Economy and Unemployment : Real Recovery a Long Shot

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Real unemployment nears depression levels;
Sustained recovery appears unlikely

By Roger Baker / The Rag Blog / December 6, 2009

It should come as no big surprise that our economy is in worse shape than the U.S. government would like to admit. Lets start out by looking at the current U.S. economic situation.

John William’s Shadow Government Statistics argues that the REAL unemployment rate is about 22%, with an obvious upwards momentum that can be seen on the unemployment chart. This figure is calculated in such a way as to roughly correspond to earlier times. We had about 25% national unemployment during the great depression in 1932, when FDR was elected.

This video graphically shows the current dynamics of unemployment spreading geographically:

There are now numerous areas of high unemployment in the USA, with a severity no doubt comparable to the great depression. The portion of the population dependent on food stamps is soaring. A quarter of the children in Travis County, Texas, now receive food stamp support as this interactive map from The New York Times indicates.

From the same Times article:

With food stamp use at record highs and climbing every month, a program once scorned as a failed welfare scheme now helps feed one in eight Americans and one in four children.

Another way to view our depressed economy is in the recent contraction of the banking credit market — a type of funding source close to small business and the average consumers who mostly drive the US economy. Look at the credit chart in this article form the Asia Times:

A 20% decline year on year does not look like a recovery. In fact, it looks like nothing we have seen since the Great Depression. C&I loan growth lags the end of recessions, to be sure, but this extreme level of credit reduction suggests profound trouble.

35% or so of Americans work for enterprises with fewer than 100 employees, and 20% work (or used to work) for firms with fewer than 20 employees. The percentages of employment in smaller firms (less than 100 employees) are much higher in real estate (46%) and construction (77%) as of the 2004 Economic Census.

It isn’t just the 17.5% broad-measure unemployment number that we should worry about, but the massacre of smaller businesses, who are concentrated in the most vulnerable sectors: real estate, construction, and retail. Retail sales may get a temporary shot in the arm from cash for clunkers, and a combination of tax credits and (de facto) subsidized mortgage rates may hold up the bottom of the housing market for a short time. But today’s data show how fragile these matters are.

In other words, the banks are not lending to support business as usual, because they realize the average American is deep in debt and thus a bad loan risk. This fact drags down other sectors. They say commercial loans will be the next sector to need a bailout. In the case of the “zombie banks,” we have the remains of a vastly over-extended sector of the U.S. economy — the byproduct of unregulated investment bankers competing to issue mountains of leveraged debt based on the capitalist credo of exponential growth forever until 2007. Yet a lot of these junk loans are still on the books.

With all these bad loans, the world of big investment banks looks objectively like a shaky house of cards, a monkey on the back of U.S. taxpayers. What to do? The answer, so far, has been to apply economic band-aids while allowing the banks to generate phony profits.

Does it ever occur to folks that the supposedly recovering banks sure are making a lot of profit on something mighty mysterious for a country that has many of its factories shut down or outsourced, and about 20% real unemployment?

Here is how the phony profit scam works. The Fed’s covert tactic of using monetary policy to recapitalize the banking system is also proving effective, perhaps too effective. By keeping short-term interest rates at or close to zero per cent, it is enabling banks to borrow at minimal cost and to invest the proceeds in higher yielding securities. The “spread” on this trade amounts to a gift from the government, and, because the Fed has promised to keep rates low for the indefinite future, it is almost risk free. Bank of America is making so much money it can afford to give the government 26.2 billion dollars in cash — or so it says. (The other 18 billion dollars will come from a new issue of convertible stock.)

The downside is that eventually those blessed with the cash are going to take these newly abundant bank profits and try to buy something that is not equally abundant, like maybe oil. Lots of hoarded dollars, not much goods. Under these conditions, and as soon as people start spending freely again, you have a self-reinforcing tendency for commodity prices to soar.

The USA seems at this point to be willfully devaluing the dollar. To the world’s many treasury bond holders, like China, this comes as bad news because they are pegged to the dollar, which means this trend degrades the value of their currency at the same time. So the Chinese are now on a global natural resource buying spree using their trillion or so of accumulated U.S. dollars, spending them on mineral deposits like oil, copper, and iron — things calculated to give a long-term trade advantage before their dollars go bad on them.

