JP Morgan Finds Obama, And US Central Planning, Has Broken The Economic "Virtuous Cycle"

Tyler Durden's picture

In the last few months we have presented various analyses, both ours and those of Goldman and even Jon Hilsenrath, on why one of the core economic empirical relationships: Okun's law, is now broken. Subsequently we presented another parallel line of inquiry - namely that in order to preserve the illusion of a recovery, the Obama administration (with help from the Fed) has engaged in a quality-for-quantity job transfer, where America is creating increasingly more jobs of lower quality (the bulk of which are part-time), which in turn is leading to less proportional personal income tax revenues, and thus to a secular shift in an indicator which is even more important for US economic growth than simply the number of jobs "gained" each month - labor productivity. Today, JPM's Michael Feroli ties these two perspectives together in an analysis that has extremely damning implications for the US, and global, economic growth prospects. In a nutshell, Feroli finds that "Productivity, which used to be procyclical, has now turned countercyclical" which in turn means that "if labor is no longer a quasi-fixed factor of production this may eliminate one type of non-convexity in production, thereby reducing the likelihood that the economy has multiple equilibria and is subject to self-fulfilling prophecies" or said somewhat simpler: "the conditions for self-fulfilling prophesies in the macroeconomy may no longer exist." Still confused: central planning, and the Obama vote grab has killed the "virtuous cycle"... Which in turn means that everything America is trying to accomplish is now a lost cause, as every incremental dollar spent, whether by fiscal and monetary policy, is pursuing an outcome that is now theoretically and practically impossible to achieve!

Congratulations central planning - you have just blown your own head off in the latest epic Catch 22. Because this time is never different. 

Feroli lays out the Okun problem quite simply:

Not too long ago Okun’s Law was somewhat obscure, familiar mostly only to economists. Recently, however, given the big move down in the unemployment rate, this empirical relationship has earned wider interest among financial and public policy audiences. The decline in the unemployment rate experienced over the past year is in apparent violation of Okun’s Law, which links changes in the unemployment rate to changes in GDP. What is curious is that two years ago Okun’s Law presented a similar puzzle but with the opposite sign: the rise in the unemployment rate experienced in 2008 and 2009 was in excess of what would have been expected by Okun’s Law given the GDP growth shortfall.


Okun’s Law holds that to reduce the unemployment rate down by one percentage point over the course of a year then GDP growth should be about 2%-pts faster than its long-run trend growth. With most estimates of trend growth in the neighborhood of 2.5%, this implies that it takes growth of about 4.5% for a year to lower the unemployment rate by one percentage point. In the year ending in December, the unemployment rate fell by almost a percentage point, a period in which growth was only 1.6%— not only not significantly above trend, but not above trend at all. To understand this violation of Okun’s Law, we return to Okun’s original analysis of the issue.


One of the bedrock relations of macroeconomics, even more fundamental than Okun’s Law, is that aggregate GDP (which we label Y) can be represented as function of the amount of capital (K) and labor (L) used to produce output, along with the overall level of technical progress (A) made in using capital and labor. More specifically, the relation Y=A*K1/3*L2/3 seems to describe US production fairly well. This means that a 1% increase in labor input will raise GDP by 2/3%-pt. If the size of the labor force is constant then a 1%-pt drop in the unemployment rate should increase labor input used in aggregate production by 1/(1-u)%, where u is the unemployment rate. This implies that holding all else equal, a 1%-pt drop in the unemployment rate should increase GDP by about 1/(1-.083)*(2/3)=0.7%, a number well below the 2% boost implied by Okun’s Law. The apparent disparity is resolved by the fact that all else is usually not equal: declines in the unemployment rate tend to be correlated with (1) increases in the average workweek, (2) increases in labor force participation rates, and (3) increases in average labor productivity.

