David Stockman: The Born Again Jobs Scam, Part 2: The Fed’s Labor Market Delusion

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,

Dr.Yellen is at it again. Noting that there is still “slack” in the labor market, she insists that more liquidity pumping action by the Fed is warranted:

“Based on the evidence, my own view is that a significant amount of the decline in participation during the recovery is due to slack, another sign that help from the Fed can still be effective.”

Once again, what Yellen is really saying is that our macroeconomic bathtub is not yet full to the brim—owing to insufficient aggregate “demand”. The purpose of the Fed’s “accommodative” policy, therefore, is to flood the American economy with additional consumer and investment spending—so that “slack” or unutilized labor and capital resources will be “pulled” into production. Thus guided by the visible hand of the Fed, a virtuous cycle of rising spending, output and income will at length levitate our $17 trillion economy to its full-employment potential.

As a practical matter, however, the Fed cannot stimulate additional “spending” unless it can also cause the economy’s leverage ratio to rise, thereby supplementing “spending” derived from current income with purchases financed by freshly minted (incremental) credit. Yet the flood of demand by which the Fed endeavors to “pull” idle and underemployed workers back into production cannot be activated if the US economy has reached a condition of peak debt, as I strongly believe to be the case. Indeed, when the credit expansion channel is broken and done, all the Fed’s liquidity “accommodation” flows into the Wall Street finance channel where it pulls up the price of existing financial assets, not the employment rate of idle labor.

And it cannot be gainsaid that the Fed is entirely ignoring the facts of peak debt and the broken credit channel it implies.  For approximately 35 years, the ratio of household debt to wage and salary income ratcheted steadily upward from 80% to 210%. But once household leverage reached the latter precarious peak under the lunatic mortgage blow-off during 2002-2007, it buckled and now stands at about 180%.

Yet why would it be reasonable to expect a retracement back to the 2007 peak—even if the madness of the student loan explosion continues or sub-prime auto lending keeps surging? These are minor upwellings compared to the $10 trillion mortgage mountain. Besides, a renewed household borrowing binge is not going to happen due to the baby-boom retirement crush, which liquidates household debt, and the “Dodd-Franking” of the banking system, which inhibits lending—risky and otherwise. So the Fed’s transmission mechanism to the household sector is blocked.

Household Leverage Ratio - Click to enlarge

Household Leverage Ratio – Click to enlarge

The same is true of the business sector. After exploding from $5 trillion to $11 trillion in the decade up to the 2007 peak, it has continued to climb owing to the yield-seeking boom in demand for corporate bonds, and now exceeds $13.5 trillion. But virtually the entire $2.5 trillion lift since the financial crisis has gone into financial engineering extractions such as LBOs, stock buybacks and M&A deals. That is, new credit has flowed into the re-pricing of existing assets rather than the acquisition of productive plant and equipment. Indeed, the latter is still $100 billion or 8% below it late 2007 level in real terms, marking the worst 7-year investment performance since WWII.  So the business credit expansion channel to higher GDP is blocked, too.

This much is obvious, yet Yellen and her monetary politburo keep on attempting to flood the nation’s macroeconomic bathtub with more “demand”. Worse still, they fail to note that even if they could induce business and households to bury themselves deeper in debt that it wouldn’t necessarily have a salutary impact on the “labor market”— the ostensible target of their strenuous ministrations.

The graphs below are dispositive. The first shows that literally not a single net new NFP payroll job outside of the fiscally-driven HES Complex (health, education and social services) has been created in the US economy since January 2000. There were 106.6 million such jobs when Bill Clinton left office–virtually the same number (106.4 million) reported last Friday for March 2014.

Nonfarm Payrolls Less HES Complex- Click to enlarge

Nonfarm Payrolls Less HES Complex- Click to enlarge

By contrast, the Fed’s balance sheet was $500 billion then and $4.5 trillion today–a 9X gain. Needless to say, this comparison does not comprehend a brief interval; it encompasses the greatest monetary policy experiment ever undertaken and suggests that there is no link whatsoever between the Fed’s policy of radical balance sheet expansion and job market developments.

