U.S. Recession: More Unemployment, Sinking Dollar

What gives? The Obama administration no sooner assures Americans that labour markets had finally stabilised and mass job losses were at an end when the Bureau for Labor Statistics comes out last Wednesday and ruins the party with the bad news that mass layoffs leapt by over 20 per cent in August. An earlier report estimated that manufacturing accounted for 31 per cent of the layoffs. (I have stressed numerous times that manufacturing always bears the blunt of the boom-bust-cycle).

It certainly looks like manufacturing is undergoing a very ugly shakeout. That the jobs situation is grim was further underlined by a report from the United States Department of Labor for the week ending 19 September which revealed that the 4-week moving average for jobs claims at 553,500. How can this be? The share markets have been moving upwards for some months and the ISM index has turned positive.

The US has experienced a lengthy and extremely irresponsible credit expansion. Irrespective of the Fed's monetary nonsense, money is not neutral. This means that the expansion created masses of malinvestments when it distorted the structure of relative prices. When the boom bust these malinvestments had to be liquidated. It is this process that the country is still experiencing.

Unfortunately, while manufacturing has been largely forced to bear the full impact of the downturn a great many malinvestments in the financial sector have been kept afloat by massive subsidies. If these investments had been denied a government lifeline the bad ones would have gone to the wall while the viable ones would have been saved. This would have had the effect of freeing capital and hastening recovery. Instead the Fed rushed to the monetary pumps while the government — starting with the Bush administration — moved to do what it is least capable of doing — and that is picking winners.

The result was an unprecedented peace-time explosion in deficit spending which if not rolled back will severely retard economic growth, by which I mean the accumulation of capital. (Forget that nonsense about government spending leading to induced investment). No administration since Roosevelt's has been more hostile to business than Obama's. Given this fact one should not be surprised if businesses becomes extremely cautious in their hiring policies, particularly considering Obama's absurd belief that unions were responsible for the emergence of America's middle class.

A particularly worrying aspect of the current situation is Ben "Helicopter" Bernanke's utterly irresponsible attitude toward monetary policy. He considers himself to be something of an expert on the Great Depression. He is anything but. By focusing entirely on money — as did Friedman and Schwartz — he completely overlooked 'real factors'. As one economist astutely observed:

...monetary factors cause the [business] cycle but real phenomena constitute it. (Fritz Machlup, Essays on Hayek, Routledge, Kegan Paul 1977, p. 23).

Because his starting premise was the neutrality of money Friedman just could not accommodate the idea of monetary-induced malinvestments despite the massive amount of statistical evidence that supported it. Bernanke — whether he knows it or not — is starting from the same premise. This certainly helps explain his cavalier attitude toward the money supply as illustrated by the two charts below. The first chart show AMS (Austrian money supply*) as rising steeply from September 2008 to June 2009. This was an increase of 25 per cent. A slight contraction brought the increase down to about 21 per cent in the following August.

The situation for the monetary base is even worse. From September 2008 to May 2009 it rocketed by 99 per cent. A slight fall had reduced the increase to nearly 92 per cent in August 2009. This expansion is truly unprecedented and extremely dangerous. Moreover, the Fed is still buying 'assets' with crispy new notes. Calling this state of affairs highly inflationary would be greatly understating the situation.

Bernanke's monetary policy strongly suggests that he is not only indifferent to the detrimental effect it will have on the exchange rate but that he is probably hoping for a significant dollar depreciation in the belief that it will stimulate exports and raise the demand for labour. (In the 1930s this was called exporting your unemployment). But a devaluation is only justified where the currency was overvalued. In all other circumstances it is a destructive and self-defeating policy.

The monetary figures are bound to have some economic commentators predicting another boom followed by the inevitable crash. I am not so sure. What America could get is a rapid reduction in idle capacity leading an increase in GDP as Bernanke's dollars work their magic. But I cannot help but be reminded of Germany's 1927-29 boom that was also accompanied by a high level of unemployment. In Germany's case the unions kept wage rates above their market clearing levels. In the US today the uncertainty created by Obama's policies could have a similar effect.