Feroli on the labor force participation rate wildcard - nothing but an optical scam to fool the general peasantry into believing that the unemployment rate is dropping, when in reality we are having a historical economic transformation of unprecedented proportions. And call it lost productivity, or a quality outflow of jobs, end result is the same:

The breakdown of correlation (2) has received the most attention recently: instead of increasing, the labor force participation rate has declined even as the unemployment rate has declined. However, Okun himself realized that the correlation of labor usage and productivity was historically the most important reason that the Okun coefficient was so large. The fact that this correlation has gone the “wrong” way over the past few years can explain both why  unemployment increased more than Okun’s Law would have predicted in 2008-2009 and why unemployment has come down so much recently. In fact, if the correlation between productivity growth and changes in the unemployment rate that prevailed between 1947 and 1984 held last year, then the decline in unemployment we have witnessed would have been accompanied by GDP growth of around 4.1%, and there would be little left to explain.


Output—GDP—equals productivity, or output per hour, times hours worked. As we noted above, growth in productivity, or correlation (3) listed above, has been weaker than what would have been expected given the decline in unemployment. However, the growth in hours worked has been only a little weaker than what would be expected. Although the labor force participation rate, correlation (2), is weaker than what one would have expected given the decline in unemployment, the average workweek, correlation (1), is stronger than what would have been expected. On net, hours worked have not behaved too abnormally given the decline in unemployment—productivity has.

A historic secular shift: productivity - a core component of GDP, is no longer procyclical.

For most of the postwar period productivity was significantly accelerating in booms and slowing in downturns. The most common explanation for this relates to labor market frictions that make labor a quasi-fixed factor of production. For example, if union contracts stipulate a certain level of employment, then in a downturn less output is spread over the same labor “overhead,” reducing productivity; the opposite happens in a boom.


A variety of micro- and macroeconomic evidence suggests that labor market frictions have declined in recent decades, which can be seen less formally in the rise of temp help employment, the decline of unionization, the rise of internet job search, etc. These factors have made labor more of a variable factor of production, rather than a quas-fixed factor of production that is adjusted only occasionally. This trend has likely led to the end of procyclical productivity. Moreover, this trend is not going away, and so we should not expect the old macroeconomic regularities to reassert themselves.

The conclusion is staggering - everything we know about the economic virtuous cycle is now irrelevant!

The new pattern of productivity growth—no longer cyclical with respect to output and countercyclical with respect to employment—has several important implications. For one, we may continue to see the unemployment rate drop more than Okun’s Law implies. Another implication is that the labor share is no longer countercyclical. This also means that profits will be less correlated with improvements in the labor market.


A final, somewhat technical, implication is that the conditions for self-fulfilling prophesies in the macroeconomy may no longer exist. The idea that there could exist virtuous/vicious circles between real economic outcomes and confidence (or asset prices, effectively the same thing) was first formally advanced by David Cass and Carl Shell. They referred to these virtuous/vicious circles as “sunspot equilibria;” George Soros dubbed the property “reflexivity.” Subsequent applied macroeconomists appealed to the procyclicality of productivity as evidence of the type of increasing returns to production sufficient to generate confidence feedback loops. If labor is no longer a quasi-fixed factor of production this may eliminate one type of non-convexity in production, thereby reducing the likelihood that the economy has multiple equilibria and is subject to self-fulfilling prophecies. While it is hard to say much definitively, it is interesting to observe that over the last two years the economy has been subject to large swings in investor sentiment and asset prices, and yet actual growth outcomes have been remarkably stable.

And there are those who wonder why we detest "central planned" attempts to attain a fake equilibrium more than anything. Luckily, now that the core driver of economic growth has failed just so a centrally planned administration can get 4 more years of "hope and change" it won't be much longer until the wheels finally and terminaly fall off the centrally panned bus tour.

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YesWeKahn's picture

The key problem is that congress people keep saying that Bernank is doing a great job without understanding what it was really up to. Then Bernank can't see the forest from his little tree.

AldousHuxley's picture

Congress know what they are doing....asking Bernanke to ease up on the credit so that they get to keep their jobs and power although they've made horrible decisions for the nation.


