The Obama Recovery is Good for Wall Street but Bad for Main Street

Posted by PITHOCRATES - January 18th, 2014

Week in Review

The December jobs report was pretty bleak.  It showed that the unemployment rate fell to 6.7% and that the economy added 74,000 jobs.  Not great but good enough for some who say that President Obama’s policies are finally working after 5 some years of trying.  Which is ridiculous.  Because that unemployment rate doesn’t tell you how many people lost their jobs.  And how many people disappeared from the civilian labor force as they gave up trying to find work that just isn’t there.  Which hides the number of people who lost their jobs.  Because the Bureau of Labor Statistics doesn’t count anyone as unemployed if they are no longer looking for work.  But if you dig down into the jobs report you’ll find this data.  And see that for every person that entered the labor force about seven people left it in December (see The BLS Employment Situation Summary for December 2013 posted January 13th, 2014 on PITHOCRATES).  Which is anything but an economic recovery.

All during the Obama presidency the Federal Reserve has been stimulating the economy.  Right out of the Keynesian handbook.  By keeping interest rates near zero to encourage people to borrow money to buy things they don’t need.  But few have.  No.  The only people borrowing that money are rich investors.  Who are borrowing this ‘free’ money to spend in the stock market.  Helping Wall Street to do very well during the worst economic recovery since that following the Great Depression.  While Main Street sees their median family income fall.  Still the chairman of the Federal Reserve, Ben Bernanke, thinks he did a heck of a job (see Bernanke Says QE Effective While Posing No Immediate Bubble Risk by Jeff Kearns and Joshua Zumbrun posted 1/16/2014 on Bloomberg).

Bernanke is seeking to define his legacy before stepping down on Jan. 31. During his eight-year tenure as leader of the Fed he piloted the economy through a financial crisis that led to the longest recession since the 1930s. He has tried to bolster growth by holding the target interest rate near zero and pushing forward with unprecedented bond buying known as QE.

“Those who have been saying for the last five years that we’re just on the brink of hyperinflation, I think I would just point them to this morning’s CPI number and suggest that inflation is not really a significant risk of this policy,” Bernanke said, referring to a Labor Department report showing the consumer price index rose 1.5 percent in the past year. The Fed has set an inflation target of 2 percent…

The Federal Open Market Committee (FDTR) announced plans last month to reduce monthly purchases to $75 billion from $85 billion, citing improvement in the labor market. The jobless rate last month fell to 6.7 percent, a five-year low.

The only reason why we don’t have hyperinflation is that everyone has depreciated their currency so much to boost exports and pay for bloated welfare states that all currencies are losing value.  And of all these bad currencies the American currency is the least bad of the lot.  Which is why some foreign nationals will pay to park their money in American banks.  Because the risk of it losing its value is so much greater in their home country.

But that doesn’t mean inflation hasn’t reared its ugly head in the US economy.  Just go to a grocery store and look at a bag of chips.  Or a box of cookies.  Or any packaged item that didn’t seem to get overly expensive during the Obama recession. A bag of chips may be the same $3-4 it was before the recession.  But notice the size of the bag.  It’s gotten smaller.  So, yes, consumer prices have not shown great inflation.  But packaging has gotten smaller.  So instead of paying more for the same quantity we are paying the same price for a lesser quantity.  Which means we may be buying 4 of something in a month instead of 3 of something.  It adds up.  Which is why there are so many more people on food stamps.  The Bernanke inflation is taking more of our paycheck to buy what it once did.

The economy is horrible.  Fewer people are in the labor force with each jobs report.  Our grocery packaging is shrinking.  And once the Fed stops its bond buying the stock market is going to fall.  A lot.  For every time rich investors think the economic data will show solid economic activity what do they do?  They sell their stocks.  Causing a stock market fall.  Why?  Why would investors leave the stock market when the data say the economy is getting stronger?  Which seems to go against common sense?  Because they know there’s been only one thing helping them get rich during the Obama presidency.  That ‘free’ money.  Once that source of cheap money goes away they will sell before those inflated stock prices fall back to earth.

The Obama recovery.  Good for Wall Street.  Bad for Main Street.

