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No Country for Old Jobs: 10 Charts Showing the Fragile Recovery. Home Sales, Buying versus Renting, Unemployment, and Real Economy Data
Dr. Housing Bubble blog
No country can go on spending more than they earn and expect sustained prosperity. Sure, they can get away with a façade of economic stability glazed over by copious amounts of debt but eventually the piper must be paid. The U.S. Treasury in combination with the Federal Reserve has made the ultimate bet that by forcing the dollar lower and injecting easy money into the economy that somehow it will jumpstart the economic engine. If we examine multiple levels of economic activity we are yielding very little overall for trillions of dollars in bailout funds. The big winners here are the banks and the American public is still waiting for the real recovery in the economy.
It is disturbing that there is a significant school of economic thought out there that somehow jobs do not matter. This line of reasoning is baffling. In many ways, this is similar to the collective deep capture that occurred during the housing bubble that somehow prices were justified even in the face of rampant fraud and mass delusion. They don’t call it mania for nothing. Take for example the wonderfully unstable budget of the biggest state of our country, California.
Only last week, State Controller John Chiang announced that the state is falling behind $1.1 billion in receipts from a budget only enacted three months ago. Keep in mind the estimates made only a few months ago were conservative by California standards yet somehow money isn’t coming in. This is occurring at the same time that the state has hiked taxes and is also front loading tax collections earlier. To the obvious person on the street, you cannot tax someone without a job. Well, that isn’t necessarily true because you can tax them on items they buy (in some counties like L.A. that rate is near 10 percent).
We are now 21 months into this recession. Job growth is no where on the horizon. It would appear that people are waiting for some ambiguous industry to emerge out of the ashes like some financial Phoenix. Will it be the green sector of our economy? Yet even in that optimistic scenario, does that sector have enough to make up for the 8 million jobs lost in this recession and the growing demands from a larger work force? If we examine eras like the 1920s in Florida and their real estate bubble, prices did not come back for years. So if you factor in the 1920s coupled with the Great Depression of the 1930s, things didn’t turn around for nearly two decades. California and Florida are coming off unsustainable highs. What does this mean? Let us go back to the State Controller report. What that translates to in the real economy is less money coming in to the government. And that means either more tax hikes or more spending cuts…
(Oct 2009)
Ostrom first woman to win Nobel Prize for Economics
Alexandra Frean, Times online
It seems only fitting that, at a time when the financial world is still examining why its own set of complex rules failed to avert a global recession,the Nobel Prize for Economics should be shared this year by two academics who have cast a critical eye on some of the free-market policies that drove so much of American economic policy in the run-up to the crisis.
That Elinor Ostrom, a Professor of Economics at Indiana University, is the first woman to win the prize, which has been awarded to 62 men since it began in 1968, is perhaps less significant than her having made a career of challenging conventional wisdom. More specifically, she has questioned the orthodoxy that common property is poorly managed and should be privatised or regulated by central authorities.
Based on numerous studies of user-managed fish stocks, pastures, woods, lakes and groundwater basins, she asserts that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest. Her work has been used to codify the rules that promote successful outcomes.
In work that has influenced climate-change debate, she has argued that, although many basic conservation strategies are sound, their use is often flawed. She criticises what she calls the Kiss (keep it simple, stupid) approach, in which strategies are applied too simplistically and rigidly and in which local customs, economics and politics are ignored. “If we keep it too simple, we lose an understanding of what’s going on out there,” she said…
(13 Oct 2009)
Influential article of Ostrom’s here
Reinventing the firm (report)
William Davies, Demos
The financial crisis has called into question many of our core assumptions about economic structures, governance and institutions. But there has been little attention paid to the basic unit of economic collaboration and production: the firm. In recent decades Britain developed a corporate monoculture in which the ‘shareholder value’ creed treated firms simply as the property of their shareholders, to be traded, exploited and disposed of in pursuit of profit.
Government policy making has done little to call this culture into question, depriving our economy of a richer vision of what a good company is and what it can do. This crisis is a chance to ask deep questions about our firms: how can they meet social and political as well as economic goals?
How can firms be modelled so that not only shareholders but employees, the economy and society profit? Many of these models already exist. Mutual and employee-owned models of business operate with longer time-horizons, achieving higher levels of performance and customer satisfaction. They nurture greater power for individuals over their economic lives and increase the accountability of managers. This report argues it is time to bring these models out of the wilderness and into the debate about where capitalism goes next.
Presenting a wide range of quantitative data alongside three new case studies of employee-owned firms, it offers a new vision of economic autonomy where democratic companies drive a happier and more sustainable economy.
(11 Sept 2009)
The report can be accessed here.
Quarterly Review and Outlook – Third Quarter 2009
Hoisington Investment Management Company
(3rd Quarter 2009)
The Federal Reserve reported that as of June 30, 2009 total U.S. debt was $52.8 trillion. Total U.S. debt includes government, corporate and consumer debt. Importantly, however, it does not include a few trillion in “off balance sheet” financing, contingent unfunded pension plans for corporate and state and local governments, or unfunded liabilities of the U.S. government for such items as Medicare, Social Security and other programs. Currently GDP stands at $14.2 trillion, so there is approximately $3.73 in debt for every dollar of output in the United States, a level unprecedented in our history (Chart 1). Normally, debt levels as a percent of GDP would be uninteresting and immaterial; however, the current level of debt is unique in two ways. First, the asset side of the balance sheet purchased by the debt is falling in price. Second, the money that was borrowed to purchase those assets was often fraudulently expended. Neither the borrower nor the lender really expected the debt to be serviced. Rather, each party expected the asset price to rise extinguishing the debt.
