Feynman
09-25-2003, 02:23 AM
The Daily Reckoning PRESENTS: The strong, compelling
evidence of an economy that is as far away from a recovery
as its disastrous job numbers.
EMPLOYMENT DISASTER
By Kurt Richebächer
There has been much talk to the effect that America has
just had its slightest recession in the whole postwar
period. That is measured in real GDP growth, being
bolstered by many statistical tricks. Measured, however,
by job losses, which certainly are the far more important
gauge, it is already America's worst recession by far.
In June it was declared that the recession had ended in
November 2001. Yet in the 20 months since, payroll
employment has declined by a total of about 1 million
jobs, or about 8%. In not one of the seven or eight
postwar recoveries has there been any employment decline.
Immediate strong job growth has been the regular
characteristic of all business cycle recoveries. On
average, payroll jobs increased 3.8% in the 20 months
following the end of recession.
What's more, no letup in job losses is in sight. During
the second quarter, widely hailed for its better-than-
expected GDP growth, the household measure of employment
slumped by 260,000. However, this figure concealed an even
greater number of workers - 556,000 - who statistically
quit the workforce because they have given up looking for
nonexisting jobs.
This rapidly growing group of people no longer count as
unemployed. What American job statistics really measure
are not changes in unemployment, but changes in job
seekers. Including the frustrated job seekers, the U.S.
unemployment rate is hardly lower than in Europe.
Certainly, it is rising much faster.
[Feynman's comment: these people will be looking for new ways to make money...]
In addition, the Labor Department is employing month for
month the same two practices that camouflage the horrible
reality. In July, for example, it reported a decline in
payrolls by 44,000, while job losses for June were revised
upward from 30,000 to 72,000. For May, the retrospective
upward revision was even from 17,000 to 70,000. As such
upward revisions of job losses in the prior month have
become a regular feature, this practice has the convenient
effect of producing correspondingly lower new numbers
every month. The same happens, at more moderate scale,
with weekly reported claims.
There is still more spinning involved. The government adds
every month some 30,000-50,000 imaginary workers to the
job total. It is based on the assumption that in an
economic recovery a lot of people start their own
business. In normal recoveries, they have done so, indeed.
All it needs to activate this statistical job creation is
a unilateral decision by the government that the economy
is in recovery. Once a year, the statisticians reconcile
their assumption with reality by a revision. When they did
this in May of this year, 400,000 new jobs that had been
reported earlier simply vanished. Such revisions, of
course, take place outside the monthly reported job
losses. Together, we presume, these statistical
casuistries have reduced the reported job losses in the
past two years by well over 100,000 per month.
It rather abruptly became the consensus view that in
America the great recovery from protracted, sluggish
growth is finally on its way. Record-low interest rates,
runaway money and credit growth, new big tax cuts, record-
high cash-outs by consumers through mortgage refinancing,
increasing house and stock prices, and rising profits are
cited as the compelling reasons for this optimism.
We are more than skeptical about the true impact of all
these influences on the economy primarily for one reason:
Most of them, if not all of them, have been at work for
some time already, but with grossly disappointing overall
effects on the whole economy, and now some of these
influences are weakening or even reversing.
Think of the sharp rise in long-term interest rates that
is most assuredly stopping the mortgage-refinancing bubble
dead in its tracks. That, in our view, will not only abort
any recovery but will also mean the economy's relapse into
new recession.
As for fiscal policy, it clearly gave its biggest boost to
the economy between the fourth quarter of 2000 and the
second quarter of 2002. That is a period of six quarters
during which the federal budget gyrated from a quarterly
surplus of $306.1 billion to a deficit of $526 billion,
both at annual rate. This year, the deficit is supposed to
hit $455 billion. Most probably, it will come out much
higher. But this follows a deficit in the last year of
$257.5 billion. The fiscal stimulus is waning, not
increasing.
In any case, actual, historical experience in the 1970-80s
with large-scale government deficit spending has been
anything but encouraging. It created more inflation than
economic growth. Over time, rising deficits were rather
recognized as impediments to economic growth. Japan's
recent experience makes frightening reading. Since 1997,
government debt has skyrocketed from 92% to 150% of GDP,
rising every year by more than 10% of GDP. Yet nominal GDP
keeps shrinking.
As to monetary policy, we have very much the same doubts
about its efficacy in generating economic growth under
current economic and financial conditions. It is the
traditional American consensus view that monetary policy
is omnipotent if properly handled. In this view, any
recession, or worse, always has its decisive cause in the
failure of the central bank to ease its reins fast enough.
In this view whatever happened in the economy during the
prior boom is irrelevant.
This time, both monetary and fiscal policies in America
have acted with unprecedented speed and vigor. To people's
general surprise, the economy's rate of growth abruptly
slumped during 2000 from 3.7% in the first half to 0.8% in
the second.