Devaluing the dollar has several U.S. government advantages. It makes it easier to compete in trade in those areas where we are still competitive (while making key imports like oil cost more). Second, it is an easy choice for a government to, in effect, just print a bunch of money to pay off the bills. Debt for economic stimulus, bills for wars, for handling the soaring social security costs of an aging population, for paying the bills of a medical system that is impervious to cost reform, for keeping GM afloat, for bankrolling Freddie and Fannie, for backing up bad credit default swaps, for paying off the previous debt, for widespread food stamp support, bank bailouts, keeping the prime rate near zero, and the list goes on. And on.

You don’t have to be a genius to see that this economic process, taken as a whole, is unlikely to get the U.S. economy back on track. What it is most likely to lead to is repaying the lenders with effectively shrunken dollars when the treasury debt comes due. As the U.S. government, you have little alternative when already debt-ridden taxpayers who provide the revenue are too far in debt to help by paying many taxes.

Dollar devaluation is a process of the marketplace expressing the supply and demand for our fiat currency. This loss of faith is already being reflected in the soaring price of gold, as central banks stock up on something that has held its value throughout history. When global lenders shun the dollar and buy gold, it really means that the buyers think the dollar is going to shrink in exchange value. Ultimately, on close examination, economics is seen to be a branch of politics. And politics, as we know, is based on psychology.

When gold soars in price like now, it means that the big players who still have dollars to lend to the U.S. government are signaling that they expect dollar devaluation, which means price inflation for internationally traded goods . Before long, lenders are likely to demand more treasury bond interest in compensation for the shrinking dollars paid back on their loans. Although the Federal Reserve is promising to keep interest rates low, there is only so long that they can defy what amounts to an economic law of gravity. Rising interest rates would of course further depress an already depressed U.S. economy.

When you are a government that can make the rules, you can get away with running heavy deficits and generating lots of Keynesian stimulation spending for years. Prominent Keynesian economists like Paul Krugman are urging heavy spending right now. However, both Krugman and most other Keynesians, like University of Texas economist Dr. James Galbraith, insist that this spending must be accompanied by banking reform. In other words, strict rules need to be imposed to stop the U.S. Treasury from becoming even more of a politicized cookie jar than it has already become.

However, the political will to reform the U.S. banking and finance system is still missing. Needless to say, this is an ominous sign. Levy Institute Scholar Galbraith recently reported on an international meeting of mostly-liberal economists, assembled a few months ago to discuss the state of the global economy. Suffice to say that the prevailing mood was not one of optimism. You can read more details of the conference notes here:

A group of experts associated with the Economists for Peace and Security and the Initiative for Rethinking the Economy met recently in Paris to discuss financial and monetary issues; their viewpoints, summarized here by Senior Scholar James K. Galbraith, are largely at odds with the global political and economic establishment.

Despite noting some success in averting a catastrophic collapse of liquidity and a decline in output, the Paris group was pessimistic that there would be sustained economic recovery and a return of high employment. There was general consensus that the pre-crisis financial system should not be restored, that reviving the financial sector first was not the way to revive the economy, and that governments should not pursue exit strategies that permit a return to the status quo. Rather, the crisis exposes the need for profound reform to meet a range of physical and social objectives.

[Roger Baker is a long time transportation-oriented environmental activist, an amateur energy-oriented economist, an amateur scientist and science writer, and a founding member of and an advisor to the Association for the Study of Peak Oil-USA. He is active in the Green Party and the ACLU, and is a director of the Save Our Springs Association and the Save Barton Creek Association. Mostly he enjoys being an irreverent policy wonk and writing irreverent wonkish articles for The Rag Blog.]

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7 Responses to Economy and Unemployment : Real Recovery a Long Shot

  1. accprof says:

    I know little about economics, having had economics only in high school. Having said that, I’m of two minds about the money supply. One side of me agrees with the Libertarians, who say we should return to the gold standard. Money then had real value.

    This won’t happen, of course, so why not increase liquidity (a euphemism for “rev up the printing presses and print more dollars”)? Someone once jokingly said “the way to end poverty? Issue everyone a million dollar savings bond and let him/her live off the interest.” OK, he was joking, but maybe if we did increase liquidity by expanding the money supply, we could fund socialized medicine and end poverty. Just some thoughts!

    Charley

  2. Sid says:

    Roger;
    I haven’t had much time lately, and so haven’t had time to respond to your essays which I find very interesting, and I’d like to make a few comments on this one, specifically on the mechanism used to fix the financial system, a system you call a “phony profit scam”.

