Christmas and Keynesian Stimulus

Posted by PITHOCRATES - December 23rd, 2013

Economics 101

(Originally published December 24th, 2012)

Christians may not like the Crass Commercialization of Christmas but the Left Loves It

The Left does not have a war on Christmas per se.  For they love the consumer spending part of Christmas.  Which is pure Keynesian.  People go into debt to spend more money at retailers.  They love that part of Christmas.  What they don’t like is the religious stuff.  Especially Jesus.

They don’t like Jesus because He is the God the Christians worship.  Their Lord and Savior.  It’s these Christians that bother the Left.  Because of their opposition to birth control (mostly Catholics), abortion and having fun in general.  The kind of fun adults enjoy.  The kind of things Christians frown on.  Premarital sex.  Gay love.  Drinking and using drugs.  Coarse language and sexual situations on television shows and in the movies.  Things they champion on the Left.  Which makes the Left hate Christianity.  Which they see as nothing but a great killjoy.

It’s the moralizing the Left does not like.  But the one thing Christians don’t like about Christmas, its crass commercialization, they do like.  So the Left will try to band images of Christ from Christmas displays wherever they can.  Despite Christmas being the celebration of Christ’s birth.  But they will gather in Rockefeller Center to party when they light the Christmas tree.  Though they would prefer that we call it the holiday tree.

Retailers often become Profitable for the Year only because of this Temporary Spending Surge at Christmas

So there are two Christmases.  The one where Christians celebrate the birth of Christ.  Wish for peace on earth.  And good will towards man.  And the other Christmas.  The one marked by the orgy of consumer spending.  Much of it funded by one-time Christmas bonuses.  A celebration of demand-side Keynesian economics.  Where people spend their hard earned money instead of saving it.  And when their money runs out they spend even more using their credit cards.

Keynesians have a bunch of charts and graphs showing how great a stimulus this Christmas spending is to the economy.  And mathematical formulas.  They can tell you about the velocity of money. How fast money travels through the economy when it goes from consumer to seller.  The seller then becomes consumer.  And spends the money they just received.  Then the person who receives this money in a sales transaction goes out and spends it as a consumer.  And on and on it goes.  Flying through though the economy at breakneck speed.  Generating a whole lot of economic activity.

Retailers often become profitable for the year only because of this spending surge at Christmas.  In fact, to handle this surge in business they hire a lot of people at Christmas time.  Part-time people.  Proving again that pumping money into the economy creates jobs.  The main tenet of Keynesian monetary policy.  Pump cash into the economy and people will spend it.  Something the Keynesians have been doing since Richard Nixon decoupled the dollar from gold in 1971.  Ending any semblance of responsible monetary policy.  And recessions forever.  At least, that was the plan.

Keynesian Stimulus is nothing more than an Orgy of Temporary Consumer Spending just like at Christmas Time

When the economy slows down and people stop buying stuff businesses have to lay off workers.  So they won’t build stuff that no one will buy.  Laid off workers no longer have money to buy things.  Which causes other business to lay off workers.  So THEY won’t build stuff that no one will buy.  It’s a vicious cycle.  In fact, we call it the business cycle.  The boom-bust cycle.  From expansion to contraction.  From an economy hiring people to an economy laying off people.

Keynesian economics was supposed to remove the contraction side of the business cycle.  By picking up the spending slack.  When consumers stopped spending money the government would step in and replace their spending.  We call it stimulus spending.  Often spending money the government doesn’t have.  So they run a deficit (i.e., borrow money).  Or simply print money.  Which they did a lot of in the Seventies.  Unfortunately, as it turns out, you just can’t do that.  For when you print money you devalue it.  Which raises prices.  As it takes more of these devalued dollars to buy what they once did.

And this is why Keynesian economics doesn’t work.  Because a Keynesian stimulus is nothing more than an orgy of consumer spending.  Just like at Christmas time.  Which happens only for a limited time.  Businesses hire temporary part-time workers at Christmas because this spending does not last.  As it does not last during a Keynesian stimulus.  It doesn’t create any full-time jobs.  Because employers know it is only temporary.  And they know that higher prices will soon follow.  As they do after Christmas when the discounting ends.  Which will reduce future economic activity.  As it does after Christmas.  Once the deals end so too ends the orgy of consumer spending.  Leaving people to deal with the aftermath.  Depleted bank accounts.  A lot of credit card debt.  And a little buyer’s remorse.

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The Minimum Wage Debate

Posted by PITHOCRATES - December 16th, 2013

Economics 101

A Fall in Economic Activity follows a Surge in Keynesian Stimulus Spending

The minimum wage argument is a political argument.  Because it’s a partisan one.  Not one based on sound economics.  Such as the classical school of economics that made America the number one economic power in the world.  Thrift.  Savings. Investment.  Free trade.  And a gold standard.  Then you have the politicized school of economics that replaced it.  The Keynesian school.  Which nations around the world accept as sacrosanct.  Because it is the school of economics that says governments should manage the economy.  Thus sanctioning and enabling Big Government.

Keynesian economics is all about consumption.  Consumer spending.  That’s all that matters to them.  And it’s the only thing they look at.  They completely ignore the higher stages of production.  Above the retail level.  They ignore the wholesale level.  The manufacturing level.  The industrial processing level.  And the raw material extraction level.  Which is why Keynesian stimulus fails.  Just putting more money into consumers’ pockets doesn’t affect them.  For they see the other side of that stimulus.  Inflation.  And recession.  And they’re not going to expand or hire more people just because there is a temporary spike in consumer spending.  Because they know once the consumers run through this money they will revert back to their previous purchasing habits.  Well, almost.

Keynesian stimulus is typically created with an expansion of the money supply.  As more dollars chase the same amount of goods prices rise.  And people lose purchasing power.  So they buy less.  Which means following a surge in Keynesian stimulus spending there follows a fall in economic activity.  Which is why the higher stages of production don’t expand or hire people.  Because they know that for them the economy gets worse—not better—after stimulus spending.

A Stronger Economy would help Minimum Wage Workers more than Raising the Minimum Wage

Increasing the minimum wage shares the Keynesian goal of putting more money into consumers’ pockets.  And many of the arguments for increasing the minimum wage mirror those arguments for Keynesian stimulus.  Even to reverse the consequences of previous Keynesian policies (see Everything You Ever Needed to Know About the Minimum Wage by Jordan Weissmann posted 12/16/2013 on The Atlantic).

The federal minimum wage is $7.25 an hour, which means that depending on the city you’re in, 60 minutes of work will just about buy you a Chipoltle burrito (without guac). By historical standards, it’s fairly low. Thanks to inflation, the minimum wage is worth about $3.26 less, in today’s dollars, than when its real value peaked in 1968.

It’s a Keynesian argument that says putting more money into people’s pockets will increase economic activity.  That’s the rebuttal to the argument that a higher minimum wage will reduce economic activity (by raising prices with higher labor costs).  For they will take those higher wages and spend them in the economy.  More than offsetting the loss in sales due to those higher prices.

The whole concept of Keynesian stimulus is predicated on giving consumers more money to spend.  Like raising the minimum wage.  Either with stimulus money raised by taxes.  From borrowing.  Or printing.  Their favorite.  Which they have done a lot of.  To keep interest rates low to spur housing sales in particular.  But with this monetary expansion comes inflation.  And a loss of purchasing power.  So the Keynesian policies of putting more money into consumers’ pockets to stimulate economic activity has reduced the purchasing power of that money.  Which is why the minimum wage in real dollars keeps falling.

According to the Bureau of Labor Statistics, 1.57 million Americans, or 2.1 percent of the hourly workforce, earned the minimum wage in 2012. More than 60 percent of them either worked in retail or in leisure and hospitality, which is to say hotels and restaurants, including fast-food chains.

…Almost a third of minimum-wage workers are teenagers, according to the Bureau of Labor Statistics.

