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Why Unemployment Will Remain High For Years (Part I)
This article originally appeared in The Daily Capitalist.
There are 15.1 million workers unemployed in America (U-1). Another 9 million are working temp for economic reasons, and another 2.5 million are marginally attached or discouraged from the work force (U-6). That is about 26.6 million people in trouble. We can argue about the "true" number of unemployed but for the purpose of this article, the fact that it is high under any measure is sufficient.
The labor participation rate, which shows what percentage of the workforce is engaged in employment, has been steadily dropping for ten years:
It hovered at about the 60th percentile for many years (1948 to 1970) and then it took off in 1970 and peaked at 67.1% from 1997 to 2001 when it started declining to its present level.
Thus, it seems that we have been going backward for the past ten years after rising rather steadily for 30 years.
What has happened during the past ten years? We have experienced two business cycles as a result of the Federal Reserve's money manipulation. The Dot com boom result in the Dot bomb bust of 2001 to 2004 and stubborn, but moderate unemployment. In our current cycle, unemployment has risen sharply since late 2007. These two unemployment cycles have lasted longer than any other Post-WWII cycle. This chart illustrates the problem:
Note the duration of the brown line (2001) and the red line (2007). Just from looking at this chart it is obvious that these recent cycles have been more difficult for the government and the Fed to "stimulate" into jobful recoveries. The depth of our current recession is unprecedented for the period following WWII.
The Big Questions: Why does unemployment persist? What is different about this cycle that makes it worse than others?
One answer is that many jobs created during these booms aren't coming back. Another answer is that a lack of "real capital" will hinder robust job growth.
The Dot com boom tricked those involved in it that they were experiencing a "New Paradigm," or a world where profitability mattered less than "concept," where buzz meant more than feasibility. Tremendous amounts of capital poured into dubious companies. The Geek Moment was at its all-time high, and they poured into Silicon Valley to make their overnight fortunes. That ended as soon as Alan Greenspan wrote "irrational exuberance" on the blackboard 100 times. What had made sense during the heat of the moment didn't look so good when the Fed's juice ran out. It was like a game of musical chairs, but in this game half of the chairs were taken away when the music stopped. Those jobs disappeared never to come back. Just look at the brown line again on the spaghetti chart: it took 47 months for employment to get back to positive job growth.
The Crash of '08 was the biggest credit bubble the world has ever seen. New Fed money flows somewhere during booms and this time it was into housing. It was so vast that the spillover poured into commercial real estate, leisure and hospitality, autos, consumer goods, and student loans. As we are finding, this boom spread to most of OECD economies (Organization for Economic Cooperation and Development, comprising 34 of the world's more prosperous economies). Fake wealth from new credit instruments spread worldwide as investors jumped lemming-like into the pool.
Credit bubbles never last. When the frenzy created by easy money starts to spin out of control the Fed regains some sanity and stops "printing money" by raising interest rates. Then things fall apart. This is the inevitable bust phase of the cycle.
This time we were hit really hard since the Fed's monetary expansion was immense. All jobs related to residential real estate have been severely impacted: workers in the construction industry, building materials jobs, developers, real estate salespeople, escrow and title workers, the real estate finance sector including home mortgage brokers, banks that financed mortgages, high-end employees in structured financing departments in very large banks, investment houses, and hedge funds. The spillover wealth effect of the boom that had pumped up the auto, retail and leisure, and hospitality industries, hit these industries hard in the bust phase.
We all understand this effect of economic busts: businesses go bankrupt or cut back, workers are laid off, and banks suffer huge losses. Then things are supposed to get better, and after some passage of time we continue growing. But that isn't happening and hasn't been happening for the past ten years if one measures employment and the labor participation rate. I don't put any faith in traditional measures of economic recovery by the NBER, the arbiter of when recessions start and end. I don't accept that there is a "recovery" when unemployment is close to 10% of the workforce.
The reason employment has been declining for the past ten years and what is significantly different from past cycles is that these boom-bust cycles have been destroying real capital on a massive scale.
The perceived prosperity of the boom was false, supported only by the Fed's creation of fiat money and credit. When the veil of fiat money was lifted we discovered the ashes of projects that were a waste of the capital invested in them. If you destroy enough capital in an economy, then fewer jobs are created because fewer businesses are able to expand and grow. It is my belief that this has happened on a massive scale in the past ten years.
Another way of saying this is that quite a bit of the perceived expansion of the economy for the past ten years was a waste of money. There is a technical term for this in economics, called "malinvestment" of capital. Let me explain this concept and how it works.
First a couple guidelines. If the Fed or any central bank could create wealth (capital) by printing money then we would all be rich. They can't. The only way capital is created is through the production of goods from which some profit is derived and saved. Government can't create wealth because it produces nothing. Only the private economy can do that.
What printing money can do is destroy capital.
How? By creating money out of thin air. Here's how it works.
