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State of the Economy – March ’10

March 8, 2010

Funny how it is all Bush’s fault when the Dem’s have been in control of the purse strings since 2006. Remember; The Presidents proposes, The Congress disposes. Know this: the recession is going to get worse. The deficit picture has turned alarmingly worse since the recession began and unemployment will remain high. Elections have consequences.

The U.S. Bureau of Labor Statistics reported last month that 36,000 jobs were lost…and Obama and Reid want to claim victory, hooray! We didn’t drop below 9.7%! Let’s not forget this: The U6* alternative gauge of the unemployment rate, which includes discouraged workers and those forced to work part-time, rose to 16.8% from 16.5%

Sooo, 36,000 additional jobs lost in February but no change in the unemployment figure? How does that work? They are playing games with the numbers again. Our government is cooking the books. Its fuzzy math; they count government jobs that are not even filled yet, such as census workers. The real national unemployment rate is at least 20%. The total number of unemployed for January, 2009 was 19,543,000 and jumped to 24,026,000 for February, 2010. California’s unemployment rate alone grew slightly to 12.5 percent in January. I bet the Obama administration has already decided what the unemployment rate number will be right up to and through the November election.

The “unemployment rate” means the number of people collecting unemployment checks that used to have a job. The Obama White House will never discuss the real indicator which is the number of people that are unemployed. Huge difference. And now that the 99 weeks or so of checks are drying up for many of these people, they will no longer be counted in the unemployment rate. So you can expect the “unemployment rate” to drop as the year goes on.

Trust me… that unemployment number will be “unexpectedly” revised upwards for February and for the quarter later when no one is paying attention. Have you ever wondered why the CPI, GDP and employment numbers run counter to your personal and business experiences? The problem lies in biased and often-manipulated government reporting.

There’s going to be another crash. The credit card debt is so huge right now, it will never be repaid. That’s a house of cards waiting to fall. And, the commercial real estate bubble hasn’t burst yet. A second wave of mortgage defaults and foreclosures will hit the economy this year and wild cards such as Iran, Israel, North Korea, positioning amongst global powers (due to a pandering administration and weaker America) and natural disasters, have already set the stage for 2010 being a roller coaster year.

The Fed is attempting to stop deflation by inflation. The housing market and commercial property collapses wiped out a lot of wealth. The Fed is trying to prevent a deflationary recession by inflating the dollars, which will probably have disastrous affects. Deleveraging in banking and the unwinding of massive securitization left a whole in the money supply for them to compensate for.

It may be “economy neutral” to just print up a bunch of money to replace what was lost in the melt down but most of the “new money” isn’t in the hands of the folks who lost value in the melt down. So essentially what we have seen is theft. Oh, I’m sorry, “redistribution.”

The problem isn’t hyper-inflation. The problem is worse: deflation.

The destruction of credit. The slower speed of money.

Falling wages. Falling employment. Falling stocks. Falling home prices.

Inflation is an increase in the money supply. People who don’t understand that or who are more interested in manipulation have many ad hoc and mutable definitions of inflation/deflation and mostly either do not understand economics (this includes many who make their livings as “economists”) or are pushing ideologies or just want people to think they are smart.

The Money supply is all cash plus all credit. Here we are in the largest credit-based economy in world history, and some people still forget the entire ‘credit’ half of the money supply when checking to see if the money supply grew (inflation) or shrank (deflation). Hey, the cash grew! Oops, the credit shrank. Which event was larger?

We have a credit-based economy. So does Japan. Japan has printed vastly more money than has the U.S., yet Japan has been stuck with deflation since 1989. Japan has lost 21 straight years to deflation. Why? Credit destruction. An analyst at ZeroHedge notes how the Federal Reserve is cooking the money supply books to hide what appears to be hyperinflation.

Obama clearly considers FDR a model and inspiration; his belief that Roosevelt led America out of a great economic depression. The ecosystem of our “real” economy vs. the imaginary debt driven economy will take decades to rebuild. To fix the economy, you cut taxes, reduce government spending, and eliminate regulation. This is the lesson that was provided by Ronald Reagan, get government out of the way. Anybody who ignores it, will fail miserably. Obama is ignoring the lesson. He is doing exactly the opposite of what needs to be done for the economy.

I’m a small business owner. If Obama thinks I’m going to borrow money to “boost my payroll”, he’s dumber than I thought. Put simply, I want more business, and that is not happening because my clients are suffering too, and potential new clients simply aren’t spending. Obama needs someone to tell him basic economics out here in the real world.

Obama sees the economy, I have come to realize, from the standpoint of banking and banking only. He knows nothing of profit and loss. He knows nothing about overhead. He knows nothing about management. He knows nothing about business. His view of the economy is based on banks. He sees the federal government as a large bank. He sees the Treasury as a larger bank. He sees tax dollars as deposits. He sees our income as withdrawals. He sees banking profits as the profit of the federal government. That’s why when Congressman Ryan of Wisconsin told him his plan was not workable from an economic standpoint all this amateur could do was give Ryan the finger.

UNCERTAINTY is the bane of business success. It stifles creativity, kills jobs, offers up more crises. Whether it’s textiles in the Carolinas, paper in New England or steel in the Midwest, most industrial cities and mill towns “are on pins and needles.” Day to day, week to week, any manufacturing facility seems vulnerable. Combine insane environmental and labor laws, shipping jobs off-shore, unions, wages too high to compete in international markets, diminished investment and are we are surprised by any of this?