Some in retail sales get a commission added on to their hourly wage.  Many in the food and leisure industry earn tips in addition to their hourly wage.  So some of those who earn the minimum wage get more than the minimum wage.  Those who don’t are either unskilled entry level workers.  Such as students who are working towards a degree that will get them a higher-paying job.  Those working part-time for an additional paycheck.  Those who work because of the convenience (hours, location, etc.).  Those who have no skills that can get them into a higher-paying job.  Or because these entry-level jobs are the only jobs they can find in a bad economy.

A stronger economy could create better jobs.  And higher wages.  For it is during good economic times that people leave one job for a better job.  And employers pay people more to prevent good employees they’ve already trained from leaving.  So they don’t have to start all over again with a new unskilled worker.  This would be the better approach.  Creating a stronger economy to allow unskilled workers to move up into higher skilled—and higher paying—jobs.  For you can’t have upward mobility if there are no better jobs to move up into.

On one side of the debate, you mostly have traditionalists who believe that increasing the minimum wage kills some jobs for unskilled workers, like teens…

On the other side, you have researchers who believe that increasing the minimum wage doesn’t kill jobs at all and may even give the economy a boost by channeling more pay to low-income workers who are likely to spend it.

The Automotive industry has long fought for tariff protection.  For the high cost of their union labor made their cars costlier than their imported competition.  The legacy costs of an aging workforce (health care for retirees and pensions) required a government bailout to keep General Motors and Chrysler from going belly-up.  And it was this high cost of union labor that caused the Big Three to lose market share.  Shedding jobs—and employees—as they couldn’t sell the cars they were making.

So higher wages raise prices.  And reduce sales.  Leading to layoffs.  And reduced economic activity.  The unions believe this.  That’s why they fight so hard for legislation to protect themselves from lower-priced competition.  You would have to believe that the economic forces that affect one part of the economy would affect another.  And those economic forces say that higher wages kill jobs.  They don’t increase economic activity.  They just help the lucky few who have those high-paying jobs.  While many of their one-time coworkers found themselves out of a job.

When the minimum wage goes up, the theory says, businesses shape up. Managers find ways to make their employees more productive. Turnover slows down, since people are happier with their paychecks, and the unemployed snap up jobs elsewhere in town. Meanwhile, Burger King and McDonald’s can raise their prices a little bit without scaring off customers.

Managers finding ways to make their employees more productive?  Do you know what that means?  It means how they can get more work out of fewer employees.  No worker wants to hear management talk about productivity gains.  For that usually means someone will lose their job.  As the remaining workers can do more with less because of those productivity gains.  So that’s a horrible argument for a higher minimum wage.  Because fewer people will have those bigger paychecks.  Made possible by reducing costs elsewhere.  As in laying off some of their coworkers.

Based on data from 80s and early 90s, Daniel Aaronson estimated that a 10 percent increase in the minimum wage drove up the price of McDonald’s burgers, KFC chicken, and Pizza Hut’s pizza-like product by as much as 10 percent. Assuming that holds true today, it means that bringing the minimum wage to $10.10 would tack $1.60 onto the cost of your Big Mac.

McDonald’s will never win the award for having the healthiest food.  And that’s fine.  People don’t go there to eat healthy.  They go there for the value.  As it is one of the few places you can take a family of four out for about $25.  Adding another $1.60 per burger could add another $6.40 to that dinner out.  For a family living paycheck to paycheck that may be just too much for the weekly budget.  Especially with inflation raising the cost of groceries and gasoline.  Thanks to those Keynesian economic policies.

Raising the Minimum Wage will not Result in any of the Lofty Goals the Economic Planners Envision

There is a lot of anger at these minimum wage companies paying their employees so little.  Some of their minimum workers have gone on strike recently to protest their low pay.  As they are apparently not working at these companies because they love the work.  So suffice it to say that no one is yearning to work at these companies.  And that some may outright hate these jobs.  So why in the world would we want to punish them by paying them more?  Removing all ambition to leave the jobs they hate?

If you raise the minimum wage what happens to other jobs that pay what becomes the new higher minimum wage?  Putting their earnings on par with unskilled entry-level jobs?  Jobs that require greater skills than entry-level minimum wage jobs?  Will they continue to work harder for the same wage as unskilled workers?  Will they leave their more difficult jobs for an easier entry-level job?  Will they demand a raise from their employer?  Keynesians would say this is a good thing.  As it will drive wages up.  It may.  But to pay these higher labor costs will require cost cuts elsewhere.  Perhaps by shedding an employee or two.

Raising the minimum wage will not result in any of the lofty goals the economic planners envision.  For if putting more money into consumers’ pockets is all we need to create economic activity then we wouldn’t have had the Great Recession.  The stagflation of the Seventies.  Or the Great Depression.  Keynesian stimulus spending didn’t create new economic activity to prevent any of these.  So why would a rise in the minimum wage be any different?

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October 2013 Employment Situation Summary

Posted by PITHOCRATES - November 11th, 2013

Economics 101

Although there were 204,000 New Jobs in October 720,000 Workers left the Labor Force

The worst economic recovery since that following the Great Depression continues (see Employment Situation Summary by the Bureau of Labor Statistics posted 11/8/2013).

Total nonfarm payroll employment rose by 204,000 in October, and the unemployment rate was little changed at 7.3 percent, the U.S. Bureau of Labor Statistics reported today…

Both the number of unemployed persons, at 11.3 million, and the unemployment rate, at 7.3 percent, changed little in October…

The civilian labor force was down by 720,000 in October.

If the Obama administration was an employment agency that found people jobs someone would have fired the management team by now with numbers like this.  204,000 new jobs for 11.3 million unemployed people is a success rate of 1.81%.  Worse, although there were 204,000 new jobs 720,000 workers left the labor force.  Which means that for every new job we lost 3.5 existing jobs.  So for one step forward in fixing the economy the administration takes 3.5 steps backwards.  Which means we’re moving in the wrong direction with the economy.

After a near-trillion dollar stimulus bill and quantitative easing up the wazoo what do we have to show for it?  Not a whole hell of a lot.  Other than more debt.  And inflationary pressures just waiting to be unleashed.  Taking us back to the stagflation and misery of the Seventies.  The heyday of Keynesian economics.

Solid Economic Growth starts at Raw Material Extraction

Before John Maynard Keynes gave us Keynesian economics the economy hummed along based on classical economic principles.  Including, but not limited to, thrift.  Savings.  Investment.  A sound banking system.  And a strong currency.  People saved their money.  Banks accumulated their savings into investment capital.  Banks made this capital available to investors.  And interest rates were determined by our savings rate.  The more we saved (i.e., the more thrifty we were) the lower interest rates were.  These are the economic principles that made the United States the number one economy in the world.

Another key concept of classical economics is the stages of production.  From the extraction of raw materials to manufacturing to wholesale goods to retail goods.  In a healthy economy there is growth at all stages.  And solid economic growth starts at raw material extraction.  For this feeds manufacturing.  Which feeds wholesale goods.  Which feeds retail goods.  Where consumers spend their money.  The fatal flaw of Keynesian economics is that it focuses only on consumer spending.  Not at these higher-order stages of production.  And when Keynesians try to end a recession while ignoring them they fail.  And get job numbers like these.

Employment in retail trade increased by 44,000 in October, compared with an average monthly gain of 31,000 over the prior 12 months…

Manufacturing added 19,000 jobs in October, with job growth occurring in motor vehicles and parts (+6,000), wood products (+3,000), and furniture and related products (+3,000). On net, manufacturing employment has changed little since February 2013…

In October, employment showed little or no change elsewhere in the private sector, including mining and logging, construction, wholesale trade, transportation and warehousing, information, and financial activities.