    As you correctly point out, unemployment is very high and the national economy is not in good shape. We all know the reasons for this, but it’s important to understand the triage that Obama had to perform when he came into office as he dealt with the wounded and dying. As bad as high unemployment is, it’s far better than the massive depression that would have been caused by widespread bank failures. Therefore, Obama had to move quickly and decisively to shore up a financial system that was facing nearly identical conditions to those of the early ‘30’s; a debt deflation that could have destroyed the entire system. To restate in the terms of the triage, an employment meltdown is survivable, a financial meltdown is not, and he acted to literally save the life of the system.

    Therefore, as distasteful as it was (throwing lifelines to the very people who were on the bridge when the ship went down), he had to devote most available resources to the financial system.

    As a result of his actions, so far this year ‘only’ 120+ banks have failed… this compared with over 9000 (!) bank failures in the Great Depression. Why did the banks fail then? For the same reason that the banks today are threatened and failing… an over-indebtedness and deflationary spiral that consumed all before it. The difference between then and now is that then the Fed sat on its hands and watched the destruction, turning the 1930 recession into a 1933 Great Depression. Now, the Fed has created a mechanism to recapitalize the banks, the one you describe correctly but, at least in my opinion, mis-characterize as ‘phony profits’. The problem Obama and the Fed face and faced is how to recapitalize the banks in the face of devastating declines in their loan portfolios? They chose the rapid injection of capital to stop the crash, and the monthly injection of capital (via the borrowing and repurchasing mechanism you describe) to recapitalize, and there’s nothing ‘phony’ about the new money on their balance sheets, as it’s as real as any other money made through arbitrage. If you know of another mechanism that would have done the same thing, please elaborate. IMO, it was the only viable way to solve the problem.
    (see next post)

  3. Sid says:

    (from last post)

    From there, the secondary triage issue of JOBS. Most rational people knew in January of 2009 the scale of the problem, and that a stimulus of approximately 4% of GDP per year was necessary to counteract the probable contraction in spending. Due to political realities, what was actually passed was 50% less. Therefore, the impact on jobs was not felt as much as it could have been had the stimulus been larger… a political impossibility. Now that the banks are recapitalizing and the system has stabilized, Obama is moving more forcefully to address a jobs stimulus. This is all as it should have been, and it’s truly amazing that we’re not in worse shape given the damage that 30 years of neo-liberal economic policies (low taxes, low controls, poor governance) combined with one big blow-out bubble did.

    Regarding a number of other points you touch on and without addressing them all, I have no doubt that the combination of a cheaper dollar, low interest rates, a re-regulated financial system, higher taxes and good governance will stabilize the national and world economy and return us to growth at least equal to demographic growth. I would consider the probabilities of either a major inflation nor a serious deflation so low as to be non-existent. Period.

    However, real growth will not happen, in my opinion, until trade policy is reviewed and the entire philosophical superstructure of ‘free-trade’ is overturned and trade becomes based upon the national needs of each nation. It’s not a ‘one size fits all’ proposition, and free trade is demonstrably not a rising tide that lifts all boats. It only lifts the boats of those in the poor countries that get the jobs, and the very few super-rich international investors that own the companies. The industrialized and organized middle class is on the verge of extinction, and until trade is addressed the natural unemployment level not just in the U.S. but among all the industrialized nations will be between 7-10%.

    best
    s

  4. RogerB says:

    What Sid has posted incomments is a lot to try to respond to, but let me respond to some of his basic points.

    First, we are now seeing widespread price inflation in the commodities market, in regard to wheat, oil, and various metals, reflected in the Bloomberg indexes since about March:

    http://www.bloomberg.com/markets/commodities/cfutures.html

    Stagflation is

  5. I wouldn’t worry, Obama plans to ride the "bush is the bad guy" bandwagon indefinitely. That way he can continue acting like candidate Obama rather than a President.

    Perhaps if Obama and junior tax cheat Geitner had focused a lot less on HCR, which no doubt was important, but certainly not at the top of most people’s list (well except for hardcore progressives), they could

  6. Sid says:

    Roger;
    Let's stipulate that Obama is allowing the financial system to heal itself and protect itself from a debt deflationary spiral by creating a way for the banks to fill the asset hole in their balance sheets by borrowing and then lending back to the government. You needn't restate that case once again, as it's a fact.

    However, let's also stipulate the

  7. Richard says:

    All the way back to the top, accprof, a return to the gold standard is very possible on a personal level. I started buying and stashing gold back when Carter was president, it is where all my meager life savings lie. When they print enough $$ so that they are worthless I will have my gold.

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