Besides cutting taxes, spending reductions, freed up regulations and bringing the capital gains tax to zero, we have to do two things in order to solve the problem in the economy right now:

1. Consumers (and many businesses) need to pay down the unsustainable mountain of debt which they racked up in the last 10 years.

2. Household spending power needs to be grown organically – ie, we can’t create more buying power again by offering more lending on increasingly dubious terms to households. Consumers need to see their household disposable income go up from actual increases in wages. Since (2) isn’t happening (thanks to the “free trade” movement who is in a pell-mell rush to outsource wealth creation overseas, and the “cheap labor” movement among American business, who are hell bent on getting as much cheap immigrant labor into the US labor market), making (1) can happen only with a commensurate reduction in discretionary spending, making money available to pay down debt. This is, in fact, what we are seeing consumers do right now.

In the last 10 years, the engines of growth have been spawned primarily from consumer spending and credit creation. Consumer’s borrowed heavily and relied on loans (credit creation) to buy everything from cars, homes, jacuzzi’s, boats, electronics, clothing to gym memberships. These loans came from not just commercial banks but alternative funding sources.

The credit creation model, which came from banks accounted for 50% of loans. Finance Co’s and securitization firms were the other 50% which is presently idle. So half the credit creation market today is gone. Evaporated. The question becomes how can banks lend more in the future since the finance and securitization firms are shut down. Simply put, the amount of credit needed where banks can lend more is hampered by the deposits available in the credit creation market space. All this effects trade flows and capital flows and new investment when half the engine of new credit creation is gone.

With both engines evaporated, the combined crisis of consumer consumption coupled with limited credit creation in a credit-driven economy has created market-sector-wide chaos in our economy. Banks still hold complex collateralized debt obligations (CDOs) and other toxic assets too that have greatly shrunk in value. While banks have greatly lowered their exposure to its toxic assets, the credit markets are still stalled as bankers hold loans on properties – both residential and commercial – that are worth much more when they were originated than they are today.

To put things in historical perspective, real estate lending, including housing, represented around 40% of all US lending from 1996 through 2001. As a result of the stock market crash of 2000, that share shot upward as many investors moved from stocks into real estate. The total share of property-based loans held by banks jumped from 39.3% in 2001 to 56.3% in 2002, according to the FDIC. That share steadily rose to a peak of 62.8% in 2006. After home prices began to decline, that figure leveled off at 60% in both 2008 and 2009.

Bankers, like all businesses in a capitalistic society, have a primary social function to store capital provided by savers and transfer it to investors who can make good use of it. The main driver is profits for themselves and their stockholders. Under present economic conditions, bank lending has yet to return to normalcy and moving forward, new business models will have to replace older business models. The weakening economic activity has accelerated job destruction. As tends to be the case during severe contractions as employer-initiated job terminations continue:

– Construction employment fell by 64,000 in February

– Employment in the information industry dropped by 18,000 in February

– Employment in manufacturing was essentially unchanged in February.

– Retail trade employment was unchanged in February

– In February, temporary help services added 48,000 jobs

– In February, employment in the federal government edged up. The hiring of
15,000 temporary workers for Census 2010

ALL LABOR REPORTS can be viewed here.

Meanwhile, with the Obama Administration seeking ways to cut greenhouse gas emissions, Americans may have to experience a sobering reality: gas at $7 a gallon. It’s difficult to predict the economy in the short term, but the Democrats are discouraging production with tax increases, greater regulations, the threat of card check and health insurance mandates, cap-and-trade, and with extended unemployment benefits.

Remember what Nixon said, “A recession is any time the people lose confidence in the future”. Forty two percent of American adults now expect the US economy to be weaker in one year’s time, up three points from January and the highest level found in 14 months. One day Obama voters will realize it’s their economy too. The country is broke and Obama continues to spend. The country rejects a deficit inducing health-care giveaway, Obama pushes it forward. Disposable incomes have diminished yet tax increases are coming.

I’m increasingly worried that no one in Washington is actually going to change their actions on deficit spending until we are confronted with not just an economic, but a dollar collapse. Our AAA rated status too is in peril. If we lose AAA rating status, the cost (higher interest rates) of borrowing capital goes up increasing our country’s debt obligations. As many economist anxiously watch rail traffic or gross shipping tonnage, which is a broad measure of world economic activity, to see any sign of an economic uptick, businesses remain frozen in a cloud of uncertainty.

As of today, Democrats have been in control of Congress for 1,159 days (since Jan. 4, 2007). At that time, Jan. 4, 2007, the unemployment rate was 4.6%. Now it’s more than twice that. The National Debt has continued to increase an average of $3.96 billion per day since September 28, 2007. In the 2006 midterm elections, Democrats took back control of congress. Lets see how they’ve done:

Dow Jones Average
Jan 07: 12,398
Current: 10,566

Unemployment Rate
Jan 07: 4.6
Current: 9.7

Federal Deficit
Jan 07: $162 billion
Current: 1.5 trillion

Federal Debt
Jan 07: 8.7 trillion
Current: 12.3 trillion

*The U6 augments U3 (The U3 is the official unemployment rate, which is the proportion of the civilian labor force that is unemployed but actively seeking employment) by including part-time workers to the unemployment rate calculation. The addition of part-time workers adds a full 2-3 percentage points to the official unemployment rate. This measure of unemployment is perhaps the most comprehensive measure of labor resource unemployment available.

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