This is not the picture of an improving economy.  Consumers are spending money.  Thanks to low interest rates and a record amount of government benefits.  But the economic activity is greatest at the consumer level.  As evidenced by the largest increase in jobs at the retail level.  There are fewer job gains at manufacturing.  And even less at the whole sale level and raw material extraction.  Meaning the new economic activity is greatest at the consumer level.  Because of cheap (and free) money.  But there are no new jobs at the highest stage of production.  Raw material extraction.  Because they see no real economic recovery.  Only Keynesian ‘hot’ money that will cause a surge in consumer spending.  And a surge in inflation.  Leading to a continued sluggish economic recovery.  Or a fall back into recession.  And the last thing they want should that happen is higher costs.  Or more debt.  So they don’t spend more or invest during periods of Keynesian stimulus.

President Obama’s Greatest Supporters are suffering some of the Greatest Unemployment

The October 2013 Employment Situation Summary paints a grim economic picture.  People continue to leave the labor force.  And the government’s efforts to stimulate economic activity isn’t stimulating anything above the consumer level.  As the higher stages of production fear the coming inflation.  And possible recession.  This after 5 years of President Obama’s Keynesian economic policies.  Further proving the futility of Keynesian economics.  And the failure of the Obama administration.  Whose policies have stalled new hiring.  And pushed people from full-time to part-time.

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed at 8.1 million in October. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

Those individuals who had their hours cut or can’t find a full-time job are in large part due to the Affordable Care Act (Obamacare).  Which is not only destroying any economic recovery.  But the Affordable Care Act is also making health insurance unaffordable.  Which will make these economic numbers worse as the carnage spreads to employer-provided health insurance.  As people will have to both pay for health insurance AND pay for all of their health care out-of-pocket thanks to those high deductibles.  Which won’t help the unemployment numbers.  For as consumer spending falls so does hiring.

Among the major worker groups, the unemployment rates for adult men (7.0 percent), adult women (6.4 percent), teenagers (22.2 percent), whites (6.3 percent), blacks (13.1 percent), and Hispanics (9.1 percent) showed little or no change in October. The jobless rate for Asians was 5.2 percent.

It is interesting, or rather ironic, that the president’s greatest supporters are suffering some of the greatest unemployment.  Teenagers.  Blacks.  And Hispanics.  Who seem to never lose their faith.  No matter how much President Obama’s policies favor old white men and women.  And Asians.  It’s not for the lack of spending, either.  For the Obama administration has spent more domestically than any other president.  But it is only his rich Wall Street cronies who are doing well.  And other rich people.  Not the rank and file Obama supporters.  Yet they remain Obama supporters.  So far, at least.  These continual bad job numbers AND the unaffordable Affordable Care Act may change things.  Especially when these continue to fall disproportionally on teenagers, blacks and Hispanics. 

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Quantitative Easing

Posted by PITHOCRATES - June 24th, 2013

Economics 101

The Gold Standard prevented Nations from Devaluing their Currency to Keep Trade Fair

You may have heard of the great gamble the Chairman of the Federal Reserve, Ben Bernanke, has been making.  Quantitative easing (QE).  The current program being QE3.  The third round since the subprime mortgage crisis.  It’s stimulus.  Of the Keynesian variety.  And in QE3 the Federal Reserve has been ‘printing’ $85 billion each month and using it to buy financial assets on the open market.  Greatly increasing the money supply.  But why?  And how exactly is this supposed to stimulate the economy?  To understand this we need to understand monetary policy.

Keynesians hate the gold standard.  They do not like any restrictions on the government’s central bank’s ability to print money.  Which the gold standard did.  The gold standard pegged the U.S. dollar to gold.  Other central banks could exchange their dollars for gold at the exchange rate of $40/ounce.  This made international trade fair by keeping countries from devaluing their currency to gain a trade advantage.  A devalued U.S. dollar gives the purchaser a lot more weaker dollars when they exchange their stronger currency for them.  Allowing them to buy more U.S. goods than they can when they exchange their currency with a nation that has a stronger currency.  So a nation with a strong export economy would like to weaken their currency to entice the buyers of exports to their export market.  Giving them a trade advantage over countries that have stronger currencies.

The gold standard prevented nations from devaluing their currency and kept trade fair.  In the 20th century the U.S. was the world’s reserve currency.  And it was pegged to gold.  Making the U.S. dollar as good as gold.  But due to excessive government spending through the Sixties and into the Seventies the American central bank, the Federal Reserve, began to print money to pay for their ever growing spending obligations.  Thus devaluing their currency.  Giving them a trade advantage.  But because of that convertibility of dollars into gold nations began to do just that.  Exchange their U.S. dollars for gold.  Because the dollar was no longer as good as gold.  So nations opted to hold gold instead.  Instead of the U.S. dollar as their reserve currency.  Causing a great outflow of gold from the U.S. central bank.

Going off of the Gold Standard made the Seventies the Golden Age of Keynesian Economics

This gave President Richard Nixon quite the contrary.  For no nation wants to lose all of their gold reserves.  So what to do?  Make the dollar stronger?  By not only stopping the printing of new money but pulling existing money out of circulation.  Raising interest rates.  And forcing the government to make REAL spending cuts.  Not cuts in future increases in spending.  But REAL cuts in current spending.  Something anathema to Big Government.  So President Nixon chose another option.  He slammed the gold window shut.  Decoupling the dollar from gold.  No longer exchanging gold for dollars.  Known forever after as the Nixon Shock.  Making a Keynesian dream come true.  Finally giving the central bank the ability to print money at will.

The Keynesians said they could make recessions a thing of the past with their ability to control the size of the money supply.  Because everything comes down to consumer spending.  When the consumers spend the economy does well.  When they don’t spend the economy goes into recession.  So when the consumers don’t spend the government will print money (and borrow money) to spend to replace that lost consumer spending.  And increase the amount of money in circulation to make more available to borrow.  Which will lower interest rates.  Encouraging people to borrow money to buy big ticket items.  Like cars.  And houses.  Thus stimulating the economy out of recession.

The Seventies was the golden age of Keynesian economics.  Freed from the responsible restraints of the gold standard the Keynesians could prove all their theories by creating robust economic activity with their control over the money supply.  But it didn’t work.  Their expansionary policies unleashed near hyperinflation.  Destroying consumers’ purchasing power.  As the greatly devalued dollar raised prices everywhere.  As it took more of them to buy the things they once did before that massive inflation.

The only People Borrowing that QE Money are Very Rich People making Wall Street Investments

The Seventies proved that Keynesian stimulus did not work.  But central bankers throughout the world still embrace it.  For it allows them to spend money they don’t have.  And governments, especially governments with large welfare states, love to spend money.  So they keep playing their monetary policy games.  And when recessions come they expand the money supply.  Making it easy to borrow.  Thus lowering interest rates.  To stimulate those big ticket purchases.  But following the subprime
mortgage crisis those near-zero interest rates did not spur the economic activity the Keynesians thought it would.  People weren’t borrowing that money to buy new houses.  Because of the collapse of the housing market leaving more houses on the market than people wanted to buy.  So there was no need to build new houses.  And, therefore, no need to borrow money.

So this is the problem Ben Bernanke faced.  His expansionary monetary policy (increasing the money supply to lower interest rates) was not stimulating any economic activity.  And with interest rates virtually at 0% there was little liquidity Bernanke could add to the economy.  Resulting in a Keynesian liquidity trap.  Interest rates so close to zero that they could not lower them any more to create economic activity.  So they had to find another way.  Some other way to stimulate economic activity.  And that something else was quantitative easing.  The buying of financial assets in the market place by the Federal Reserve.  Pumping enormous amounts of money into the economy.  In the hopes someone would use that money to buy something.  To create that ever elusive economic activity that their previous monetary efforts failed to produce.

But just like their previous monetary efforts failed so has QE failed.  For the only people borrowing that money were very rich people making Wall Street investments.  Making rich people richer.  While doing nothing (so far) for the working class.  Which is why when Bernanke recently said they may start throttling back on that easy money (i.e., tapering) the stock market fell.  As rich people anticipated a coming rise in interest rates.  A rise in business costs.  A fall in business profits.  And a fall in stock prices.  So they were getting out with their profits while the getting was good.  But it gets worse.