Eruption of the Money Printers - Fed Securities Holdings 1952 to present - Total Fed Credit. Click to enlarge.

Click to enlarge.

A closer look at the HES Complex further underscores the non-existent link between strenuous money printing and the labor market. Nearly half of the 31 million jobs in this sector are in education, including both public and private institutions. It is self-evident that the driving force here is fiscal policy, not the word clouds and monetary injections which emanate from the Eccles Building.

In a word, after robust growth up to the 2007 peak, education jobs have been flat as a pancake because governments are broke. Stated differently, the phony prosperity of the Greenspan Bubble years led state and local governments especially to over expand education spending based on non-sustainable revenue windfalls from the housing and credit binge. That one-time expansion is now deep in the rearview mirror.

Education Jobs - Click to enlarge

Education Jobs – Click to enlarge

Essentially the same thing is occurring in the balance of the HES Complex. Health care job growth is also beginning to slow significantly in response to the tightening fiscal equation at the Federal level. In any event, for several decades it was possible to induce households to buy more autos, big screen TVs and trips to Disneyland on mortgages and credit cards, but that has never been the case for health care. Demand surged for decades due to the perverse incentives of the third-party payment system and heavy government subsidies, not because of the household credit channel through which monetary policy was formerly transmitted.

Health Care Jobs - Click to enlarge

Health Care Jobs – Click to enlarge

In short, any reasonable examination of the NFP data based on longer term trends and on disaggregation of the lump-sum monthly number which comprises the Jobs Friday “print” demonstrates the silliness of the Fed’s “labor market” excuse for running the printing presses at white hot speed. The graph below, for instance, shows the dismal 14 year trend in good-producing jobs in manufacturing, construction and mining/energy.

Here we are reminded that the US economy is not a closed bathtub. Much of the credit-fueled demand for goods in the decades leading up to the financial crisis “leaked” into foreign production, not increased utilization of domestic capacity and labor. So the dramatic decline of the very best paying jobs in the US economy was a structural issue related to high domestic wage rates and the competitive dynamic of the global economy in tradable goods; it had virtually nothing to do with the massive expansion of the Fed’s balance sheet—other than the perverse impact that that the latter permitted the American consumer to live high on the hog on borrowed money used to purchase Chinese manufactures:

Goods Producing Economy Jobs - Click to enlarge

Goods Producing Economy Jobs – Click to enlarge

Finally, the Fed’s serial bubbles have also impacted the job market—but not especially in the manner intended. With each successive inflation of financial assets, households in the upper reaches of the income ladder have been able to increase discretionary spending for leisure and entertainment spending, thereby causing a punctuated rise in the job count . However, jobs in the Bread &Circuses Economy have a pay rate of barely $20k per year—meaning that they have added a lot more to the monthly jobs print than to the real prosperity of the Main Street economy.

Bread and Circuses Economy Jobs - Click to enlarge

Bread and Circuses Economy Jobs – Click to enlarge


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Cognitive Dissonance's picture

I swear to God Dr. Yellen poor David Stockman must feel like the loneliest man on Earth. He speaks wisdom to the deaf, dumb, blind and terminally stupid.

<Can you hear, see or perceive me now?>

It must be the charts David. Moar color is the trick to get the fiat addicted to pay attention.

InjectTheVenom's picture

COMPLETELY OT with this (and plz forgive me if i missed it) , but why hasn't ZH ran anything yet about the Bundy Ranch standoff  happening in Nevada ?  

James_Cole's picture

There were 106.6 million such jobs when Bill Clinton left office–virtually the same number (106.4 million) reported last Friday for March 2014.

And in 2028? Job growth may have already peaked and if not certainly soon. 

The elephant in the room no one (Stockman included) is willing to really address:


The Alarmist's picture

Because it is not as interesting as the Bunny Ranch standoff might be.  Next OT question?