Bernanke also is answering banksters calls to legitimize toxic assets off of bank's balance sheets to keep the game going for them.

Tao 4 the Show's picture

Yes, in the short term they know what they are doing. On longer scale, i am not sure anyone knows what they are doing. The tricky part is that this "longer scale" is getting shorter and shorter, with huge uncertainties now in the months range. This latest move by the U.S. govt to tell all of the world to stop trading with Iran or else face having their Swift access cut off is mind blowing. Will China and Russia (and India) just buckle? Or is this a major turning point in world affairs? I know it seems we have been on high alert/crisis mode for years now, but the next 6-9 months look like a critical moment in history. Someone is going to have to yield, and it's hard to say how gracefully or ungracefully that will happen.

palmereldritch's picture

  It takes a BHOtemkin Pillage

LowProfile's picture

The key problem is The Bernank created inflation via ASSET PRICES as opposed to WAGES.

What a fuckin' dolt.

qqqqtrader's picture

If house prices are going up (not real sure about that) and wages are going down, who's left to buy? ...chart

Divided States of America's picture

Not a big surprise here...with the quality of the leadership that is running this country, its no surprise the state of degradation in the society is at an all time high. Now we have to choose between another term with Bammy or Mittens...looks like we are definitely keeping this trend going for at least another 4 years.

Manthong's picture

They’ll just keep drinking until they sober up..

it’s just a short drive home and they know the way.

Henry Chinaski's picture

and they are too damn drunk to walk home now.

boogerbently's picture

Until all homes are either being paid for or foreclosed on, we have NO idea where the banks stand.

Financials are the only asset class, in my TDAmeritrade account, that when I try to check on "Financial Strength", it says "Data not available...."

WHEN the banks are allowed to foreclose on, and resell that inventory, housing prices will drop even further.

Great for would-be homeOWNERS, bad for "investors", as it should be.

AldousHuxley's picture

facebook early employees after IPO .


all you need is one dumbass to over pay for shitty old house in Palo Alto to raise prices of all homes in the neighborhood.


also most boomers seem to have multiple homes from all the money they got from selling out their kids' futures to india and china.

Quinvarius's picture

Those SWIFT threats cannot be retracted and are devistating to the use of the Dollar in global settlement.  It is like threatening to nuke someone.  Once you say it, everyone knows you are mentally unstable, and they will forever guard against you.  It will be seen as the bullet in the back of the neck to the dollar in a couple years.  No one can any longer afford to operate in the dollar based SWIFT system if the US is threatening to kick people out of it merely for buying things they need.

Only an unprepared moron with no clue about banking or world affairs, like Hilary Clinton, could have come up with a threat like kicking people out of SWIFT to use against our allies.  It is absolutely the same as threatening to drop nukes.  We are going to feel the wrath of the world over this.

It was stupid.  It was George Bush stupid. 

Tao 4 the Show's picture

Good points. This seems like an all-or-nothing play, otherwise spelled desperation. If this fails, the U.S. loses position/credibility in a big way. And even if everyone buckles, they will immediately accelerate their exit plans to remove this vulnerability. The U.S. loses in either case.

The only win is if they gain total dominance/control by having Iran and a large percentage of energy resources in hand far into the future. Is this unbelievable hubris at work or a real sense of iron fist? Seems like a major turning point.

GetZeeGold's picture



It was stupid. It was George Bush stupid.


Except George Bush didn't do it.......what does that say about the people that actually did.


Worse than is that even possible?



Calmyourself's picture

Shh, don't interrupt the meme.. You cannot have Clinton as stupid, banging 19 year olds in the oval office and then lying about it under oath and being debarred is smart..  Obama stupid, please, he is African American did you realize that, he cannot be stupid. Billary got rolled by the smartest African American in the world so she cannot be stupid..  It simply must be GW, get with the program, watch some CNN in no time at all you'll feel right as rain..