The economy is not improving because of a host of other bad policy decisions.  Higher taxes, more regulations on business, Obamacare, etc.  And a massive devaluation of the dollar (by ‘printing’ all of that new money) just hasn’t overcome the current anti-business climate.  But the potential inflation it may unleash worries some.  A lot.  For having a far greater amount of dollars chasing the same amount of goods can unleash the kind of inflation that we had in the Seventies.  Or worse.  And the way they got rid of the Seventies’ near hyperinflation was with a long, painful recession in the Eighties.  This time, though, things can be worse.  For we still haven’t really pulled out of the Great Recession.  So we’ll be pretty much going from one recession into an even worse recession.  Giving the expression ‘the worst recession since the Great Depression’ new meaning.

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Economic Indicators

Posted by PITHOCRATES - May 20th, 2013

Economics 101

To Better Understand the Economy we should Study the Economic Indicators Investors Study

If you’ve lost your job you have a pretty good idea about the state of the economy.  It’s bad.  An unemployed person is like a soldier in the trench.  He or she doesn’t need to examine any data to understand what’s happening in the economy.  They know firsthand how bad things are.  But generals far behind the lines don’t have that up close and personal economic experience.  So they have to examine data to understand what’s going on.  Just as government officials, investors and economic prognosticators have to examine data.  Giving them an understanding of the state of the economy.  So they can know what the unemployed know.  The economy sucks.

Government officials want positive economic data so they can say their policies are working.  Whether they are or not.  In fact, they will parse the data to serve them politically.  When necessary.  Such as during the run-up to an election.  So their reports on the economy are not always, how should we say, full of truthiness.  For they can take some bad economic data and put a positive spin on it.  Completely changing the meaning of the data.  The unemployed won’t believe the rosy picture they’re painting.  But those in the trenches may.  And those in the rear with the gear.  After all, they have jobs.  So things don’t really seem that bad to them.

No, for a better picture of the economy you should listen to the people with skin in the game.  Those who are making bets on the economy.  Investors.  And business owners.  Who are risking their money.  And if we look at what they look at we can get a better understanding of the economy.  See what bothers them.  What pleases them.  And what excites them.  So what do they look at?  Economic data we call economic indicators.  Because they indicate the health of the economy.  And give an idea of what the future holds.  There are a lot of economic indicators.  The government compiles most of them.  They each give a little piece of the economic puzzle.  And when you put them together you see the bigger picture.

With a Rise in Housing Starts a Rise in Durable Goods should Follow Creating a lot of New Jobs

As far as economic indicators go retail sales is a big one.  Because consumer spending is the vast majority of economic activity in the new Keynesian economy.  (John Maynard Keynes changed the way governments intervene in the private sector economy in the early 20th century.)  Keynesians believe consumer spending is everything.  Which is why governments everywhere inflate their money supplies.  To keep their interest rates artificially low.  To encourage people to borrow money.  And spend.  When they do retail sales increase.  Signaling a healthy economy.  When they fall it may mean a recession is coming.  Of course, if retail spending rises more than expected investors get nervous.  Because it could mean inflation is coming.  Which the government will try to prevent by raising interest rates.  Thus cooling the economy.  And hopefully sending it into a soft landing.  But more often than not they send it into recession.

Another economic indicator is housing starts.  A lot of economic activity comes from building houses.  Building them generates a lot.  And furnishing them generates even more.  So governments are always trying to do everything within their power to encourage new housing.  They keep interest rates artificially low.  Encouraging people to get mortgages.  And they’ve pressured lenders to lower their lending standards.  To get more people with bad credit (or no credit) into houses.  Which led to subprime lending.  The subprime mortgage crisis.  And the Great Recession.  So more housing starts can be good.  But too many housing starts can be bad.  Generally, though, if they are increasing it’s a sign of an improving economy.

Before Keynesian economics the prevailing school of economic thought was classical economics.  Which we used to make America the world’s number one economic power.  Unlike Keynesians in the classical school we looked higher in the stages of productions.  Where real economic activity took place.  Raw material extraction.  Industrial processing.  Manufacturing.  And wholesaling.  An enormous amount of activity before you reach the consumer level.  All of these higher order economic activities fed into the making of durable goods.  Those things we bought to fill those new houses.  Which is why we like rising housing starts.  Because a rise in durable goods should follow.  And when we’re producing more durable goods we’re employing more people.  Making the durable goods economic indicator a very useful one.

One should Always be Skeptical when the Government says their Policies are Improving the Economy

The Producer Price Index (PPI) tells us how the prices are moving above the consumer level.  So if the PPI is rising it tells us the costs to produce consumer goods are rising.  And these higher costs will flow down the stages of production to the consumer level.  Causing a rise in consumer prices.  So the PPI forecasts what will happen to the CPI.  The consumer price index.  When it rises it means inflation is entering the picture.  Which the government will try to prevent by raising interest rates.  To cool the economy down.  And lower the prices at both the consumer and producer level.  Again, trying to send the economy into a soft landing.  But usually sending it into recession.  Which is why investors pay close attention to the PPI.  So they can get an idea of what will happen to the CPI.  So they can buy and sell (stocks and/or bonds) accordingly.

The rest of us can get an idea of what these investors think about the economy by following the Dow Jones Industrial Average (DJIA).  Which is the weighted ‘average’ of 30 stocks.  (We calculate it by dividing the sum of the 30 stock prices by a divisor that factors in all stock splits and changes of companies in the Dow 30).  As a company does well in a growing economy its stock price grows.  And if investors like what they see in other economic indicators they bid up the stock price even further.  So a rising DJIA indicates that investors believe the economy is doing well.  And will probably even improve.  But sometimes investors have a little irrational exuberance.  Such as during the dot-com bubble in the Nineties.  Where they poured money into any company that had anything to do with the Internet.  Making a huge bet that they found the next Bill Gates or Steve Jobs.  Of course, when that blind hope faded and reality set in those inflated stock prices came crashing down to reality.  Causing a long and painful recession in the early 2000s.  So even investors don’t always get it right.

When the dot-com bubble burst it threw a lot of people out of a job.  Increasing the unemployment rate.  Another big economic indicator.  But one that can be massaged by the government.  For they only count people out of a full-time job who are looking for full-time work.  The official unemployment rate (what we call the U-3 rate) doesn’t count people who gave up looking for work.  Or people who took a couple of part-time jobs to make ends meet.  A more accurate unemployment rate is the U-6 rate that counts these people.  For while the official unemployment rate fell below 8% during the run-up to the 2012 election the U-6 rate was showing a much poorer economic picture.  And the labor force participation rate showed an even poorer economic picture.  The labor force participation rate shows the percentage of people who could be working who were actually working.  So the lower this is the worse the economy.  The higher it is the better the economy.  So while the president highlighted the fall of the U-3 rate below 8% as a sign of an improving economy the labor force participation rate showed it was the worst economy since the Seventies.  Something the unemployed could easily understand.  But those who had a job believed the less than honest U-3 economic indicator.  Believed the president was making the economy better.  When, in fact, he had made it worse.  Which is why one should always be skeptical when the government says their policies are improving the economy.  For they are more concerned about winning the next election than the people toiling away in the trenches.

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Keynesian Economics is as Corrupt and Immoral as is Crony Capitalism

Posted by PITHOCRATES - May 5th, 2013

Week in Review

Before John Maynard Keynes came along the established economic thought was classical economics.  Those principles that made America the number one economic power in the world.  A sound money like the gold standard gave you.  Low tax rates to encourage economic risk taking.  Responsible government spending for only those things a federal government should be doing.  And only spending what that minimal federal tax revenue could pay for.  Little government intervention into the private sector economy.  And thrift.  People spending money very cautiously.  And saving as much as they possible could.  To save for the future.  While providing investment capital for businesses.