The Alarmist's picture

Question is, does anyone play pinball anymore?

nightshiftsucks's picture

Hell yeah,I've got about 10 of them Joker Poker and Medieval Madness are the best.I probably made 5k each on the Medieval and on a Monster Bash,they go for about 10k each.

Charles Wilson's picture

My copy of "Dragon" shorted out a few months ago.  Very sad.

I should've taken out a loan at 0% a few years ago and bought every copy of "Attack from Mars" I could find.

"I'd be rich, I tell ya'.  RICH!"



nightshiftsucks's picture

Attack from Mars is a good one.The Dragon is a system 1 and they are known for bad connections and the CPU board,couple hundred and it should be good to go.If you need help go to google pinball rec group,lots of help.Most of the pinball guys are great,ask any question and they will help,ask me and I can help you also.

HedgeAccordingly's picture

Old news.. 15 NDX monthly candles in a row.. April is the 1st red..



prains's picture

when do the zombies start eating peoples faces?

The Alarmist's picture

So, credit is tapped out, real wages are falling, and food and energy and healthcare are getting more expensive every day; yeah, if Mr. Market takes off the QE goggles and tries to go back to discounting future earnings, I can see why he might head south.

Oldwood's picture

Reality is only a theory.

AdvancingTime's picture

The recently released figures showing a decline in job formation over recent months may be may be an omen of danger ahead. A big problem is the quality of many of these jobs is poor. This calls into question claims the economy has reached escape velocity and lends credence to claims by others like me that QE and artificially low interest rates are not the answer.  These policies and massive government deficit spending can only carry a distorted economy so far. Expect this issue to come front and center in coming months as the Fed will come under increased scrutiny to defend their policies.

The whole concept of economic growth is based on the idea of an ever growing trend of increased production. Overall we seek numbers that reflect an upward and onward slope. When it becomes apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates is no longer effective in driving the economy forward options evaporate. When this happens the extra GDP growth generated by each batch of loans drops and momentum ends this becomes the equivalent of pushing on a string. More on this subject in thw article below.


ebworthen's picture

The run up in FED money printing from '87 to '07 on it's own is astounding - but the run up since '09 is absolutely positively an unsustainable world changing event (third chart).

Not to mention it hasn't done a God Damned thing for employment.

NO GOING BACK you fucking FED tapeworms.


game theory's picture

much of what the fed did since '09 is reversible. 

ebworthen's picture

Sure; all under control, finger in the dyke, "do not worry", um-hum.

Wilcox1's picture

Its real simple: The main street economy can't get traction because it is illegal to make a profit.  Lets imagine you lost your job and none are available so you create one.  Thats illegal.  You can't legally make computers (or whatever) in your garage anymore.  What you are legally supposed to do are have licences, laywers, and facilities.  Who can do that having levered themselves to the hilt trying to keep up the standing required to keep that job they just lost? So the central bank thinks providing liquidity to the capital owning class is going to result in "anybody that wants a job can have one"?  Its just not going to happen.  A recovery for the long term can only occur when it's legal to make a profit.  

shermacman's picture

I'm pretty sure that the problem with Stockman's charts is that the colors are all wrong, the colors are not colorful enough! If he could redraw them them with more color they would be more accurate. And add some links to pics of Mylie Cyrus or any one of the Kardashians.

whidbey-2's picture

Not sustainable.  The selloff  on 4/10/14 tells you its a long road with a fed and president getting away with murder while congress applaudes. Run, Be openly demanding of change now...

DOGGONE's picture

the f___ing truth is

The Public Be Suckered

polo007's picture


Federal Debt: Total Public Debt

2013 Q4 $17,351,970,000,000

Quarterly, End of Period, Not Seasonally Adjusted, GFDEBTN, Updated: 2014-03-25 8:21 AM CDT


Effective Federal Funds Rate

2014-03: 0.08 percent

Monthly, Not Seasonally Adjusted, FEDFUNDS, Updated: 2014-04-07 3:51 PM CDT

tony bonn's picture

paul craig roberts and david stockman in one night is an economics and political science wet dream