Let's say you are a developer of residential housing. You've been looking at a piece of property for a 100 home project and you pencil it out to discover that it doesn't make sense. Let's say that a year later you look at the property again, but the Fed has been printing money for the past year and as a result price inflation has driven housing prices up. You think you can now sell the homes for $250,000 rather than the $220,000 you had projected last year, and now the project looks feasible to you. You think you can make 15% profit on the project. You go to your bank and borrow 70% of the money for the project, say $15,000,000. For the other 30%, or 6,250,000, you get 90% of it from a big pension fund and put up 10% of the money yourself.
The bank extends the loan and the Fed creates it out of thin air. By a few keystrokes the bank has another $15,000,000 on its books and credits your account by that amount. It is brand new money, freshly "printed" by the Fed. All the bank needed was $1,500,000 of uncommitted Tier 1 capital to make this happen. You now go out and build the project with the new money and bid away building materials from others and pay with checks that are deposited into the suppliers' bank accounts. What have you done? You have gotten something for nothing. You have bought goods for free because the money is a fiction of a keystroke.
Other builders see this new activity (assume you aren't the only one doing this) and they see prices of homes rising and do the same thing. All prices are going up as new money bids away scarce resources. As we get farther away from the bank's injection of new money, the lowly consumer earns no more money but prices are going up and he has to pay more. He's getting screwed and you've gotten something for nothing.
It takes you two years to build the project. But by then the Fed sees that prices are spiraling up and up and they raise interest rates to slow the creation of money. Mortgage rates increase, and for a while home prices also continue their rise. But now fewer folks are buying homes because they can't afford them: it only worked with cheap mortgage rates. Now buyers can't afford to buy your homes, and your sales slow down. Maybe you've sold half of them but the rest lay idle. You know that you wouldn't make any money until the sale of the last 15 homes. At this point, you haven't made enough back to pay off the bank or the pension fund, or take money home for yourself.
The economy slides into recession and more and more housing projects are going belly up. You can't sell a thing. After another year of trying to work things out with your lender, the bank forecloses, and takes back the 50 unsold homes. They sell the homes at wholesale prices and have lost about $4,000,000. The pension fund lost its entire $5,600,000, and you've lost $550,000 and the bank and the pension fund are going after you personally for repayment. You go bankrupt and they get nothing.
This is exactly what happened during The Great Recession. I speak from experience.
Tomorrow, Part II.
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Anonymous-
It’s time you STOPPED getting SCREWED by the BIG RED WHITE and BLUE !!
http://www.moneynews.com/FinanceNews/Credit-Card-Delinquencies-Rates/2010/12/15/id/380041
only 16.3% used credit card purchases for Black Friday compared to 30.9% last year.
No more credit, no more buying. Cash only, if you have it. That doesn't sound good for employment. CC companies crying. Hahahaha
our country's largest electronics retailer Best Buy just reported third quarter same store sales down 3.3% from one year ago!
The Crash of '08 was the biggest credit bubble the world has ever seen. New Fed money flows somewhere during booms and this time it was into housing...Fake wealth from new credit instruments spread...
At the heart of this wealth manipulation, registration, allocation and ultimately disintegration lies the seemingly benign creature known as MERS. Without this yeasty ingredient the bubble in the bread would never have inflated.
MERS simultaneously separates and combines promissory notes from and with the attendant trust deed in an ethereal world of electronic recordation / registration. This activity is carried out in a vacuum absent legal authority and has resulted in destroying trust, faith and the backbone of our nation's middle class.
Robo-signing is symptomatic of the impunity the entities that devised this scourge have with lawful conduct.
Everyone knows that as notes are paid down, the payer's interest is paid first and the equity second. The servicer on the other hand, applies these payments in just the opposite ratio, thereby reducing their "at risk" capital by recovering it first.
The deed however has a separate value in and of itself. BASAL II requires certain levels of these instruments to be recorded in member's possession irregardless of attendant promissory notes.
As the attendant physical property declines in relative FRN valuations, more deeds are now unencumbered by those pesky notes as more and more home buyers find themselves unlucky to have bought at "the wrong time".
These bankers without borders have successfully harvested the tree of liberty's fruit of trust, honor and freedom, and in it's place have planted seeds of uncertainty, shame and enslavement. imo
You know times are tough when....
http://www.treehugger.com/files/2008/12/ups-delivers-by-bike.php
What Happens when China starts to Trade with g20 partners in Renminbi (RMB)? How screwed will we be then? WAR?
PNTE
I wonder if the Ass-hats governing Monetary policy realize Manufacturing continues to decline and Corporations will flee the Dollar if and when it becomes worthless. The eggheads running the show are not thinking things through. We are left with a hollowed out economy filled with broke has beens. Good luck to the unemployed, they will need it.
PNTE
I guess the personal view of unemployment is influenced by where one lives and the micro environment. My guess of real unemployment is over 15%, certainly 20% to 25% in certain sectors.
The over 40 year old may be finished with this career. The young college student or graduate is gonna have a real tough time. Two of my son’s friends who paid their way thru school by waiting tables, and are now graduated, are still waiting tables.