These policies made the United States the number one economic power in the world.  Laissez-faire capitalism.  Tried and proven for over a century in the U.S.  But then government got big in the beginning of the Twentieth Century.  The progressives came into the government.  And they needed a new way to lie to and deceive the American people.  And then came along John Maynard Keynes.  The answer to their dreams.  Whose Keynesian economics has destroyed nation after nation with his assault on classical economics.  And now debt crises from excessive government spending in the Twentieth Century have plagued Greece, Italy, Spain, Portugal, Ireland, the United Kingdom, Japan, the United States, and other nations that dared to embrace Keynesian economics.

President Obama’s economic recovery has been horrible because he embraces Keynesian economics.  He lied like a good Keynesian to the American people to pass his stimulus.  It did nothing.  As predicted by everyone that isn’t a Keynesian.  He continues to destroy the American economy with near zero interest rates.  Destroying our savings.  Creating stock market bubbles while the labor force participation rate falls to its lowest since the Seventies.  And caused the federal debt to soar to levels that we can never pay down.  Putting us on the road to Greece.  All because of the corrupt economic school of thought John Maynard Keynes gave us.  That governments everywhere are using to increase their size and power.  To elevate the government class into a new aristocracy.  That lives very well thanks to those people beneath them.  The working class.  That works longer while earning less.  Like the nobility and peasants of old.  And a little Orwellian.  As they built this upon a house of lies.  Beginning with changing the meaning of words (see Two Sides of the Same Debased Coin by Hunter Lewis posted 5/2/2013 on Ludwig von Mises Institute).

When we turn to Keynes’s economics, perhaps the most fantastic self-contradiction was that an alleged savings glut, too much supposed idle cash, could be cured by flooding the economy with more cash, newly printed by the government. Perhaps even more bizarrely, Keynes says that we should call this new cash “savings” because it represents “savings” just as genuine as “traditional savings.” That is, the money rolling off the government printing presses is in no way different from the money we earn and choose not to spend.

All this new “savings” enters the economy through the mechanism of low interest rates. At this point, Keynes further confounds his forerunners and elders by arguing that it is not high interest rates, as always thought, but rather low interest rates, that increase savings, even though we started by positing too much savings in the first place.

Keynes’s followers echo this even today. Greenspan, Bernanke, and Krugman have all written about a savings glut which is supposed to be at the root of our troubles, and have proposed more money and lower interest rates as a remedy, although they no longer call the new money “genuine savings.” They prefer quantitative easing and similar obscure euphemisms…

The General Theory does argue that interest rates could and should be brought to a zero level permanently (that’s pages 220–21 and 336)…

Keynesians hate savings.  They don’t want people saving their money.  They want them to spend every last dime.  And then borrow more money to spend when they run out of their own.  Because consumer spending is everything to them.  Spending is what drives economic activity.  And any money they save they don’t spend.  And drain out of the economy.  Which is why they want zero interest rates.  Or even negative interest rates.  To discourage people from saving.  For if you lose purchasing power when you put your money in the bank you might as well spend it now.  And generate economic activity.

This is, of course, a ‘live for the day and screw the future’ mentality.  For if people spend all of their money going out to dinner, buying new cars, going on more vacations, running up their credit cards, etc., that will create a lot of economic activity.  But when these people retire they will have to live like paupers.  Because they didn’t save for their retirement.  Even if someone loses their job and is out of work for a few months if they have no savings they will struggle to pay their mortgage or rent.  Struggle to put food on the table.  They will struggle to pay their utility bills.  And their credit card bills.  This is the problem of living as if your income stream will never end.  It sometimes does end.  And if you didn’t bank a rainy day fund you could find yourself suffering some extreme hardship as you can no longer afford to live like you once did.

Keynesians once called printed money ‘savings’.  Today they call tax cuts ‘spending’.  A little Orwellian doublespeak.  Change the meanings of words.  So they can fool the people into believing that the government printing money and depreciating the currency is the same thing as you working hard and saving for your retirement.  And not taking more of your hard-earned paycheck is irresponsible government spending.  The only government spending, incidentally, they find irresponsible.  This is a fundamental tenet of Keynesian economics.  Deceiving the people.  So politicians can continue to recklessly spend money they don’t have to buy votes for the next election.  And to reward their campaign contributors with the favors of crony capitalism.

These Romney advisors also, of course, believed in the fairy tale of borrow-and-spend stimulus. It is usually forgotten that Keynes assured us that each dollar of such stimulus would produce as much as twelve dollars of growth and not less than four dollars. Even the most ardent Keynesians have, of course, been unable to demonstrate as much as one dollar. How did Keynes know that you would get four dollars at least? He didn’t. He told the governor of the Bank of England, Norman Montague, that his ideas were “a mathematical certainty” but that was just a crude bluff.

What is empirically verifiable is that all debt, private or public, has been generating less and less growth for decades. In the ten years following 1959, the official figures say that you got 73 cents in growth for each dollar borrowed. By the time of the Crash of ’08, that was down to 19 cents. And I expect it was really negative by then and is deeply negative now.

Keynes lied.  But that lie sanctioned governments to expand into the private sector economy.  So they embraced the lie.  And continue the lie.  Because none of these politicians want to give up the good life and get a real job.  They like it the old fashioned way.  Before the Founding Fathers had to muck it up with their attacks on the nobility.  They like being part of the aristocracy.  To live better than any of the poor schmucks that work a 40-hour week.  They just want to take a percentage of that poor schmuck’s earnings for themselves.  Rub elbows with the beautiful people.  And laugh at the working class.

The idea that you can take a dollar from the taxpayer, run it through a costly bureaucracy that a portion of that dollar has to pay for and think you’re going to generate more than a dollar in economic activity is absurd.  By the time that dollar reenters the economy the government has skimmed so much off the top that any economic activity it generates is negligible.  Now compare that to how the taxpayer who earned that dollar spends it.  He or she spends a dollar out of that dollar.  Because they’re not putting it through a costly bureaucracy before they spend it.

Which begs this question.  If a wage earner gets more economic activity when spending that money why not let that wage earner keep more of his or her money to spend?  For each additional dollar they can keep they can generate another dollar of economic activity.  Not the 19 cents the government will be lucky to generate from it.  Ah, well, if they can keep their money they may just do something responsible with it.  Like save it.  Which Keynesians hate.  And the government won’t be able to skim at least 81 cents from each dollar if they don’t tax it away.  Which Keynesians hate even more.

The common theme [of Keynesian Economics] is that market prices don’t matter…

Is this, then, the essence of Keynesianism, its blind destruction of the price mechanism on which any economy depends, as Mises demonstrated? Yes. But there may be an even deeper essence…

For the Victorians, spending within your means and avoiding debt were not just financial principles. They were moral principles. Keynes, who was consciously rebelling against these same Victorians, described their “copybook morality” as “medieval [and] barbarous.” He told his own inner circle that “I remain, and always will remain an immoralist…”

So, in conclusion, when we strip down Keynesianism to its essence, the relationship to crony capitalism becomes even clearer. Crony capitalism represents both a corruption of capitalism and a corruption of morals. Keynesianism also represents both a corruption of economics and a corruption of morals. Crony capitalism and Keynesianism are just two sides of the same debased coin.

The price mechanism allocates scarce resources that have alternative uses.  Through the laws of supply and demand.  Guaranteeing that the people who most want a resource—and are willing to pay more for it than others—will get that resource.  While those who don’t want that resource as badly are not willing to pay the higher prices others are willing to pay.

This is capitalism.  This is what enables you to go out and buy the things you want.  Because the price mechanism has automatically allocated millions upon millions of resources in the economy to get them into the things people most want to buy.  Crony capitalism smashes this apart.  By distorting market forces.  With government fiat.  Which allocates those resources first to their close friends who, in return, favor their friends in government with generous campaign contributions.  Or gifts of gratitude.  While others must pay a higher price.  If they can even get these resources at all.  Which they might not be able to do if they don’t please someone in government who has power over these resources.