There is also the possibility that even Bernanke will be forced to apply the monetary brakes before his inflationary policy has time to bring unemployment down to a politically acceptable level. Whichever way one looks at it, any recovery based on these monetary foundations is doomed to be a short-lived one, thereby ultimately frustrating his policy of using inflation to lower unemployment for the long-term by cutting real wage rates and driving down the dollar.

*There are some differences among Austrians as to what ought to be included in a definition of the money supply. My own approach follows in the steps of Walter Boyd who in his open letter to Prime Minister Pitt in 1801 defined in the following terms:

By the words 'Means of Circulation', 'Circulating Medium', and 'Currency', which are used almost as synonymous terms in this letter, I understand always ready money, whether consisting of Bank Notes or specie, in contradistinction to Bills of Exchange, Navy Bills, Exchequer Bills, or any other negotiable paper, which form no part of the circulating medium, as I have always understood that term. The latter is the Circulator; the former are merely objects of circulation. (Walter Boyd, A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issues in Specie at the Bank of England, on the Prices of Provisions, and other Commodities, 2nd edition, T. Gillet, London, 1801, p. 2).

In simple terms, money is the medium of exchange.

Comments

[Mad Hedge F...:]

wnt With the collapse in employment, it is all about “location, location, location.” No surprise then that Michigan leads the country with a 15.2% jobless rate caused by the implosion of the auto industry. Detroit is suffering a horrific 17.3% rate. Nevada came next at 13.2%, blasted by both barrels of a shotgun by simultaneous layoffs in housing and hotels. Rhode Island at 12.8% took big hits in health care services and tourism. My home state of the “Land of Fruits and Nuts,” California, now has a 12.2% jobless rate, the worst in 70 years. Housing was the grim reaper here, and now 20,000 teachers have started collecting unemployment checks, thanks to our bankrupt state government. Who has the lowest unemployment rate in the nation? Sunny North Dakota at 4.3 %, where healthy agriculture and energy industries kept people in work, and ranking 48th in population, have almost no people to fire anyway. It also helps that the “Roughrider State” was completely bypassed by the subprime boom, and for many years was the cheapest place in the country in which to own a home. To get unemployment back to a normal 5% rate, Obama has to create 20 million jobs by the next election in 1012, one tall order.

Sep 28 03:15 PM

[Robert Mart...:]

Gerard,

Thanks for the update, grim as it is.

As you noted, the U.S. is pulling out all the stops to revive it's debt-laden economy: We have loose monetary policy under Bernanke, and loose fiscal policy under Obama. Of the two, I fear fiscal deficits more, since governement programs are notoriously difficult to unwind after the need for stimulus is gone.

Yet where are the jobs?

Despite massive monetary and fiscal stimulus, corporations are still not hiring. Corporations are cutting costs to boost margins, so Americans now see a complete disconnect between job growth and corporate profits. The lack of jobs and the mountain of debt has created genuine anxiety that is reshaping the political landscape. I wrote about this in detail in "The Deflation of the American Dream." seekingalpha.com/artic...

Rob

Sep 28 03:34 PM

[John Ryskamp:]

Don't worry about inflation. Collapse in demand will outpace it by a country mile.

And do you really think all that stimulus money is watering trade? Nonsense. It bounces right back to Washington.

We are in the second phase of Andrew Mellon's "liquidate liquidate liquidate." The first was circling the wagons (making sure all the bonds are paid on). The second is shooting out at the Indians (destroying the American people).

The depression is proceeding right on schedule. But who's our candidate for World War III target?

Sep 28 03:36 PM

[conceptwizard:]

We just found out from the Fed that they lied about gold swaps. What do you think the percentages are that they are lying about currency swaps and secret Fed buying of Treasuries from secret offshore locations?