Starting on Jan. 3, 2001, the Fed slashed its short-term
rate in unusually quick succession. Within just 12 months,
its federal funds rate was down from 5.98 to 1.82.
Assessing the development, the first thing that struck us
as most unusual was that this sudden, sharp economic
downturn occurred against the backdrop of most rampant
money and credit growth. Total nonfederal, nonfinancial
credit grew by $1,144.3 billion in 2000, after $1,102.6
billion in the year before. This compared with nominal GDP
growth during the year by $437.2 billion. The first
important conclusion to draw therefore was that this
sudden economic downturn had obviously nothing to do with
money or credit tightness.
Ever since, nonfinancial credit growth has sharply
accelerated. In the fourth quarter of 2002, it hit a
record of $1,612.8 billion, at annual rate, followed in
the first quarter of 2003 by $1,338.3 billion. This
coincided with simultaneous nominal growth of $388.4
billion and real GDP growth of $224.4 billion, both also
at annual rate. For each dollar added to real GDP, there
were thus six dollars added to the indebtedness of the
nonfinancial sector.
Regards,
Kurt Richebächer,
for The Daily Reckoning
P.S. During the 1960-70s, by the way, there was on average
about 1.5 dollars of debt added for each dollar of
additional GDP. Just extrapolate this escalating
relationship between the use of debt and economic
activity. And think of it: the GDP growth of today is
tomorrow a thing of the past, while the debts incurred
remain. Plainly, Greenspan's policy has collapsed into
uncontrolled money and debt creation that has rapidly
diminishing returns on economic activity.
As we noted in these pages last week, the late economist
Hyman P. Mynsky would call this a Ponzi economy where debt
payments on outstanding and soaring indebtedness are no
longer met out of current income but through new
borrowing. Soaring unpaid interests become capitalized.
Editor's note: Former Fed Chairman Paul Volcker once said:
"Sometimes I think that the job of central bankers is to
prove Kurt Richebächer wrong." A regular contributor to
The Wall Street Journal, Strategic Investment and several
other respected financial publications, Dr. Richebächer's
insightful analysis stems from the Austrian School of
economics. France's Le Figaro magazine has done a feature
story on him as "the man who predicted the Asian crisis."
In the September issue of his newsletter, Dr. Richebächer
aggressively dissected the data economists are
interpreting as a miracle 'recovery' - including a
critical look at defense spending and its aggregate effect
on the revised GDP numbers for Q2. His conclusion: the
recovery is hokum.
evidence of an economy that is as far away from a recovery
as its disastrous job numbers.
EMPLOYMENT DISASTER
By Kurt Richebächer
There has been much talk to the effect that America has
just had its slightest recession in the whole postwar
period. That is measured in real GDP growth, being
bolstered by many statistical tricks. Measured, however,
by job losses, which certainly are the far more important
gauge, it is already America's worst recession by far.
In June it was declared that the recession had ended in
November 2001. Yet in the 20 months since, payroll
employment has declined by a total of about 1 million
jobs, or about 8%. In not one of the seven or eight
postwar recoveries has there been any employment decline.
Immediate strong job growth has been the regular
characteristic of all business cycle recoveries. On
average, payroll jobs increased 3.8% in the 20 months
following the end of recession.
What's more, no letup in job losses is in sight. During
the second quarter, widely hailed for its better-than-
expected GDP growth, the household measure of employment
slumped by 260,000. However, this figure concealed an even
greater number of workers - 556,000 - who statistically
quit the workforce because they have given up looking for
nonexisting jobs.
This rapidly growing group of people no longer count as
unemployed. What American job statistics really measure
are not changes in unemployment, but changes in job
seekers. Including the frustrated job seekers, the U.S.
unemployment rate is hardly lower than in Europe.
Certainly, it is rising much faster.
[Feynman's comment: these people will be looking for new ways to make money...]
In addition, the Labor Department is employing month for
month the same two practices that camouflage the horrible
reality. In July, for example, it reported a decline in
payrolls by 44,000, while job losses for June were revised
upward from 30,000 to 72,000. For May, the retrospective
upward revision was even from 17,000 to 70,000. As such
upward revisions of job losses in the prior month have
become a regular feature, this practice has the convenient
effect of producing correspondingly lower new numbers
every month. The same happens, at more moderate scale,
with weekly reported claims.
There is still more spinning involved. The government adds
every month some 30,000-50,000 imaginary workers to the
job total. It is based on the assumption that in an
economic recovery a lot of people start their own
business. In normal recoveries, they have done so, indeed.
All it needs to activate this statistical job creation is
a unilateral decision by the government that the economy
is in recovery. Once a year, the statisticians reconcile
their assumption with reality by a revision. When they did
this in May of this year, 400,000 new jobs that had been
reported earlier simply vanished. Such revisions, of
course, take place outside the monthly reported job
losses. Together, we presume, these statistical
casuistries have reduced the reported job losses in the
past two years by well over 100,000 per month.