This is crony capitalism.  Corrupt.  And immoral.  Just as is Keynesian economics.  Unlike the classical economics that made this country the number one economic power in the world.  Thanks to the gold standard, low taxes, low government spending, little government intervention into the private sector economy and thrift.  Things that kept a government moral.  However hard they may try not to be.

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More of the Same from the Fed means more Housing Bubbles and Great Recessions

Posted by PITHOCRATES - April 14th, 2013

Week in Review

Those who wanted to get away from the United States’ limited government past and grow government had to do away with the gold standard.  Those who favored a large and expansive federal government needed fiat money.  They needed the power to print money at will.  To fund deficits when they continually spend more than they have.  Despite continuously raising taxes.  When Nixon decoupled the dollar from gold in 1971 the fiat money people got their way.  Now the Keynesians could tax, borrow, print and spend to their heart’s content.  With the federal government in the driver’s seat of the U.S. economy.  With their Keynesian economists advising them.  Who said government spending was just as good as private spending.  So go ahead and tax, borrow and print.  Because all you need to create economic activity is to print money.

Of course they couldn’t have been more wrong.  As the Seventies proved.  Printing money just created inflation.  Higher prices.  And asset bubbles.  With no corresponding economic activity.  Instead there was stagflation.  And a high misery index (the inflation rate added to the unemployment rate).  Because there is more to economic activity than monetary policy.  Tax rates and regulations matter a whole heck of a lot, too.  As well as a stable currency.  Not one being depreciated away with double-digit inflation.  Rich people may get richer buying and selling real estate and stocks during periods of high inflation but working class people just see both their paycheck and savings lose purchasing power.

It was these Keynesian policies that caused the S&L Crisis.  The dot-com bubble.  And the subprime mortgage crisis.  Giving is the Great Recession.  The worst recession since the Great Depression.  But have we learned anything from these failed policies of the past?  Apparently not (see Blind Faith In The Fed Is Not Enough by Comstock Partners posted 4/12/2013 on Business Insider).

The move of the S&P 500 into new all-time highs is based on neither the economy, nor earnings, nor value, but almost completely on the blind faith that the Fed can single-handedly flood the market with enough funds to keep the illusion going.  In this sense the similarity of the current stock market to the dot-com bubble of the late 1990s or the housing bubble ending in 2007 is glaring…

Real consumer spending has been growing at a mediocre 2% rate over the past year despite growth of only 0.9% in real disposable income over the same period.  This was accomplished mainly by decreasing the savings rate to only 2.6% in February, compared to rates of 7%-to-11% in more prosperous times.  With employment growth diminishing and the negative effects of the January tax increases and the sequester yet to kick in, consumer spending is likely to slow markedly in the period ahead.  While March year-over-year comparisons may benefit from an earlier Easter, the reverse will probably be true in April.  Keep in mind, too, our over-riding theme that consumers, still burdened with most of the debt built up in the housing boom, are in no shape to jump-start their spending…

In sum, the lack of support from the economy, earnings or valuation leaves the Fed as the only game in town.  Although the old adage says “Don’t fight the Fed”, it did pay to fight the Fed in 2001 and 2002 and again from late 2007 to early 2009.  In our view, the Fed can only try to offset the tightness coming from the fiscal side, but cannot get the economy growing on a sustainable basis.

The only real growth we had was from a tax cut.  Surprise, surprise.  Of course that cut in the tax rate of the Social Security payroll tax decreased the Social Security surplus.  Moving the Social Security funding crisis up in time.  That along with Medicare and whatever Obamacare will do will cause a financial crisis this country has yet to see.  Which will cause great suffering.  Particularly because people are saving less because they have less.  Which is the only way they can compensate for the horrible economy President Obama and his Keynesian advisors are giving us.  So they won’t have private savings to replace their Social Security benefits that the government will spend long before they retire.

And what does the government do?  Why, spend more, of course.  Because of the sweet nothings their Keynesian advisors are whispering into their ears.  Saying the things big government types want to hear.  Spend more.  It’s good for the economy.  If you wonder what got Greece into the mess they’re in this is it.  Spending.  And anti-business policies to pull more wealth out of the private sector so the government can spend it.

All the countries reeling in the Eurozone sovereign debt crisis are there for the same reason.  None of them got into the mess they’re in because they had low taxes and low regulatory costs.  Because countries with business-friendly environments create private sector jobs.  And private sector jobs don’t cost the government anything.  So they don’t have to tax, borrow, print and spend like they do when they listen to their Keynesian advisors.  Because that is what causes chronic deficits to fund.  And growing national debts.  Things that don’t happen when you leave the economy in the private sector.

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Civilian Labor Force Participation Rate and Recessions 1950-Present

Posted by PITHOCRATES - April 9th, 2013

History 101

LBJ was able to pass JFK’s Tax Cuts resulting in a Long Period of Economic Growth

The official unemployment rate is stuck around 8%.  But if you count all the people who can’t find a full-time job the actual unemployment rate is closer to 14%.  With every jobs report we hear the positive spin from the government about another down tic in the official unemployment rate.  And the hundreds of thousands of new jobs created.  But after three years or so of hearing these reports people start questioning the numbers.  And the rosy spin.  Because despite all the good news they tell us people are disappearing from the civilian labor force.  Which is the only reason why the official unemployment rate is falling.  Because they’re not counting a lot of unemployed people.  So looking at the civilian labor force may be a better indicator of the health of the economy.  Or better yet, the civilian labor force participation rate (CLFPR).  Which is basically the percent of those who can work that are working.  So let’s do that.  Starting with the Fifties.

Labor Force Participation Rate and Recessions 1950 to 1959

After World War II veterans went to college on the G.I. Bill.  These new college graduates with degrees in science, engineering and business management entered the workforce in the Fifties.  Helping the United States to develop new technologies.  New industries.  And a lot of new jobs.  American wells were busy pumping domestic oil.  Keeping gasoline cheap.  Having escaped the damage of war the American economy exported to those countries that didn’t.  And consumer spending took off.  Thanks to the new advertising industry telling Americans about all the great things to buy.  They bought houses and cars with borrowed money.  And used the new credit card to spend even more money they didn’t have.  Changing the American economy into a consumer-based economy.  Making the Fifties one of the most prosperous times in U.S. history.  Despite the Korean War.  And the Cold War.  Which was getting underway in a big way.  There was a burst of inflation to help pay for the Korean War.  When it ended they contracted the money supply to get rid of that inflation sending the economy into recession.  But once the recession ended the economy took off with all that consumerism.  Shown by the sharp rise in the CLFPR.  To correspond with the very good economic times of the Fifties.  Another monetary contraction happened in 1957 to tamp out some price inflation.  With a corresponding fall in the CLFPR.

Labor Force Participation Rate and Recessions 1960 to 1969

The Sixties started with another recession.  After it ended, though, the CLFPR continued to fall.  The recession was officially over but the economy was not doing well.  The CLFPR fell for almost three years following the recession.  Things were different from the Fifties.  For one, a lot of those war-torn economies were up and running again.  Providing some competition.  Especially a little island nation by the name of Japan.  Which one day would build all the televisions sold in America.  It was because of this fall in economic activity that JFK started talking about tax cuts in 1963.  Congress blocked his attempt to cut tax rates.  But after his assassination LBJ was able to pass the Revenue Act of 1964.  This lowered the top marginal tax rate from 91% to 70%.  And lowered the corporate income tax from 52% to 48%.  Among other favorable business measures.  Resulting in a long period of economic growth.  And a long upward trend in the CLFPR.

The Tax Cuts and Deregulation of the Eighties created one of the Longest Periods of Economic Growth

But following the Revenue Act of 1964 came the Great Society.  The Vietnam War.  And the Apollo moon program.  All paid for with a huge surge in federal spending.  Deficits began to grow.   As the government struggled to pay for everything.  And were unwilling to cut anything.

