant economic contraction. Here is the old Econ 101 question: highly accommodative monetary policy is prescribed when the economy is a) growing, or b) contracting?

The dark side of income inequality

Republicans, Libertarians, and Any Rand aficionados like to talk about income inequality as if it is an intrinsically socialist concept. And there is some truth to that. Socialists and other distributionists often appeal to income inequality in order to violate private property rights and rob from Peter in order to pay Paula, DaPaul and Pedro. Income equality can be, and has often been used to justify socialism.

However, superior talent, hard work, and luck combined with a capitalist system are not the only source of income inequality. Income inequality also comes from theft, fraud, government corruption and other evils. And that is the very sort of income inequality that is not only indefensible, but is ever bit as problematic economically as it is morally.  Zerohedge explains the dark side of income inequality:

This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.

The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.

The banking sector has been able to significantly increase its profits or claims on goods and services. However, more claims held by one sector, which essentially does not create anything of real value, means less claims on real goods and services for everyone else. This is why counterfeiting is illegal. Hence, the central bank has been playing a central role as a “reverse Robin Hood” by increasing the economic pie going to the rich and by slowly sinking the middle class toward poverty.

One need not be a socialist, or oppose capitalism, to oppose the income equality that is the result of theft. With the assistance of the Federal Reserve and Congress, the banks have financially raped the American economy and the American people through fraud and political corruption. A reckoning is overdue. Everything that has been done in the last five years has been done in order to postpone it. And yet, a reckoning is coming nevertheless, because that which cannot continue will not continue. The rich simply cannot consume enough to substitute for more equitable consumption; how many cars can a man drive? In how many homes can a man dwell?

Amazon vs BEA

So, on the one hand, the BEA is reporting 3.2 percent economic growth. On the other, retail sales are below expectations, both in physical and online terms:

Amazon.com Inc.’s shares fell almost 10 percent a few minutes past 4 p.m., after the company dropped some disappointing earnings news. The title of the company’s news release is cheerily optimistic: “Amazon.com Announces Fourth Quarter Sales up 20% to $25.59 Billion.” And its operating income actually beat estimates — $510 million, compared with $489.9 million. But fourth-quarter sales of $25.6 billion were considerably below estimates of $26.08 billion, and earnings per share were 51 cents instead of the 69 cents that analysts had been expecting.

That’s not just disappointing for Amazon; it’s also not great news for the U.S. economy. When retail foot traffic and sales were disappointing in December, the standard explanation was that people must be moving their purchases online. Obviously, they weren’t — at least, not nearly as much as analysts expected. Given how dominant Amazon is in e-commerce, this should cause most of us to revise our expectations of fourth-quarter retail sales, as well as growth in gross domestic product.

Now, I wonder if perhaps the data being produced by the government bureaucracy might perhaps be less than entirely accurate? No, surely that’s not possible. That’s crazy conspiracy talk!

A meeting of exceptional minds

If you haven’t read Richard Cantillon’s An Essay on Economic Theory, I highly recommend it. It’s really remarkable for its insights, especially considering when it was written. I have about twenty bookmarks, each of which probably merit their own post, but it was this one little aside on metal ratios that truly blew me away:

It is true that the coinage in England might equally have been adjusted to the market price and ratio by diminishing the nominal value of gold coins. This was the policy adopted by Sir Isaac Newton in his report, and by the Parliament in response to this report. But, as I shall explain, it was the least natural and the most disadvantageous policy…. Newton told me in answer to this objection that according to the fundamental laws of the Kingdom, silver was the true and only monetary standard, and that as such, it could not be altered.

Can you imagine being a party to that conversation? Listening to one of Man’s greatest economic minds in history criticizing the currency policy of what may have been Man’s greatest mind in history would have been an unparalleled privilege. Even if it was only an exchange of letters, it is still amazing to be offered this glimpse into such a fascinating interaction, however brief it may have been.

It also shows how government interventions were having materially deleterious effects on the economy long before Keynes and Marx produced their fallacious justifications for deeper and more pernicious interventions.

And now the punchline. I was reading this in between sets at the gym, and, being understandably overcome by the excitement of the passage, told the story to a junior Swiss diplomat who often works out at the same time I do. He’s a sharp, well-educated guy in impressive condition. He nodded appreciatively, (or so I thought), then said: “so do you know these guys?”

I am 95 percent sure that he thought the conversation took place at Davos….