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The August Jobs Report, Stuck between a Lie and a Hard Place

Posted by PITHOCRATES - September 8th, 2013

Week in Review

The left has been lauding the good economic news jobs report after jobs report.  Always talking about all those new jobs created.  And the falling unemployment rate.  While not talking at all about the falling labor force participation rate.  For good reason.  For while new jobs and a falling unemployment rate are good people leaving the labor force is not.  And, sadly, the only thing making the jobs report look good is that people are simply disappearing from the labor force (see 169K New Jobs Last Month, 7.3% Unemployment: Conflicting Signals For The Fed by Abram Brown posted 9/6/2013 on Forbes).

Unemployment continues to fall, with joblessness reaching a 4-and-a-half-year low in August at 7.3%. Troublingly, the drop in unemployment comes from fewer people looking for jobs rather than a robust economy adding workers to open positions. The number of Americans participating in the labor market is at the lower [sic]point since August 1978.

Going forward, the Fed will need to decide how much stock to put in the unemployment number. It threatens to continue to fall while job creation stays meager–setting up a situation when the Fed could reduce its stimulus at a time when the recovery still isn’t firmly rooted. “People were not supposed to be dropping from the labor force this year,” says FTN Financial’s Chris Low. “While the Fed wrestles with this quandary, we’ll wait to see if it really meant what it said about the quality of improvement in the unemployment rate…At the Fed, there is a tendency to fall back on the unemployment rate as the best gauge of labor market health.” And he warns, “Markets will be unsettled.”

So what is a lying government to do?  After all of those years, and all those jobs reports, trumpeting the success of their economic policies based on the fall in the official unemployment rate, what do they say about the Fed who may raise interest rates because the official unemployment rate says the economy has recovered while the labor force participation rate says it’s still in the toilet?  When the only economic activity has been their friends on Wall Street taking the money the Fed was making and investing it?  Making money with money?  But making no jobs?  That’s something a Democrat administration is not supposed to do.  Helping rich people at the expense of the middle class.  So what is a lying government to do?

Tell the truth and admit that their economic policies have all failed?  To keep that cheap money tap open for their friends on Wall Street?  Or lie?  And say their economic policies have been successful?  And offer no rationale to keep the easy money tap open?  And let them close that tap?  Killing the only economic recovery?  That was enjoyed only by their friends on Wall Street?  Thus exposing the lie that their economic policies created any kind of economic recovery?

Quite the quandary for the Obama administration.

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Wall Street Cheers a Dismal Jobs Report

Posted by PITHOCRATES - May 5th, 2013

Week in Review

The markets reacted positively to the new jobs report.  The unemployment rate changed little.  But what really got them excited was that the economy created 165,000 new jobs.  More than last month.  But not really good.  But you wouldn’t know that from reading the report (see Employment Situation Summary posted 5/3/2013 on Bureau of Labor Statistics).

The unemployment rate, at 7.5 percent, changed little in April but has declined by 0.4 percentage point since January. The number of unemployed persons, at 11.7 million, was also little changed over the month; however, unemployment has decreased by 673,000 since January. (See table A-1.)…

The civilian labor force participation rate was 63.3 percent in April, unchanged over the month but down from 63.6 percent in January. The employment-population ratio, 58.6 percent, was about unchanged over the month and has shown little movement, on net, over the past year.(See table A-1.)

When you read this it sounds good.  But it’s not.  The labor force participation rate holding at 63.3% is horrible.  It wasn’t this bad since the Seventies.  That’s a lot of people who have just disappeared from the labor force.  Who just gave up trying to find a job.  Because they just aren’t out there.  And because they’ve disappeared the government doesn’t count them anymore.  Which is the only reason why the unemployment rate has fallen during the Obama presidency.

When President Obama entered office the labor force participation rate was at 65.8%.  Which means it has fallen 3.8% in little over four years.  This is a huge fall.  The steepest decline ever.  And the fact that it is holding at 63.3% means there are a lot of people out of work that have to reenter the workforce.  Also, the current number is the lowest it has been since President Obama entered office.  Which means we haven’t even begun the economic recovery yet.   So these jobs numbers couldn’t be worse.  Yet Wall Street celebrates.  Why?  Probably because they’re suffering from irrational exuberance.