Labor Force Participation Rate and Recessions 1969 to 1979

The economy fell into a mild recession in 1970.  The CLFPR remained relatively flat.  To meet their spending needs they started printing money.  Devaluing the dollar.  Still part of Bretton Woods the dollar was still pegged to gold at $35/ounce.  That is, the U.S. agreed to exchange gold for dollars at $35/ounce.  But as they devalued the dollar our trading partners no longer wanted to hold dollars.  Because they were losing their purchasing power.  They wanted the gold instead.  So they began exchanging their dollars for gold.  Causing a great outflow of gold from the U.S.  Causing a problem for President Nixon.  He didn’t want the U.S. to lose all of their gold reserves.  But he didn’t want to cut any spending.  Which meant he didn’t want to stop printing money.  In fact, he wanted to print more money.  And the easy way out of his dilemma was by doing the most irresponsible thing.  He slammed the gold window shut in 1971.  And refused to exchange gold for dollars anymore.  And when he did there was no restriction to the amount of money they could print.  And they printed it.  A lot.  Creating double-digit inflation before the Seventies were over.  The inflation caused prices to rise.  Which Nixon tried to prevent with wage and price controls.  Causing a shortage of available rental property as people converted them into condos to get away from the rent control.  Gasoline stations ran out of gas as people filled their tanks with below-market priced gas.  And meat disappeared from grocery stores.  Wage controls kept wages from keeping pace with inflation.  So even though people had jobs they lost more and more purchasing power.  Or simply found there was nothing to purchase.  Throwing the economy into recession in 1973.  After the recession the CLFPR grew throughout the remainder of the Seventies.  But it wasn’t good growth.  It was growth sustained with double-digit inflation.  A bubble of artificial economic activity.  That would have to crash.  As all inflationary periods must crash.

Labor Force Participation Rate and Recessions 1979 to 1989

In the Eighties Paul Volcker, Federal Reserve Chairman, raised interest rates to double digits to wring out the double-digit inflation from the economy.  To restore people’s purchasing power.  And return the nation to real economic growth.  The tax cuts and deregulation of the Eighties created one of the longest sustained periods of economic growth in U.S. history.  With one of the longest upward trends in the CLFPR ever.  Indicating a growing economy.  With more and more people who could work finding work.  Proving that Reaganomics worked.  And worked very well.

If JFK or Ronald Reagan were President Today we wouldn’t be seeing a Freefall of the CLFPR

But it wouldn’t last.  Thanks to the government’s interference into the banking industry.  They had set a maximum limit on interest rates S&Ls (and banks) could offer.  When inflation took off people pulled their money from their savings accounts.  Putting it in higher earning instruments.  So they didn’t lose their savings to inflation.   This bad banking policy begat more bad banking policy.  They deregulated the S&Ls and banks.  So they could do other things to make up for their lost savings business.  And that other thing was primarily real estate.  They borrowed short-term money to make long-term loans.  Helping to create a housing bubble.  And when they began to wring that inflation out of the economy interest rates rose.  When those short-term loans came due they had to refinance them at higher interest rates.  While the interest they were earning on those long-term loans remained the same.  So their interest expense soon exceeded their interest income.  Creating the savings and loan crisis.  And a severe recession that ended the economic expansion of the Eighties.  With a corresponding fall in the CLFPR.

Labor Force Participation Rate and Recessions 1990 to 2000

Once the recession ended the CLFPR resumed a general upward growth.  But not as good as it was in the Eighties.  Also, it would turn out that much of the growth in the Nineties was artificial.  Bill Clinton’s Policy Statement on Discrimination in Lending forced lenders to lower their lending requirements.  And to qualify the unqualified.  Which created a surge in subprime lending.  And the beginning of a housing bubble.  The Internet entered the economy in the Nineties.  Just as the personal computer entered the economy in the Eighties.  Making Bill Gates a very rich man.  Investors were anxious to find the next Bill Gates.  Taking advantage of those low interest rates creating that housing bubble. And poured money into dot-com start-ups.  Companies that had no revenues.  Or products to sell.  Creating a dot-com bubble.  And a surge in computer programming jobs.  Also, as the century came to a close there was the Y2K scare.  Creating another surge in computer programming jobs.  To rewrite computer code.  Changing 2-digit date codes (i.e., ’78) to 4-digit codes (i.e., 1978).

Labor Force Participation Rate and Recessions 2000 to 2013

The Y2K scare proved to be greatly overblown.  Which put a lot of computer programmers out of a job in January of 2000.  And they wouldn’t find a dot-com job for the dot-com bubble burst in the same year they lost their Y2K job.  Throwing the economy into recession in 2001.  And then making everything worse came the terrorist attacks on 9/11.  Prolonging the recession.  As can be seen by the long decline in the CLFPR.  Which leveled out after the Bush tax cuts.  But then that housing bubble peaked in 2006.  And burst in 2007 into the subprime mortgage crisis.  Thanks to all those toxic mortgages Bill Clinton’s Policy Statement on Discrimination in Lending forced lenders to make.  And because Fannie Mae and Freddie Mac bought these toxic mortgages and had Wall Street package them into collateralized debt obligations this crisis spread worldwide.  Selling what they told unsuspecting investors were high yield, low risk investments.  Because they were backed by the safest of all loans.  Mortgages.  What they failed to tell these investors was that these mortgages were not safe 30-year conventional mortgages.  But highly risky subprime mortgages.  In particular adjustable rate mortgages.  Where the monthly payment would increase with an increase in interest rates.  And that is what happened.  And when it happened the unqualified could not afford the new monthly payment.  And defaulted.  Kicking off the Great Recession.  And because President Obama was more interested in national health care than ending the Great Recession he didn’t cut taxes.  Or cut regulations.  Instead, he increased taxes and regulations.  Making the current recovery one of the worst in U.S. history.  As can be seen in the greatest decline in the CLFPR since the Great Depression.  If you look at a continuous graph from 1950 to the present you can see just how bad the Obama economic policies are.

Labor Force Participation Rate and Recessions 1950 to Present

The JFK and Reagan tax cuts caused the greatest economic expansions.  And the greatest rise in the CLFPR.  Also, after most recessions there was a return to a growing CLFPR.  Interestingly, the two times that didn’t happen are tied to Bill Clinton.  Who created two of the greatest bubbles.  The dot-com bubble in the Nineties.  And the subprime mortgage bubble that was built in the Nineties and the 2000s.  The growth was so artificial in building these bubbles that the CLFPR did not recover following the bursting of these bubbles.  It might have following the dot-com bubble if the subprime mortgage crisis didn’t follow so soon after.  The current recovery is so bad that it has taken the CLFPR back to levels we haven’t seen since the Seventies.  Making the current recovery far worse than the official unemployment rate suggests.  And far worse than the government is telling us.  So why are they not telling us the truth about the economy?  Because the government wants to raise taxes.  And if the economy is improving there is no need for recession-ending tax cuts.  So they say the economy is improving.  As they hate tax cuts that much.  Unlike Ronald Reagan.  Or JFK.  And if either of them were president today we wouldn’t be seeing a freefall of the CLFPR.

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The Rich are doing well in the Stock Market while the rest of us Suffer in a Jobless Recovery

Posted by PITHOCRATES - April 7th, 2013

Week in Review

The stock market is doing well.  Thanks to the Federal Reserve’s flooding the economy with new money.  Which rich people are borrowing to get even richer in the stock market.  But all this monetary stimulus is not creating real economic activity.  Like Keynesian economics says it’s supposed to.  For the Keynesians believe the only thing needed to create economic activity is cheap money.  And government spending.  Which the government is doing.  Running record trillion dollar deficits.  But there is no new economic activity.  They are not creating new, good-paying jobs.  No, it’s quite the contrary.  Some of the most anti-business policies has frozen job creation.  With Obamacare doing much of that freezing.

