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A rather frightening and somber forecast for the U.S.A. in the years to come was published by Econintersect this past week – USA in 2012/2016: An Insolvent and Ungovernable Country.

In a nutshell, the European think tank LEAP/Europe 2020 sees:

  • U.S. institutional deadlock and the break-up of the traditional two-party system

  • The unstoppable spiral of recession/depression/inflation

  • The breakdown of the U.S. socio-political fabric

Econintersect believes there is enough evidence to support a possibility of an economic death spiral – although it is hard to believe that the lawmakers and Federal Reserve would not intervene to mitigate or reverse this death spiral. Yet, LEAP/Europe 2020 sees the political system entering a complete deadlock – incapable of action or reaction.

I would like to say I would be surprised if politics got in the way of a solution, but turn on your favorite flavor of news – and listen to the senseless rhetoric.

Employment has been the bee under my bonnet. No country can survive a widespread lack of jobs. The USA specifically uses a methodology to define unemployment which is particularly ignorant – as it uses an inconsistent monthly survey and a meaningless definition of who is in the workforce. We agree with LEAP/Europe 2020 that the real unemployment is near 20%.

If a country cannot deliver jobs, it will likely end in unrest. Employment is a bigger issue than debt – and the U.S.A. “capitalistic” system is particularly good at providing impediments to business creation. Try to start a handyman business, a restaurant, or even a small delivery service. You are likely engaged in an illegal activity if you are paid by the little old lady down the street to take care of her. Better yet, watch your kids get arrested for setting up a lemonade stand. True capitalism allows the easy creation of a source of income.

For most of the down-and-out unemployed, starting a business is out of the question; not only due to the financial impediments, but also the legal ones. So what option does this leave for survival? For most there is just one – unemployment benefits. Yet, justified by the mantra of fiscal responsibility, even unemployment eligibility periods will be further curtailed. Consider this post from Bill Mitchell:

The mainstream economic theory that the conservative politicians use to justify cutting benefits claims that the provision of benefits reduces search effectiveness by the unemployed – the benefits “subsidize” unemployment. It follows that if you cut them the workers will search harder and lower their requirements.

There have been many “research” articles published in the self-serving mainstream journals supposedly proving that unemployment support reduces employment by undermining the incentives of the jobless to search for work.

If you read this literature you will realize it proves nothing of the sort. The literature is replete with fudged datasets, spurious techniques and other niceties that the mainstream researchers use to cheat on their findings or mislead the reader as to what is actually being demonstrated.

Some economists will try to tell you that people don’t work because they chose to not work. Some will tell you that unemployment, or reduction of hours worked, is based upon labor choice, of people choosing to work less or not at all. Why? It is a consequence of the assumptions of economic theories followed by neoclassical economists. The theory is the economy operates in a series of equilibrium conditions and involuntary unemployment can not persist in an equilibrium. It can only be a fleeting, temporary condition. So, if a large number of people are not working for a significant period of time, it can only be by their own choices. What, you say, could the theories be wrong? No, will be the answer. It is the interpretation of the facts that is wrong if the facts disagree with the theory.

This theory of progression through sequences of equilibrium conditions led to the postulate that the world had reached an era known as the Great Moderation and the era of depressions was no more. And we all know how that turned out.

I am a conservative – and the U.S.A. unemployment issue is bigger than the rhetoric and dogma. The current system for jobs creation is broken.

I prefer not to follow the neoclassical theories that the economy proceeds through a series of equilibria. Isn’t it possible that that the economy is often, even frequently, in some state of instability? And when that instability becomes extreme, what would be a hot spot in normal economic times can become a fire. If your house is on fire, and you are out of money – you do not shut off the water because you cannot afford it.

Economic News this Week:

The Econintersect economic forecast for December 2011 predicts weak but improving economic growth.

ECRI has called a recession. Its data looks ahead 6 months and the bottom line for the ECRI is that a recession is a certainty. The size and depth is unknown. Although Econintersect data is not recessionary (one month look-ahead) – we take this recession call seriously. This week, the actual level of ECRI’s WLI index declined slightly – but as the graphic shows below, the index has been in a range between -7.4 and -7.8 for the last six weeks. However, this index is still indicating the economy six months from today will be worse.

Click to enlarge:

Initial unemployment claims fell 4,000 (from 368,000 which was revised up from a preliminary 366,000 last week) to 364,000. Looking back, the last time initial unemployment claims were this low was in May 2008.

Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – fell slightly to 400,000. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.

Click to enlarge:

Overall the data this week continued to show a weakly improving economy. However, the sea container imports and exports are both negative – an event usually (but not without exceptions) associated with recessions. The global markets continue to react to developments in Europe.

Weekly Economic Release Scorecard:

3Q2011 GDP: Not a Happy New Year in these numbers
November New Home Sales: Sales up strong
November Personal Consumption Expenditures: Up 0.2%, not recessionary
November Durable Goods: Sales up strongly due to aircraft orders
December Conference Board Leading Economic Indicator: Future without recession
December UM Consumer Confidence (final): A Christmas improvement?
November CFNAI (superindex): Continues to show subdued growth
3Q2011 GDP 3rd Estimate: Downwardly revised due to consumption
Economics of Moving Freight: A look at the economics of truck, rail, ship and air
November Existing Home Sales: Sales up from a downwardly revised database?
The Great Debate: Problems and advantages of high frequency trading.
November Residential Construction: Strength is due to apartment construction
China: Growth is slowing but remains rapid and as unhealthy as ever
Greece: EU simply ignores the falsification of Greece’s public finance data
November Sea Containers: Now both imports & exports contracting yoy
2012 Investments: Time to drop 2011 rockets
Residential Real Estate: Are we near the bottom?
Clean Energy: Are we approaching this from the wrong angle?
Growing Debt: A case made that a major economic contraction is necessary
European Banking: Are we ignoring a run on European Banks?
Market Direction: How do the markets look for the end of the year?
Business Moves: What has effected stock prices this past week.
Modern Monetary Theory: Primer for understanding current monetary operations
Europe: What the euro did for European Politics
Banking System: Going back to the roots of Occupy Wall Street
USA: Will it be an ungovernable country by 2016?
Debt Jubilee: Will the Euro banking collapse facilitate U.S. gov’t bank ownership
Eurocrisis: Would it be better to have the euro die a quick and speedy death?
Banking: Should banks be subjected free market forces?

Bankruptcies this Week: Delta Petroleum, William Lyon Homes, Privately-held Money Tree

Failed Banks this Week: None

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Headwinds For 2012 And Beyond