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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 Official Unemployment Rate falls to 7.8% but the U6 Unemployment Rate Holds Steady at 14.7%

Posted by PITHOCRATES - October 6th, 2012

Week in Review

The jobs report is out.  And the Left is trumpeting the great fall in the unemployment rate from 8.1% in August to 7.8% in September (see Table A-15. Alternative measures of labor underutilization posted 10/5/2012 on Bureau of Labor Statistics).  This is the official U3 unemployment rate.  That only counts people looking for full-time employment.  It doesn’t include those working part-time because they can’t find full-time work.  And it doesn’t include the people who just gave up looking for full-time work because there just isn’t any out there.  Which throws a little cold water on this 7.8% number.  For it doesn’t reflect a gain in new jobs.  It just reflects that they are counting fewer unemployed people.

A more accurate picture of the current employment climate is the U6 unemployment rate.  This number counts everyone who can’t find a full-time job for whatever reason.  Some have given up their search.  Some have retired early.  Some are living off of government benefits.  Some are working part-time jobs.  Some are working a couple of part-time jobs to make ends meet.  Interestingly, although the U3 rate fell 3 points the U6 rate held steady at 14.7%.  Which is puzzling.  For everyone included in the U3 rate is included in the U6 rate.  So if U3 fell U6 should have fallen, too.  For U3 and U6 generally rise and fall with each other.  As they have done in the past.  Such as in the years from 2006 to 2012 (pulled from the same Bureau of Labor Statistics website).

During the 2006 mid-term elections the Democrats were saying the economy was just terrible.  They hammered the economic numbers saying it was one of the worst economies ever.  Of course, the numbers say otherwise.  Whether you’re looking at the U3 rate or the U6 rate.  The economic numbers were very strong right until that sustained Keynesian monetary expansion forcing interest rates below market values and the government pressure on mortgage lenders to lend to people who could not afford a conventional mortgage blew up in their faces.  Beginning with President Clinton’s Policy Statement on Discrimination in Lending.  Which is why these lenders turned to the subprime mortgage.  Approving so many people for mortgages that housing prices soared.  Creating a huge housing bubble just waiting to be pricked by a rise in interest rates.  Which had to come.  As expansionary monetary policy eventually creates inflation.  And the only way to stop that is by raising interest rates.  Which was the time bomb ticking buried deep within those adjustable rate subprime mortgages.

Facilitated by the federal government and their GSEs Fannie Mae and Freddie Mac (who guaranteed and bought these toxic mortgages from the lenders they were pressuring to approve more toxic loans), subprime lending expanded.  As the GSEs sold these toxic mortgages to unsuspecting investors.  Which all blew up in the final months of 2008.  Creating the subprime mortgage crisis.  And the Great Recession.  The U3 rate rose as high as 10% in the fallout from this bad Keynesian expansionary monetary policy.  While the U6 rate soared as high as 17%.  Great Depression unemployment levels.  And neither has fallen much since these highs.  As the current numbers are closer to their highs than their previous lows.

Worse, the spread between U3 and U6 is far greater under President Obama then it was under George W. Bush.  Which tells us how poorly the U3 rate describes the current employment picture.  The greater the spread the more meaningless U3 is.  As it is simply not counting all the unemployed people in the economy.  The Left trumpets the 3 point fall in September but that only brings the U3 rate down to what the U6 rate was under Bush.  And the Left was calling the even lower U3 numbers under Bush some of the worst job numbers of all time.  So by their own standards President Obama is a far greater disaster to the economy than George W. Bush was.  For if it was horrible under Bush anything worse than Bush’s numbers must be more horrible.

When they passed the stimulus bill they promised they would have 5% unemployment by 2012.  Even the president said he would be a one-term president if this didn’t happen.  Despite all of their spending these numbers haven’t fallen much.  Despite their Summer Recovery pronouncements of 2010.  Their economic policies have all failed.  And there is a simple explanation for that.  Their policies were Keynesian policies.  And Keynesian policies have never worked.  Nor will they ever work.

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