The problem is that governments embrace Keynesian economics to expand the government.  Not the economy.  They hope the economy will follow.  But if it doesn’t, that’s okay.  For they are more interested in taxing, borrowing, printing and spending.  Because you can get a lot of people to vote for you when you do.  And when stimulus spending fails, why, it just gives them an excuse to pass more stimulus spending legislation.

But businesses aren’t stupid.  They know that when the government expands the money supply they will depreciate the dollar.  So they’re not borrowing any of that cheap money.  Because they know inflation will soon follow.  Raising prices.  And bringing on another recession.  Or keeping us in a perpetual recession.  At most you get a surge of consumer spending.  But that’s it.  Retailers may draw down inventories at wholesalers.  But the wholesalers aren’t increasing their orders with manufacturers.  And the manufacturers aren’t increasing their orders with their raw material suppliers.  So there is no job creation above the retail level.  And very little at the retail level.  So while rich people are taking advantage of the Federal Reserve’s quantitative easing to get rich in the stock market, the rest of us are just seeing flat and stagnant economic growth of a jobless recovery (see Demand for space in U.S. strip malls still weak in first quarter by Ilaina Jonas posted 4/4/2013 on Reuters).

With retail sales struggling to recover and muted demand for space, new construction for neighborhood strip centers remained near record low levels during the quarter, according to the report by real estate research firm Reis Inc…

The data adds to recent evidence that without a stronger labor recovery, the rebound of the U.S. economy continues at a glacial pace, rather than gaining momentum.

“Until the economy begins to create more and better jobs, retail sales will remain listless, demand will remain at low levels, and the vacancy compression will be slow and tedious,” Reis economist Ryan Severino said…

Since the United States began to drag itself out of recession, the national vacancy for neighborhood strip centers is just half a point below the 1990 all-time high of 11.1 percent that was also reached in 2011. Vacancies remain well above their 2005 low of 6.7 percent.

The unemployment rate fell in March from 7.7% to 7.6% with the economy adding only 88,000 jobs.  Horrible economic numbers.  And an unemployment rate that is meaningless.  For 496,000 people disappeared from the civilian labor force in March.  Which is the only reason why the unemployment rate fell.  They didn’t count these 496,000 people who don’t have a job as unemployed.

The economy is horrible.  It is far more horrible than the official government numbers tell us.  And it’s not going to get better anytime soon.  Not with these anti-business policies freezing hiring and hindering new job creation.  Especially Obamacare.  Whose onslaught of new taxes will snuff out whatever life is left in this anemic recovery.

But the Keynesians play with the economic data.  Telling us, as they have been telling us the past 4 years, that we’ve turned the corner.  But the only improvement in the unemployment rate is due to people disappearing from the civilian labor force.  Since Obama became president there has been a permanent decline in the labor force participation rate.  Because President Obama is a Keynesian.  And cares more about the power these horrible policies give him than the economy.

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GDP Growth, Recession, Depression and Recovery

Posted by PITHOCRATES - March 18th, 2013

Economics 101

Gross Domestic Product is basically Consumer Spending and Government Spending

In the 1980 presidential campaign Ronald Reagan said, “A recession is when your neighbor loses his job.  A depression is when you lose yours.  And a recovery is when Jimmy Carter loses his.”  A powerful statement.  And one that proved to be pretty much true.  But don’t look for these definitions in an economics textbook.  For though they connect well to us the actual definitions are a little more complex.  And a bit abstract.

There is a natural ebb and flow to the economy.  We call it the business cycle.  There are good economic times with unemployment falling.  And there are bad economic times with unemployment rising.  The economy expands.  And the economy contracts.  The contraction side of the business cycle is a recession.  And it runs from the peak of the expansion to the trough of the contraction.  A depression is basically a recession that is really, really bad.

But even these definitions are vague.  Because getting an accurate measurement on economic growth isn’t that easy.  There’s gross domestic product (GDP).  Which is the sum total of final goods and services.  Basically consumer spending and government spending.  Which is why the government’s economists (Keynesians) and those in the Democrat Party always say cutting government spending will hurt the economy.  By reducing GDP.  But GDP is not the best measurement of economic activity.

Even though Retail Sales may be Doing Well everyone up the Production Chain may not be Expanding Production

One problem with GDP is that the government is constantly revising the numbers.  So GDP doesn’t really provide real-time feedback on economic activity.  The organization that defines the start and end points of recessions is the National Bureau of Economic Research (NBER).  And they often do so AFTER the end of a recession.  One metric they use is GDP growth.  If it’s negative for two consecutive quarters they call it a recession.  But if there is a significant decline in economic activity that lasts a few months or more they may call that a recession, too.  Even if there aren’t two consecutive quarters of negative GDP growth.  If GDP falls by 10% they’ll call that a depression.

There’s another problem with using GDP data.  It’s incomplete.  It only looks at consumer spending.  It doesn’t count any of the upper stages of
production.  The wholesale stage.  The manufacturing stage.  And the raw commodities stage.  Where the actual bulk of economic activity takes place.  In these upper stages.  Which Keynesian economists ignore.  For they only look at aggregate consumer spending.  Which they try to manipulate with interest rates.  And increasing the money supply.  To encourage more consumer spending.  But there is a problem with Keynesian economics.  It doesn’t work.

When economic activity slows Keynesian economic policies say the government should increase spending to pick up the slack.  So they expand the money supply.  Lower interest rates.  And spend money.  Putting more money into the hands of consumers.  So they can go out and spend that money.  Thus stimulating economic activity.  But expanding the money supply creates inflation.  Which raises prices.  So consumers may be spending that stimulus money but those businesses in the higher stages of production know what’s coming.  Higher prices.  Which means people will soon be buying less.  And they know once these people spend their stimulus money it will be gone.  As will all that stimulated activity.  So even though retail sales may be doing well everyone up the production chain may not be expanding production.  Instead, wholesalers will draw down their inventories.  And not replace them.  So they will buy less from manufacturers.  Who will buy fewer raw commodities.

The continually falling Labor Force Participation Rate suggests the 2007-2009 Recession hasn’t Ended

So retail sales could be doing well during an economic contraction.  For awhile.  But everything above retail sales will already be hunkering down for the coming recession.  Cutting production.  And laying off people. Making unemployment another metric to measure a recession by.  If the unemployment rate rose by, say, 1.5 points during a given period of time the economy may be in a recession.  But there is a problem with using the unemployment rate.  The official unemployment rate (the U-3 number) doesn’t count everyone who can’t find a full-time job.

U-3 only counts those people who are looking for work.  They don’t count those who take a lower-paying part-time job because they can’t find a full-time job.  And they don’t count people who give up looking for work because there just isn’t anything out there.  Getting by on their savings.  Their spouse’s income.  Even cashing in their 401(k).  People doing this are an indication of a horrible economy.  And probably a pretty bad recession.  But they don’t count them.  Making the U-3 unemployment rate understate the true unemployment.  A better metric is the labor force participation rate.  The percentage of those who are able to work who are actually working.  A falling unemployment rate is good.  But if that happens at the same time the labor force participation rate is falling the economy is still probably in recession.  Despite the falling unemployment rate.

The NBER sifts through a lot of data to decide whether the economy is in recession or not.  Do politics enter their decision-making process?  Perhaps.  For they said the 2007-2009 recession ended in 2009.  The U-3 unemployment rate had fallen.  And GDP growth returned to positive territory.  But the labor force participation rate continued to fall.  Meaning people were disappearing from the labor force.  Indicating that the 2007-2009 recession hasn’t really ended.  In fact, one could even say that we have been in a depression.  For not only did a lot of our neighbors lose their jobs.  A lot of us lost our jobs, too.  And because the president who presided over the worst economic recovery since the Great Depression didn’t lose his job in 2012, there has been no recovery.  So given our current economic picture the best metric to use appears to be what Ronald Reagan told us in 1980.  Which means things aren’t going to get better any time soon.

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