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Previous Employment Levels Founded On High Credit Limits
The uptick in unemployment is directly correlated to the extreme tightening in credit standards we've seen over the past year or so. The environment of lax credit "easy money" we experienced over the past several decades artificially inflated the perceived purchasing power of households by most likely several magnitudes. If someone had $2,000 in bank but had a $10,000 credit card, there was no reason this person couldn't ratchet up credit card debt to the hilt and pay it off slowly. This was no doubt due to confidence in "job security." If I feel confident that I will have a job one year from now, I then believe that I will be able to finance any debt I may incur for the foreseeable future and can continue spending well beyond my earned income.
However, the underlying "bid" in the job market over the past several decades was ironically and without doubt directly correlated to this lax credit environment. In this environment, if someone with $2,000 in the bank had purchasing power of $10,000 and was more than willing to spend up to that amount + a percentage of earned income, then the demand for goods and services throughout the economy was in fact significantly driven by that credit portion of someones purchasing power and hence employers were bidding for labor based on a demand for goods and services founded on credit lines. In other words, high credit lines were producing "job security" which was producing demand based on easy access to credit lines...which was producing "job security", etc
Now what we've experienced over the past year or so is a significant retraction of those credit lines down to levels equivalent to real earned income. In other words, someone with $2,000 in the bank now most likely only has access to $5,000 in credit and that credit is most likely already spent. In other words, $5,000 of purchasing power has been eliminated from the economy and hence the demand for goods and services must be adjusted downward by the same amount unless the decrease is offset by an increase in spending by cash (which we know is not the case). Therefore, employers must now adjust their expectations of production to this lower level of demand which requires the need for less labor. Therefore, the bid for labor declines significantly, unemployment rises, and the level of "job security" declines. In the short-term this produces an increase in cash saving levels, and a decrease in demand for goods and services. The labor market is adjusting to a new paradigm in credit standards which are certain to remain for several years until cash levels increase to a level which allows for the re-extension of credit and confidence by creditors that those debt levels will be repaid in a timely fashion. In other words, expect unemployment to remain relatively high for several years until cash savings levels increase dramatically and credit lines begin to be re-extended. However, expect even when those credit lines are re-extended they will be to a much lower level than their previous highs as the market has seen the consequences of extremely easy access to credit, and hence the lows and new historical averages in unemployment will begin to rise in response to new lower levels of credit.
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Don't know where you live halvord, but in the past decade, the prime beneficiaries have been the poor people, not the rich. The high-end, college educated people, particularly, the engineers, have lost massive ground in terms of their compensation, while minimum wage continues to grind higher. The percentage spread between someone who is college educated and someone just working at a minimum wage job has never been smaller, historically speaking. And in the past decade, even poor people were able to own housing.
Most of my 2002 graduating class in Electrical/Computer Engineering is unemployed today, the result of the horrible US economy in the past decade and its complete lack of emphasis on productivity and innovation. University flunkouts (a.k.a. bankers), and high school grads (turned Realtors and mortgage brokers) have never had it better, while the smartest university grads, the scientists, the engineers, etc., have had their careers and lives ruined by the economic collapse that began in 2000.
Unemployment of university grads is easily much higher than that of the general population. In some fields such as engineering and the sciences, unemployment has been as high as 50% in the past decade for US graduates. An engineering grad out of a US school has a 30% chance of actually finding a job using his/her engineering skills. So don't know how you can claim that capital has replaced labour; seems that things are the complete opposite (which is one of the big problems in the contemporary economy!).
The stock market long term is beholden to one data point, outstanding credit, and that data point is dropping rapidly.
If outstanding credit starts to increase, we must all become bulls because they will have delayed the final collapse again. Until that happens, this long term bear market will continue and worsen.
Exactly! This is why the best stimulus is giving poor people money. They'll spend it immediately instead of saving it. The next best thing is giving poor people money via some sort of make-work, because a lot of poor people don't have the life skills to get to work on time.
The problem here, of course, is that the US economy continually sheds 10 low-wage jobs and acquires 1 high-wage job and has done so since (at least) the 70's. Getting poor people used to the idea that they will have jobs will have terrible consequences.
I had to re-read the article after seeing your post. That is not the right lesson to take. The point is there has been too much debt spending. That has to be corrected (i.e., paid for) and that requires savings. And it will take a few years to clean up the mess ("socialist mops" will not help).
one of the best posts i seen so far on ZH.
Debt spiral. The swirling turd does eventually exit the toilet bowl through the hole in the bottom. Then we can start the process of creating new turds for the next flush.
Great post, thanks.
About time this was illustrated.
Too much easy money infiltrates all segments of economic activity and creates a false sense of comfort. Everything becomes distorted.
When it unravels, it hurts everyone except the puppett masters.
Nicely stated. It really is a simple concept, but so many high priced analysts, economists, politicians, etc. are unable or unwilling to see this.
That is the benefit to recessions, to clean out the excesses and bring the economy back on an even keel. All the government interventions do is postpone that cleaning function and make the problems drag on longer. (A shame that we can only see what does happen, and cannot benefit from seeing what might have happened).
Thanks for stating it so well.