Wall Street loses Krugman

Wow, I have to admit that I didn’t expect to see this out of the former Enron advisor:

Normal people take it in stride; even if they’re angry and bitter over political setbacks, they don’t cry persecution, compare their critics to Nazis and insist that the world revolves around their hurt feelings. But the rich are different from you and me.

And yes, that’s partly because they have more money, and the power that goes with it. They can and all too often do surround themselves with courtiers who tell them what they want to hear and never, ever, tell them they’re being foolish. They’re accustomed to being treated with deference, not just by the people they hire but by politicians who want their campaign contributions. And so they are shocked to discover that money can’t buy everything, can’t insulate them from all adversity.

I also suspect that today’s Masters of the Universe are insecure about the nature of their success. We’re not talking captains of industry here, men who make stuff. We are, instead, talking about wheeler-dealers, men who push money around and get rich by skimming some off the top as it sloshes by. They may boast that they are job creators, the people who make the economy work, but are they really adding value? Many of us doubt it — and so, I suspect, do some of the wealthy themselves, a form of self-doubt that causes them to lash out even more furiously at their critics.

Nice call-out to F. Scott Fitzgerald there on the part of the quasi-Nobel winner too. But Krugman fails to notice that there is an amount of truth to Perkins’s complaint about the coming Kristallnacht of the so-called One Percent, especially given that a disproportionate amount of the parasitical One Percent are Jewish.

It’s not paranoia when someone really is out to get you. And self-doubt is more than justified when you know damn well that you eminently deserve to have people out to get you. The financial skimmers of Wall Street not only don’t make the economy work, they have destroyed the wealthiest economy history has ever known through the massive malinvestments their massive credit bubble has created. And they have made matters worse by coopting the federal government into making good their losses at the expense of the American people.

When the final crash comes, I expect a considerable portion of the One Percent to be wiped out by an angry and well-armed populace. And no one should shed a tear for them, because they eminently deserve their such bitter desserts. The wolves of Wall Street who preyed upon the helpless for decades will become the hunted.

China: two stories

First, this Forbes report is NOT true: “The People’s Bank of China , the central bank, has just ordered commercial banks to halt cash transfers.” The false report was particularly worrisome in light of the way it appeared to coincide with HSBC’s recent attempt to crack down on all withdrawals of more than 3,000 pounds in the UK. (HSBC appears to have backed down on that following widespread outrage.) However, that does not mean that all is well with the Chinese economy, which you will recall has been engaged in much bigger credit inflation and government spending stimulus programs since 2009 than the USA or the European governments. From Zerohedge two weeks ago:

the big problem in big China remains that of an out-of-control credit creation process that is blowing up. As we previously noted, instead of crushing credit creation, the PBOC’s liquidity rationing has forced distressed companies into high-interest-cost products in the shadow-banking world. Investors on the other side of “troubled shadow banking products” had assumed that ‘someone’ would bail them out but this evening Reuters reports that ICBC has confirmed that it will not rescue holders of the “Credit Equals Gold #1 Collective Trust Product”, due to mature Jan 31st with $492 million outstanding.

A single $492 million default sounds very small compared to the overall size of the shadow banking market, but the problem is that what expands by the multiplication effect will contract even faster. There are many multiples of credit dollars stacked upon each actual dollar, so a default has a domino effect that is one or two orders of magnitude greater than the size of the default itself.

It’s probably not a coincidence that the banks appear to be a little nervous leading up to this default, because it’s not possible to know exactly what the effects of the Friday default will be. I expect next weekend will be a very busy one throughout the financial industry as the markets position for the fallout on Monday; I imagine the central banks’ printing presses will be smoking.

Making matters worse

Mike Shedlock explains how the Troika of the European Union-International Monetary Fund-European Central Bank have made the Greek situation more than six times worse by refusing to take their financial medicine five years ago:

Greece could have defaulted in 2009 with perhaps a €40-50 billion mess
to cleanup. In a foolish attempt to prevent contagion, the nannycrats
turned a relatively small mess into major €325 billion problem,
virtually assuring the contagion they set out to prevent. Expect to see much use of the word “contagion” in the coming months.

One can’t help but notice that Spain, Italy, and, yes, Greece, are collectively responsible for guaranteeing 32.54 percent of the next Greek default. There would be your contagion vector. More debt is never the answer to a debt problem.