It rather abruptly became the consensus view that in
America the great recovery from protracted, sluggish
growth is finally on its way. Record-low interest rates,
runaway money and credit growth, new big tax cuts, record-
high cash-outs by consumers through mortgage refinancing,
increasing house and stock prices, and rising profits are
cited as the compelling reasons for this optimism.
We are more than skeptical about the true impact of all
these influences on the economy primarily for one reason:
Most of them, if not all of them, have been at work for
some time already, but with grossly disappointing overall
effects on the whole economy, and now some of these
influences are weakening or even reversing.
Think of the sharp rise in long-term interest rates that
is most assuredly stopping the mortgage-refinancing bubble
dead in its tracks. That, in our view, will not only abort
any recovery but will also mean the economy's relapse into
new recession.
As for fiscal policy, it clearly gave its biggest boost to
the economy between the fourth quarter of 2000 and the
second quarter of 2002. That is a period of six quarters
during which the federal budget gyrated from a quarterly
surplus of $306.1 billion to a deficit of $526 billion,
both at annual rate. This year, the deficit is supposed to
hit $455 billion. Most probably, it will come out much
higher. But this follows a deficit in the last year of
$257.5 billion. The fiscal stimulus is waning, not
increasing.
In any case, actual, historical experience in the 1970-80s
with large-scale government deficit spending has been
anything but encouraging. It created more inflation than
economic growth. Over time, rising deficits were rather
recognized as impediments to economic growth. Japan's
recent experience makes frightening reading. Since 1997,
government debt has skyrocketed from 92% to 150% of GDP,
rising every year by more than 10% of GDP. Yet nominal GDP
keeps shrinking.
As to monetary policy, we have very much the same doubts
about its efficacy in generating economic growth under
current economic and financial conditions. It is the
traditional American consensus view that monetary policy
is omnipotent if properly handled. In this view, any
recession, or worse, always has its decisive cause in the
failure of the central bank to ease its reins fast enough.
In this view whatever happened in the economy during the
prior boom is irrelevant.
This time, both monetary and fiscal policies in America
have acted with unprecedented speed and vigor. To people's
general surprise, the economy's rate of growth abruptly
slumped during 2000 from 3.7% in the first half to 0.8% in
the second.
Starting on Jan. 3, 2001, the Fed slashed its short-term
rate in unusually quick succession. Within just 12 months,
its federal funds rate was down from 5.98 to 1.82.
Assessing the development, the first thing that struck us
as most unusual was that this sudden, sharp economic
downturn occurred against the backdrop of most rampant
money and credit growth. Total nonfederal, nonfinancial
credit grew by $1,144.3 billion in 2000, after $1,102.6
billion in the year before. This compared with nominal GDP
growth during the year by $437.2 billion. The first
important conclusion to draw therefore was that this
sudden economic downturn had obviously nothing to do with
money or credit tightness.
Ever since, nonfinancial credit growth has sharply
accelerated. In the fourth quarter of 2002, it hit a
record of $1,612.8 billion, at annual rate, followed in
the first quarter of 2003 by $1,338.3 billion. This
coincided with simultaneous nominal growth of $388.4
billion and real GDP growth of $224.4 billion, both also
at annual rate. For each dollar added to real GDP, there
were thus six dollars added to the indebtedness of the
nonfinancial sector.
Regards,
Kurt Richebächer,
for The Daily Reckoning
P.S. During the 1960-70s, by the way, there was on average
about 1.5 dollars of debt added for each dollar of
additional GDP. Just extrapolate this escalating
relationship between the use of debt and economic
activity. And think of it: the GDP growth of today is
tomorrow a thing of the past, while the debts incurred
remain. Plainly, Greenspan's policy has collapsed into
uncontrolled money and debt creation that has rapidly
diminishing returns on economic activity.
As we noted in these pages last week, the late economist
Hyman P. Mynsky would call this a Ponzi economy where debt
payments on outstanding and soaring indebtedness are no
longer met out of current income but through new
borrowing. Soaring unpaid interests become capitalized.
Editor's note: Former Fed Chairman Paul Volcker once said:
"Sometimes I think that the job of central bankers is to
prove Kurt Richebächer wrong." A regular contributor to
The Wall Street Journal, Strategic Investment and several
other respected financial publications, Dr. Richebächer's
insightful analysis stems from the Austrian School of
economics. France's Le Figaro magazine has done a feature
story on him as "the man who predicted the Asian crisis."
In the September issue of his newsletter, Dr. Richebächer
aggressively dissected the data economists are
interpreting as a miracle 'recovery' - including a
critical look at defense spending and its aggregate effect
on the revised GDP numbers for Q2. His conclusion: the
recovery is hokum.