AldousHuxley's picture

if Bush is stupid, then what about 50% of Americans who voted for him?


and the idiots wanted Sarah Palin as the leader?


redneck: I don't care for government, they don't show me anything

journalist: you get food stamps!

redneck: yeah, I deserve food stamps. I have no unemployment.

journalist: voting republican hasn't worked for you

redneck: but it could

AldousHuxley's picture

on the other hand you have welfare queens who have no shame anymore getting welfare


US government is only working for the very rich or the very poor. blue collar workers and professionals are the ones getting screwed with high income taxes (vs. capital gains) while not getting much from the government.

TrulyBelieving's picture

One of your few posts that make sense AH. The rich running the govt and the well connected are rich because they are able to manipulate the laws, take money for favors, or any other illegal act they can find to steal from us. The poor get their crumbs for their votes and support. Blue collars and professionals are left holding the debt via taxes. And most of these are respectable people who don't want anything from the govt except to be left alone. 

Greenie's picture

"You cannot have Clinton as stupid, banging 19 year olds in the oval office and then lying about it under oath and being debarred is smart.."

At least Barry and Michelle had the foresight to have their law licenses "voluntarily retired", so as to forgo the unpleasantry of being disbarred like Clinton.





Gully Foyle's picture


Or there is another vector being planned.

You can't have a one world government unless everyone sits at roughly the same table. Read enough and you discover how standards of living are dropping in the developed world and rising in the undeveloped. How the Welfare state is being merged with the Capitalist state, it is most obvious where state run health care is now under threat from personal insurance.

Eventually the US, and maybe Europe, will be the hammer. Africa and the third world will be the rescources. China and India will be the manufacturing hub.

Nothing is stupid if it moves the long term plan along.

ISEEIT's picture

Who is to be the next world bank prez and what are his qualifications?

dark pools of soros's picture

i hear he can rap and sing some flashy notes

GetZeeGold's picture



All that and he's a buddy of Soros,...........uber qualified.


hangman's picture

certainly, US and 'western' world face unprecedented challenges, the 'rest' is still too far behind to fill the void in any meaningful manner, fast.  we still have quite a bit of savings that our ancestors build-up, putting a nice distance between us and the rest, that we are depleting, fast.  Thus, if we don't get our shit together before we run out of good grace our hard working grandparents build-up for us, we could become the shortest reigned super-power, ever.

We need to stop infighting, blaming each other, parties, etc., etc. Instead, we need to find a common ground, solution and only through hard work we can overcome this mess, doesn't matter who made this mess, we are certain it was Americans, etc., fast, before it's too late.

In short, infighting and blaming games are the surest sign of much worst things to come...



ISEEIT's picture


Stupid as in those doing as instructed? Yes. Stupid but also as told. I am convinced that the long game is to collapse the USD. What is happening is actually rather brilliant, evil for certain, but not stupid.

nickt1y's picture

Or it was brilliant if you are presuming a Cloward Piven approach. Break the dollar, break the country, present a despot to the sheeple. Weimar to the 3 rd Reich for example.

SilverDoctors's picture

"The conclusion is staggering - everything we know about the economic virtuous cycle is now irrelevant!"

Apparently everything we know about precious metals is now irrelevant too as a TUNGSTEN FILLED 1 kilo gold bar has been discovered in the UK. 
Vindication for Rob Kirby?

Tungsten Filled 1 kilo Gold Bar Discovered in UK
Chaffinch's picture

Wow - thanks for the link Doc! Amazing to see photos of the drilled-out bar with its tungsten inserts! I had thought the constant references on ZH to tungsten were a bit of a joke until recently, when I checked out tungsten on wikipedia and found how just how heavy it is. Is the only way to be sure to cut the bar in half? I'm sticking with coins I can recognised and test by weighing myself - and small ones at that - no one kilo gold coins for me ; )

Gully Foyle's picture


Nov 12, 2009

By: Rob_Kirby

Here’s what I now understand really happened:

The amount of “salted tungsten” gold bars in question was allegedly between 5,600 and 5,700 – 400 oz – good delivery bars [roughly 60 metric tonnes]. 