My son is in this 5th year of engineering school at Cal State LB is having difficulty getting the classes to graduate. The girl next door at Cal State Fullerton for a teaching degree in History is also 5th year and is changing Majors because of the same problem. By going from History to a Math degree she can get the classes but will be at least 6 years, maybe more.
SOooooo, these kids are not unemployed, they just cant get employed because they cant graduate---- because the Universities are withholding classes. Sort of a shadow unemployment. This can not end well.
Every year boomers should give up or retire that's about 2 m per year. That should help if people stop having kids
This is why The Bernank can predict, with accuracy, unemployment will be low for years to come. He knows his monetary policy is designed to recapitalize insolvent banks at the expense of the American economy. Money that should be used to create wealth and jobs in the private sector is being sucked into a black hole of derivatives, ponzi schemes, cooked books, and Wall Street bonuses.
Get government (mostly) out of the career licensing would be a huge help. And for professions that should have some tests and requirements, make sure the professions don't become self protecting, frequently offer the licensing tests which they later make public, and prevent against overly bureaucratic permitting of businesses. In other words free up the entry to the job market and the transition between jobs.
Great video of the basic troubles of starting a small business in this country:
http://www.youtube.com/watch?v=YQscE3Xed64
Spiffy,
ya gotta be kidding. can we spell g-u-i-l-d?
- Ned
HAHA!
Here in Belgium, so many people retired that there is actually a shortage of working people :)
SO
RETIRE THOSE GREYS!!
What causes the destruction of capital?
Investing that capital in ventures that are not profitable.
Return the capability to earn profits consistently and over the longer time frames, and the jobs return.
To ignore profits is to ignore the obvious.
Part 2,3,4 to infinity::
Too many people.
Not enough of whom are entrepeneurial, really really smart and creative, and inventing entire industries that will employ hundreds of millions of people.
Time to listen to Vonnegut. Money or something else, chits, vouchers, credits that need not be repaid need to be 'earned' by NOT WORKING, essentially bribing people to utilize their new freedom to do other things to find fulfillment in their lives. Work is gradually becoming obsolete.
Work was originally invented to prevent people from going nuts. Now they need to find a way to not go nuts by not working. Should be a time of bubbling creativity, new frontiers, and scary as all hell.
Not everyone possesses the strange morality (or amorality) required. Creativity is one thing, it is another to have business sense.
braaappp!
Not true. The guy who invented TV didn't make a dime on it. One can invent something and another can possess the business savvy and street smarts to make it at a profit.
The literature is abundant with those who invented stuff but relied or were forced to accept that they coudn't run a business to get it to market.
Look at the Chinese. They are masters at stealing ideas.
You just proved my point.
anony:
... er ... dang, I always thought that work was invented to avoid starving. Go figure. Even the Pilgrims eventually got it right, see e.g. (but all over the place):
http://www.academia.org/inside-the-first-thanksgiving/
and I'm with you:
Pelosi has done a great job about explaining this as part of her ObamaCare proponency, e.g.:
http://www.youtube.com/watch?v=7H2pFgbEqd0
- Ned
NAFTA.
"I don't accept that there is a "recovery" when unemployment is close to 10% of the workforce.
The reason employment has been declining for the past ten years and what is significantly different from past cycles is that these boom-bust cycles have been destroying real capital on a massive scale."
god bless you for your insight and decency. this is perhaps the finest explanation i have read on the foolishness of the fed and the evils of inflation since rothbard.
booms and busts are not natural phenomena or inherent with the system. they are directly caused by the fed and franctional reserve banking. that 10% reserve is typically 3% or less so tier 1 capital required would be closer to 500,000.
anyone wanting additional insight into the nature of capital destruction should read fekete...the excesses of the fire economy are symptoms of cancerous and fraudulent tax policy....
while i largely favor low taxes, it is abundantly clear that the wealthy are receiving benefits from the fascist state all out of proportion to the price they pay.
the rentier economy is killing us.
fuck the fed.
Oh Econophile, you're such a pooper. Look at Table A.4 from BLS unemployment tables. 5.1% unemployment for BA+ in November !
Even if you hate BLS, then double it--10.2 underemployment.
What does that figure--for what is by far the most powerful class in the U.S.--tell you:
FULL SPEED AHEAD WITH BAILOUTS TO THE TUNE OF $70 TRILLION.
When BLS figure reaches 20%, let me know. Until then, shut up.
The highly politicized and laughably manipulated BLS (Bureau of Lying Scumbags) so-called "statistics" are NEVER going to reflect anything close to the REAL unemployment figures ... or the real inflation figures .... or anything much in the way of reality. If you accept them as such, then you are a hopelessly gullible idiot.
In my neighborhood house prices are still falling and they look like they could fall for another 2-5 years as there are plenty of empty houses and no buyers...
Depends on if you have a university next door. Especially one that has $40k/year tuition and a very politically active administration.
Right now, more than a few in my neck of the woods are getting snapped up for boarding houses. The owner is usually absent, sometimes being out of the country. There are buyers, but they sure don't want to hang around or follow the law. Even if it's a few shades shy of "blood feud" status.
Uh, except housing prices are still falling... fast!