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Great Depression Online Archive Issue:

Getting It Just Right

Great Depression Online
Long Beach, CA
August 10, 2010

Inside This Issue You Will Discover…

*** Not Cutting the Mustard
*** Failing to Tread Water
*** Getting It Just Right
*** And More

Not Cutting the Mustard

Early last week Treasury Secretary Tim Geithner, in a New York Times op-ed, said “Welcome to the Recovery.”  Inside he identified private jobs growth as a sign economic recovery is underway. 

Yet that sign may just be a figment of his imagination.  For when one looks around there’s hardly any tangible evidence private jobs growth really exists.

Last Friday, for example, the Labor Department announced that private employers added just 71,000 jobs in July; economists expected 90,000.  However, those private jobs numbers could be less than half that. 

~~~~~~’Who’s Scoffing Now?’~~~~~~

It’s kind of ironic, I find, that the very same people who are quickest to scoff when hearing the phrase “This time it’s different” – namely the professional investing class – apparently see nothing to worry about in the idea that the world’s largest debtor can run the world’s largest deficits… and do so at historically low interest rates.

To which I would comment, “Trust your eyes.” If it seems as though the situation is untenable, it very likely is.  The only real question in my mind is, how long can this fiction persist?  To that I don’t have an answer, but I suspect that when the truth of the situation is revealed – possibly by the roundabout path of seeing one or more of the large Asian economies come unglued – things will get far uglier, far faster, than most people suspect.

Who’s Scoffing Now?

~~~~~~~~~~~~~~~~~~~~~~~~~

For instance, the Labor Department just revised the number of jobs private employers added in June from 83,000, where it was reported last month, down to just 31,000.  If the 71,000 is revised down at a similar rate, it’ll come in at about 26,500. 

Alas, 26,500 – or 71,000 – private sector jobs don’t cut the mustard.

Failing to Tread Water

While 71,000 jobs are better than no jobs, they fall far short of covering the nation’s population growth.

“Right now, the nation's labor pool is about 154 million people, or just under 65 percent of the 238 million Americans ages 16 and older who are eligible to work,” reports AP.

“Nearly 139 million Americans are working.  An additional 14.6 million want jobs but can’t find them.  The government excludes the remaining 84 million people from the work force – either because they are retired, not interested in working or want a job but have given up looking.

“So given those numbers, how much job creation is needed to bring down the unemployment rate?

“Let’s start with the basics.  Just to keep pace with the growth in population, the economy has to add at least 100,000 net jobs each month.  Some experts say the figure needs to be closer to 125,000.”

In other words, 125,000 jobs per month are enough to just tread water…71,000 sinks.

“Economists say that about 200,000 new private sector jobs would need to be added each month to drive the unemployment rate lower.”

Private employers have added a net total of 559,000 jobs this year, which amounts to 6.65 percent of the 8.4 million jobs that have disappeared during the recession.  At that rate it’ll take over 8-years just to get back to 2007 jobs numbers.  What this means is, sometime around 2019 the U.S. economy will return to its 2007 jobs market totals.

Getting It Just Right

Jobs are what the economy needs to recover.  More exactly, private sector jobs – jobs that produce something of value – are what the economy needs…not Obama jobs.

Deflation, in its most simple terms, is when your dollars become more valuable.  On first glance this sounds like a good thing.  Who doesn’t like being able to buy more for less?  Nonetheless, deflation scares the willies out of central bankers and central governments.

Here’s why…

When prices on consumer goods become cheaper, purchases are delayed further and further into the future.  Why buy the new computer or car today when next month they’ll be cheaper?  Why buy them next month when two months from now they’ll go for even less?

As people stop buying anything but the bare essentials, companies lose money and cut jobs.  Economists call this a deflationary spiral…where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price.

What makes deflation especially dangerous is debt.  Simply put, if you loose your job it’s pretty hard to make a mortgage or a car payment.  And even if you don’t loose your job, if your income is reduced, making those payments is especially difficult.

That’s why central bankers love a little inflation…it stimulates demand and reduces the burden of debt over time.  With a little inflation, over thirty years, a house payment becomes much smaller.  In fact, Ben Bernanke made an academic career pontificating on what the optimal inflation target should be for monetary policy (i.e. about 2 percent).

Yet hitting the inflation target has been more illusive than a saint in Sunday school.  And as the jobs market stalls, and the economic recovery slows, the prospect of deflation is returning. 

Last week we alerted you to Federal Reserve Bank of St. Louis president James Bullard’s contemplation of further quantitative easing…Federal Reserve purchases of U.S. Treasuries using money created from thin air.  Today the Federal Open Market Committee will meet and will discuss their return to quantitative easing.

Will further quantitative easing be just what the economy needs?  Will it stave off deflation?  Will it revive demand and stimulate private sector jobs growth?  Perhaps.

Perhaps, too, it’ll undermine the value of dollar.  But that’s the Federal Reserve’s goal, of course.  With a little persistence and dogged determination we’re confident they’ll eventually get it right and hit their inflation target…but only for a moment as prices rocket past on their way to the moon.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Government bond yields have declined to historic lows at the same time the government’s spending record budget deficits.  What gives?  Find out here…

“Trust Your Eyes”

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