This was apparently all highly orchestrated by an extremely well financed criminal operation.

Within mere hours of this scam being identified – Chinese officials had many of the perpetrators in custody.

And here’s what the Chinese allegedly uncovered:

Roughly 15 years ago – during the Clinton Administration [think Robert Rubin, Sir Alan Greenspan and Lawrence Summers] – between 1.3 and 1.5 million 400 oz tungsten blanks were allegedly manufactured by a very high-end, sophisticated refiner in the USA [more than 16 Thousand metric tonnes].  Subsequently, 640,000 of these tungsten blanks received their gold plating and WERE shipped to Ft. Knox and remain there to this day.  I know folks who have copies of the original shipping docs with dates and exact weights of “tungsten” bars shipped to Ft. Knox.

The balance of this 1.3 million – 1.5 million 400 oz tungsten cache was also plated and then allegedly “sold” into the international market.

Apparently, the global market is literally “stuffed full of 400 oz salted bars”. 

Makes one wonder if the Indians were smart enough to assay their 200 tonne haul from the IMF?

Chaffinch's picture

Thanks Gully - I followed the Kirby link from the SilverDoctors site and read about the 400 ounce bars - amazing stuff!

If it is true that the Chinese were the target of the original scam, would it not leave them wanting revenge? If the CBs are really playing these kinds of games with each other / the world gold markets it adds quite a twist to the endgame - what the he'll is going to happen? Gold shoots up to previously undreamed of highs - at which point everyone with anything larger than a ten ounce bar starts cutting it open to find out whether they own gold or tungsten! And the winner is - sorry - not you Mr Chavez - that's mainly tungsten - sorry Germany - that stuff you took from Greece was tungsten too... Well done Ireland! You've not got much of it but it is real gold...! This is madness!

hedgehog9999's picture


LongSoupLine's picture



Well, all one has to do is look at the "national outrage" for one kid being shot by one cop in a completely isolated incident.  Protests, hoodie rallies, actors, sports icons...the're all in on the fever of it.  Yet, the Fed, Congress, TBTF's and a multitude of other entities "kill" the American public daily.

Are the American people idiots and ignorant lemmings on average?...yep.'s picture

If you're talking about Trayvon Martin he was not shot by a cop.

t_kAyk's picture

correct, he was shot by an individual on neighborhood watch.  I believe LongSoupLine was pointing out that we only see solidarity among the masses when it comes to isolated incidents.  when crime is conducted on a grand scale, some people can't see it for it's true nature while others succumb to their conditioned response and go back to playing angry birds. 

you can't see the forrest from the trees, or:

"If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”  ~ Joseph Goebbels's picture

What makes you say that the murder of Trayvon Martin is an isolated incident? It seems that lots of young blacks are victimized for purely racial reasons. (I'll take the obligatory moment to explain to the idiots that I realize that some blacks attack whites over race as well.)  But the beatings and shootings of young black men for no apparent reason other than that the victims were acting suspiciously Negro are not particularly isolated events.

It is a shame that publicity hounds are polarizing this case.

t_kAyk's picture

You are correct, sir.  It is not my intention to focus on the race of the individual (although there are many who do, and will continue to do so), but more at the size of the crime.  People, no matter what color/race/creed, etc., are gunned down everyday and there is outrage.  Banks and government rape the masses and no one so much as blinks.'s picture

I talk with folks about the crimes of government and its cronies almost everyday. Most folks agree with me whole-heartedly. Some are even more visibly upset than I am.

I was at a meeting dealing with our county's recent property reassessment which increased assessments for poor neighborhoods and lowered them in rich neighborhoods. One eighty year old woman told me that she thought everyone should get a gun and go to the courthouse. An eighty year old man was calling for "revolution."

AssFire's picture

Oh crap, Trayvon was under school suspension? the photo of him was when he was 13? .. Now unfortunately another witnesses supporting Zimmerman (who unfortunately is not white)...This did not exactly fit the JJ, Sharpton victim boilerplate..