Now China is only buying only short term debt and moving dollars into commodities slowly. I see no way to stop this whole nightmare from unraveling.

Sep 28 04:18 PM

[CautiousInv...:]

Why would any business expand employment?

There is no improvement in final demand beyond the temporary fillip afforded by fiscal stimulus; businesses will not hire until there are signs of organic growth. And organic growth will not resume until the health of the banking sector has been restored and global imbalances have been corrected.

Banks, after being recapitalized and sitting on $ billions of excess reserves, are tightening lending standards and reducing outstanding credit to both businesses and consumers. Small businesses, once the engine of job growth, cannot access credit.

Were banks were truly healthy this would not be the case and we would not be (1) paying interest on reserves (2) depressing short term rates to the benefit of banks and the detriment of savers (3) afraid to implement broad based accounting reforms and (4) fearful of increasing FDIC premiums to make the system actuarially sound.

The author is correct about the malinvestments that have taken place including the toxic assets that plague bank balnce sheets. Other malinvestments include the nation's housing stock that we continue to add to through FHA programs that allow families to finance 96.5% of the loan; underwriting standards have improved as has the appraisal process but why are we doing this? Similarly why is China expanding the capacity of its export machine in the face of declining demand?

Growth will not resume until (1) individual economies have been rebalanced through eliminating excesses stemming from bubbles (2) government's restore fiscal discipline and give the private sector breathing room and (2) the global economy has been recalibrated to better distribute imports and exports, eliminating massive trade imbalances.

Sep 28 04:52 PM

[Moon Kil Woong:]

When bernake was confronted with how he would drain the money ponds to prevent mass inflation his only response was he had a plan. Gerald Jackson is right in that there is no right way to drain the pond. It will either stagnate and rot causing mass inflation later and depreciation of the dollar (that's happening now) or it will force the Fed's hand to tighten thus plunging us into a W recession if not a great depression. Really, did Bernake really study the great depression.

After stimulus didn't work everyone was forced to tighten their belts including the Federal government in which the economy collapsed. At the same time the Fed raised interest rates from their unusually low lows. Geee, is there not striking similarities! Did Bernake study the depression just so he could repeat it but under even worse circumstances?

Sep 29 05:52 AM

[Economic Lens:]

Why does anyone think America will go down a different road than any other society in the past with similar economic conditions. Wheter inflation or deflation, high unemployment is here to stay for many years, creating a large poor and lower middle class within the country similar to a multitude of other countries around the world. The effects of globalization have finally come home. The wealth of our manufacturing base has been sent overseas, raising the lives of multitudes. Unfortunately at a cost of severely lowering the standards of living for multitudes in this country. This is but the beginning of a generational change and probably the worst is yet to come.

Sep 29 11:03 AM

[carey_jim:]

Whether you see these things from an Austrian, Marxist, Monetarist, Keynesian, neo-Keynesian or Groucho Marxist point of view doesn't really matter because all of these economic theories shine a light on only part of the economic landscape.

There are many theories of what "caused" the Great Depression and the monetarist (Bernanke's partial choice) is only one of them. But the debate rages on and has raged since the G.D. began.

From Wikipedia:

In a speech on Milton Friedman's ninetieth birthday (November 8, 2002), Bernanke said, "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna [Schwartz, Friedman's coauthor]: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." Anna Schwartz however is highly critical of Bernanke and wrote an opinion piece on New York Times to advise President Obama against his reappointment to Chair of Federal Reserve. [21] Bernanke focused less on the role of the federal reserve, and more on the role of private banks and financial institutions[22]. Bernanke found that the financial disruptions of 1930-33 reduced the efficiency of the credit allocation process; and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand, identifying an effect he called the financial accelerator. When faced with a mild downturn, banks are likely to significantly cut back lending and other risky ventures. This further hurts the economy, creating a vicious cycle and potentially turning a mild recession into a major depression.[23]

This same Wikipedia article states that Bernanke “was also an All-State saxophonist, playing in the school’s marching band.”