This type of financial arrangement was correctly analyzed by the famous American economist Hyman Minsky in his paper, “Financial Instability Hypothesis”, in which he described three phases of debt financing. The first is “hedge finance”, where the lender expects a return on both principal and interest. The second is “speculative finance” where the lender expects to get interest on the loan but perhaps not the principal. The third case, where the lender expects neither the principal nor interest to be returned, is referred to as “ponzi finance”. This was typified in the last business cycle by loans issued without documentation, no down payment home loans, extremely low cap rates on commercial real estate, and the high leverage borrowing ratio of private equity funds. Even ponzi finance works as long as asset prices are rising. But once the bubble is pricked, the debtor is left with declining asset values that preclude the rollover of their obligations.
Presently, in this worst of all post-war recessions we are witnessing the collapse of asset prices that were inflated by the speculation of earlier years. The aftermath of that speculation and its impact on the economy has been thoroughly studied prior to our present business cycle by the economists of yesteryear who marveled at the mania in the collective mindset of private citizens and their elected representatives who produced such bubbles. The most famous of these economists was Irving Fisher (1867-1947), who in 1933 wrote about this problem of over-indebtedness (Irving Fisher, 1933, Econometrica, “The Debt-Deflation Theory of Great Depressions”). He stated flatly that over-indebtedness was the difference between normal business cycles (recessions), which occur frequently through “over-production, inventory misjudgment, or commodity price fluctuations” and extreme business cycle fluctuations (depressions). Based on his analysis of the great depressions of 1837, 1873, and 1929 he outlined a pattern of economic developments that will take place when the debt cycle is broken. Seemingly old news, but it is interesting to apply his sequence of events to today’s economic developments as there are disturbing similarities…
Suggested by EB contributor William Tamblyn.
The Sound of One Hand Clapping – What Deflationists May Be Missing
Chris Martenson, chrismartenson.com
My central thesis to this crisis, developed a few years before it even hit, is that the economic troubles are the symptoms, while the money system itself is the cause.
My views on this are expressed in the opening of an article that I initially penned in 2006 but updated in 2008:
Within the next twenty years, the most profound changes in all of economic history will sweep the globe. The economic chaos and turbulence we are now experiencing are merely the opening salvos in what will prove to be a long, disruptive period of adjustment. Our choices now are to either evolve a new economic model that is compatible with limited physical resources, or to risk a catastrophic failure of our monetary system, and with it the basis for civilization as we know it today.
In order to understand why, we must start at the beginning. While it was operating well, our monetary system was a great system, one that fostered incredible technological innovation and advances in standards of living, two characteristics that I fervently wish to continue. But every system has its pros and its cons, and our monetary system has a doozy of a flaw.
It is this: Our monetary system must continually expand, forever.
The article above provides the big-picture backdrop that drives my long-term vision and thinking. I raise it now so that you’ll understand that I principally view the economic world through a monetary lens.
The hot topic of the day is “Inflation or Deflation?” and the camps are firmly divided into groups of inflationistas and deflationistas. When asked which camp I am in, I reply “Yes.” Some would say that puts me in the confusionista camp, but I actually have an explanation for why are living in a world encompassing both.
From a technical perspective, we are absolutely in one of the most powerfully deflationary periods in history, yet, besides housing prices and a few over-produced consumer goods, we find that stocks, bonds, and commodities are all well-bid at the moment…
(9 Oct 2009)
Recession Is Over; Depression Has Just Begun
Edward Harrison, Seeking alpha
For the last few months I have been casting around looking for bullish data points as counterfactuals to my more bearish long-term outlook. I have found some, but not enough. If you recall, early this year, I stated that we are in depression, making the case for the ongoing downturn as a depression with a small ‘d.’ Nevertheless, I was quite optimistic about the ability of policymakers to engineer a fake recovery predicated on stimulus and asset price reflation and I certainly saw this as bullish for financial shares if not the broader stock market. But, I saw these events as temporary salves for a deeper structural problem.
As a result, I have been on a quest to find data which disproves my original thesis – signs that the green shoots that everyone keeps talking about (and a term I had banned from my site) are part of a sustainable economic recovery. Unfortunately, I have concluded that they are not. This post will discuss why we are in a depression, not a recession and what this means about likely future economic and investing paths. I will try to pull together a number of threads from previous posts, add some context via Wikipedia links and draw in some good discussion via recent posts by Prieur du Plessis on balance sheet recessions and Marshall Auerback on the sector financial balances model of economics which completed the picture for me.
…Back in my very first post in March of 2008, I said that the U.S. was already in a recession, the only question being how deep and how long – a question I answered in the next post saying “we are definitely in recession. And according to Gary Shilling, this recession is going to be a big one. Worse than 2001, 1990-91 or the double dip recession of 1980-82.” This has certainly turned out to be true. The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.
I see the debt problem as an outgrowth of pro-growth, anti-recession macroeconomic policy which developed as a reaction to the trauma of the lost decade in the U.S. and the U.K.. This was a period of low growth, high inflation and poor market returns, in which the U.K. became the sick man of Europe and labor strife brought that economy to its knees. It is a period that saw the resignation of an American President and the humiliation of the Iran Hostage Crisis.
…However, just as the policy of the 1950s to the 1970s was not really Keynesian (read Keynes’ General Theory as Richard Posner did and you will see why), the 1980s-2000 was not really an era of true ‘free markets.’ I call it deregulation as crony capitalism. What this has meant in practice is that the well-connected, particularly in the financial services industry, have won out over the middle classes (a view I take up in “A populist interpretation of the latest boom-bust cycle”). In fact, hourly earnings peaked over 35 years ago in the United States when adjusting for inflation…
(2 Oct 2009)