So, a Hispanic man chases a black youth. The Hispanic thinks the kid is a thug and the Black youth thinks the Hispanic man is a gang banger and he needs to defend himself. I think they both profiled each other and the result was tragic. The one difference was that one guy had a gun.


Here is a current photo from Trayvon's Facebook...I must agree with the President- If he had a son, this IS what he would look like:

and lets not for get the photo with his gang's name emblazoned on it:

At least our President did not act stupidly by stirring up racial hatred  before learning all the facts as in the Cambridge debacle. Now a beer summit must be held for him to recapture the latino vote. Scientists will support Holder's contention that it was "Zimmerman's white side" that killed Trayvon.

Despicable race baiters never cared about the facts and now that the media doesn't either we are headed straight to shit as a nation.'s picture

Zimmerman followed Martin simply because he thought he looked "suspicious." No mention has ever been made about any alleged criminal activity beyond the non-criminal act of walking while black.

Zimmerman profiled Martin, Martin simply defended himself with his fists when a stranger stalked him first by vehicle and then on foot.

AssFire's picture

You understand people are killed by fists?

You really want to dispute that Zimmerman, by eyewitness accounts and evidence was on his back being beaten?

Why the guilt?  You really seem to think the white race must pay for this injustice they had nothing to do with?

Liberal apologists are destroying the country with their beliefs and they don't have any guilt for that.'s picture

Are you saying that after Zimmerman pursued him by car and on foot that Martin had no right to defend himself?

Are you suggesting that if I stalked a member of your family and they fought back that I would have your permission to shoot them?

Zimmerman never indicated that Martin did anything other than to look "suspicious." Zimmerman then pursued Martin. Zimmerman was the aggressor.

Standing up for murder victims is a function of the rule of law. You must be a liberal if you fail to understand that simple fact.

I have no guilt so you can forget the pop psychology (that's another one of your liberal traits). I do have black family members. Don't even think about living out your insane revenge fantasies with one of them. This white boy knows how to do self defense the right way.

t_kAyk's picture

I would love to see the link for the accounts you have of Zimmerman being beaten. 

Here's the audio of him stalking the young man:

Here's the audio of Martin being murdered:

I am sure you can locate all of this on MSM feeds and blogs. 

I know there are two sides to every story, but the way things are trending in this country, especially with the extreme police militarization (even though he wasn't a cop, but rather some wannabe jackboot), i'm gonna have to side with the departed.'s picture

The dead boy is a statistic and so Critical Race Theory which is based purely on anecdotal evidence and eschews hard data does not apply.

LongSoupLine's picture



 I believe LongSoupLine was pointing out that we only see solidarity among the masses when it comes to isolated incidents.  when crime is conducted on a grand scale, some people can't see it for it's true nature while others succumb to their conditioned response and go back to playing angry birds. -t_kAyk


BINGO!  I completely understand the issue of "profiling" and hate crimes.  All I was trying to point out was, apples to apples, when you look at the scope of damage to our way of life, Bernanke, TBTF's, CONgress, etc have it won hands down...where's the outrage other than a fading OWS?  It's all about the intellectual average of America...and, in my opinion, it's sucking wind when you view the MSM coverage of this shooting.

vast-dom's picture

I really can't wait for the wheels to fly off this motherfucker -- it is simply impossible to not just invest but even sanely track these markets given the actual schizoid policies and HFT like bullshit out there. What is the point of value and growth when fundamentals are now irrelevant and there is only a synthetic rigged upward market trajectory on nothing, not even hope and change, just plain utter greed-fantasy and alter-world crooked accounting. This shit will go on and on because the mentally ill are in charge and we all know that insane people can rationalize anything, especially if it's about their very own needs.... Sooner these markets collapse and the people running them are admitted into the nuthouse, the better.

The only growth that makes sense is in the guns and ammo charts as shown here yesterday -- that makes a lot more sense than, say, Apple....

And it's ironic that the culpable are now writing articles about how this system is untenable; sounds like some venal reverse-psycho ploy to me....