Why A Crisis Is Coming - Four Simple Charts Explaining Everything

Tyler Durden's picture

Submitted by Eugen von Böhm-Bawerk of Bawerk.net

The great “science” of economics once discovered an empirical relationship between GDP and unemployment that has been dubbed Okun’s Law. It simply states that the unemployment rate rises as GDP contracts, or vice versa, as production shrinks less people will be employed. It is not exactly rocket science.

However, this made us think about another relationship we have observed lately. US government real tax receipts have been trending downwards while employment has kept up remarkably well. If we draw a chart of US withholding taxes (smoothed from all the short-term noise) and overlay that with employment growth, we find a worrisome divergence that has historically not been there.

If we plot the same chart, but using annual change in real GDP instead of the annual employment growth, everything seem to fall into place though.

What can explain this dichotomy? The most obvious explanation is the increased employment of low paid workers with lower productivity relative to what we have seen in previous recoveries. Substituting $50 – 100k  full time breadwinner jobs with barmaids and waiters is certain to drive down wages (and hence taxes) and GDP as the marginal productivity of each additional new hire is lower than the previous. Both productivity statistics and the monthly labour market report substantiates our view.

Years of capital consumption have led to peak debt whereby each additional unit of debt reduces economic growth instead of artificially stimulating it. There is only one way out of this, and that is a wholesale admission that current policies of extend and pretend is no longer working; unfortunately only real crisis seem to focus minds enough to implement necessary changes. Until then, the painful slog will continue. Our dire prediction for the future is simply one where the confluence of a struggling middle class and politics jointly forces through some sort of structural change. These usually make things much worse before the system is reset toward a more sustainable path. Upcoming elections in Italy, the US, the Netherlands, France, Germany and Spain in a post-Brexit environment provide ample opportunity for radical change.

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CorporateCongress's picture

Yes yes yes, we are fucked I know... Forward!

CorporateCongress's picture

Lol.. Indeed FORE seems appropriate. 

JRobby's picture

Rhymes with MOAR! OF THE SAME

And that's what we are gonna get!!!!

bleu's picture
bleu (not verified) JRobby Sep 3, 2016 10:17 PM

The coming Financial CATACLYSM. It'll be Ugly, Bloody, and Messy.

The central planners's picture

Thats nothing that QE4/-1% can not fix, right??

ANestIOS's picture

"current policies of extend and pretend is no longer working" right, let's change it to "kicking the can down the road" then - fixed 

Antifaschistische's picture

okums "law".   Any metric that says leaving a 100k job for a 30k job, i.e. with zero impact on "unemployment" is missing a few variables.

glad they finally realized tax receipts were more relevant since they amplify the 70k loss in income due to the upwardly progressive tax rate.

...and "capital consumption" does not lead to "peak debt"....free FED money leads to "peak debt"

adanata's picture



+10   ... but there is no such thing as "free"... we are 'paying' them for our ignorance and they're killing us.

PlayMoney's picture

Translation.....Fed continues to spike VIX, triggering Pavlov Bots to buy and market goes higher

stecha's picture

this site says it all (http://www.usacommoner.com)

get ready america the end is near!!!

Contrariologist's picture
Contrariologist (not verified) Sep 3, 2016 1:36 PM

The only thing that will fix all of this is if Republicans win every single election, perhaps forever. Yes! That would fix everything.

Batman11's picture

80% of bank lending goes into real estate.

It inflates the price of real estate but surprisingly does nothing for growth.

The majority of lending needs to go into business and industry.

Inflating the price of real estate increases rents and mortgage payments sucking purchasing power out of the economy.

Bank lending is actually making things worse!.



tire_half_full's picture

There will be no meaningful reform of the system on the government's side. The US empire will crumble, just like all the rest.

DontWorry's picture

The US economy had 2 golden geese - the middle class and near - market interest rates.  The middle class had enough of an income to drive a consumer economy.  Reasonable interest rates (6-8%)  allows savers and those on a fixed income - again the responsible memebers of the middle class - to get an income for their savings.  It encouraged saving, discouraged indebtedness and speculation.

The middle class was destroyed for short term corporate interest - offshoring.  Central bank moneyprinting killed interst rates.  The golden geese are cooked.  Now the economy is based on fake money, paper shuffling and fraud.  I give it another 20 years tops.

StagStopa's picture

"Barmaids" and "waiters" = sexist. "Waitstaff" and "servers" is acceptable.


jcdenton's picture

There is only ONE way out of this ..


Admit it is ALL ..





brushhog's picture

The reason for the divergence in the chart is that they are using "employment" instead of "labor particpation rate". Using the LPR would clear up alot of confusion.

Minburi's picture

All fudged numbers.

How about an end to the fed and how about a sound currency?

Blankfuck's picture

But, But But...The truth is im short equities now for 7 years. I here this over and over but the markets are at all time highs, real estate in my area again near all time highs, the vixx at all time lows. Can someone explain? Year after year after year-- higher higher higher