We know that Alan Greenspan played saxophone in a band with Stan Getz.

If anything is clear, to avoid bubbles and recessions we should prevent Jewish saxophone players from becoming head of the Federal Reserve.

Sep 29 03:13 PM

[pater_teneb...:]

It absolutely does matter which economic theory one employs. Economic laws are not subject to whim, they are laws; either one's economic premises are correct, or they are not.
Among the economic theories J. Carey has enumerated, the Austrian school is the only one that offers a rich enough theory of capital , money and credit to actually be able to cogently explain what has happened (and continues to happen).
However, the Austrian theory is detrimental to the job prospects of economists - since it eschews all forms of intervention and central planning, but instead argues that the free market can not possibly be improved upon (a premise that is both theoretically and empirically sound).
If economists are not called upon to formulate and implement grandiose plans, they naturally feel 'underused'.
Also, they have found out that as soon as one provides a 'scientific fig leaf' for statist intervention as Lord Keynes has done, one immediately is showered with tax payer financed grants and jobs, and gets to advise the political class.
It is therefore in the self-interest of most economists to argue for interventionism.
The Federal Reserve employs a veritable horde of economists (i encourage everyone to randomly pick a few papers from the Fed's economic research department and read them - if afterwards you feel that there are apparently many people in the world with nothing of value to do, you got the right idea), the main job of whom is to produce nice papers completely removed from the real world that serve to absolve the Federal Reserve of all responsibility for inflation and the boom/bust cycle - in spite of the fact that this institution is the root cause of both.
These people naturally, will always defend the interventionist doctrines that keep their jobs secure (it is quite different with other people's jobs, as we can see now that the inevitable bust is here).
As a result, we are showered with economic propaganda while sound economic theory ends up roundly ignored in the mainstream.
Mr. Jackson performs a valuable service by bringing such sound theory to a wide readership. Economics is too important a topic to be left solely to professional economists.

Sep 29 10:19 PM

[carey_jim:]

books.google.com/books...


On Sep 29 10:19 PM pater_tenebrarum wrote:

> It absolutely does matter which economic theory one employs. Economic
> laws are not subject to whim, they are laws; either one's economic
> premises are correct, or they are not.
> Among the economic theories J. Carey has enumerated, the Austrian
> school is the only one that offers a rich enough theory of capital
> , money and credit to actually be able to cogently explain what has
> happened (and continues to happen).
> However, the Austrian theory is detrimental to the job prospects
> of economists - since it eschews all forms of intervention and central
> planning, but instead argues that the free market can not possibly
> be improved upon (a premise that is both theoretically and empirically
> sound).
> If economists are not called upon to formulate and implement grandiose
> plans, they naturally feel 'underused'.
> Also, they have found out that as soon as one provides a 'scientific
> fig leaf' for statist intervention as Lord Keynes has done, one immediately
> is showered with tax payer financed grants and jobs, and gets to
> advise the political class.
> It is therefore in the self-interest of most economists to argue
> for interventionism.
> The Federal Reserve employs a veritable horde of economists (i encourage
> everyone to randomly pick a few papers from the Fed's economic research
> department and read them - if afterwards you feel that there are
> apparently many people in the world with nothing of value to do,
> you got the right idea), the main job of whom is to produce nice
> papers completely removed from the real world that serve to absolve
> the Federal Reserve of all responsibility for inflation and the boom/bust
> cycle - in spite of the fact that this institution is the root cause
> of both.
> These people naturally, will always defend the interventionist doctrines
> that keep their jobs secure (it is quite different with other people's
> jobs, as we can see now that the inevitable bust is here).
> As a result, we are showered with economic propaganda while sound
> economic theory ends up roundly ignored in the mainstream.
> Mr. Jackson performs a valuable service by bringing such sound theory
> to a wide readership. Economics is too important a topic to be left
> solely to professional economists.

Oct 01 12:45 AM