FedUpUSA

Archive for May 16th, 2010

Reindexing The Unemployment Rate By America’s Population Growth Yields Some Ugly Results

Submitted by Tyler Durden

One of the more peculiar phenomena in the current Great Recession has been the persistent drop in the Civilian Labor Force Participation Rate, after averaging around 66.5% for the past 20 years, in the past 18 months it has plunged, and despite a marginal improvement over the past several months, is still at 65.2%. This is counterintuitive when one analyzes the data side by side with the overall civilian population in the United States. An indexed chart, using the January 2000 level as a baseline demonstrates that while the US population has been climbing at a fairly steady arithmetic growth rate, the civilian labor force, which should track the changes in the actual population, has been behaving in an erratic pattern, having more to do with BLS data interpretation and the nuances of the business cycle than demographics. Which is why when reindexing data for nominal changes in the US rate of population growth, yields some troubling variations from the just disclosed 9.9% unemployment rate. Basing the adjustment to the unemployment rate on nothing but a statistical regression to the growth of America over the past ten years, would yield an unemployment rate of 12.7%. More troubling is that the underemployment rate would be a number far higher than the 17.1% disclosed for April. According to our calculations, a reading closer to 22% would be more appropriate to represent the level of real joblessness in the US. A number, which is higher than the corresponding metric in austerity-ridden Spain.

First, we demonstrate the labor force participation rate. The most recent disclosed reading of 65.2% is materially different from the 20 year average of 66.4%.

Of course, the US population isn’t static. It grows constantly, and according to the BLS, the Civilian Noninstitutional Population has increased from 211.4 million in January 2000, to 237.3 million in April 2010. This is a 12.3% change, which is nearly 50% compared to the change in the Civilian Labor Force, which has increased from 142.2 million to 154.7 million, or an 8.7% change.

Showing this graphically yields the following chart: an indexed comparison of these two very interlinked series demonstrates that while the civilian population has grown in a pretty much straight line, the same can not be said for the Civilian Labor force. Of course, for the US economy to be able to sustain the influx in the population without forming any surplus aberrations, these two lines have to be matched as close together as possible. To be sure, one can make the argument that as society has gotten more efficient, the need for the labor force has declined. The problem with that is that there is an increasingly larger buffer of perpetually unemployed people who will be a drag on the social safety net of America, where there is no free lunch, even in the massive field of government spending. Alternatively, many of these people work in the shadow economy where they pay exactly zero taxes.

Using the above data, and knowing the indexed differential between where the labor force probably is based on the growth of the US population, and what the BLS would like us to believe the Labor Force Participation rate is (as low as possible to keep the actual unemployment number as low as possible as well), we can determine that the real unemployment rate, using an expanded Labor Force, and thus a larger pool of unemployed people, yields an unemployment rate (U-3) of 12.7%. This is about 28.6% larger than the officially reported 9.9%.

And where the discrepancy gets really scary, is when the U-6 underemployment or “real” unemployment rate is comparably reindexed. Instead of the reported 17.1%, we obtain a number that would put even double-dip Spain to shame. Real “real” unemployment is 22% of the civilian labor force, or a whopping 34 million people who are “unemployed, marginally attached, plus total employed part time for economic reasons.” This excludes the roughly 80 million people who are not part of the labor force to begin with.

One last parting thought, or as the case may be, chart, is the distribution by weekly duration of unemployment buckets within the unemployed universe. As the chart below shows, out of the 15.3 million unemployed (U-3 definition), the average duration of unemployment has shot up to 33 weeks. The number of people who are unemployed for 27 weeks or more has hit a stunning 45.9%. At this rate, more than half of the unemployed pool will have been out of a job for more than half a year in a month or two. The skills that these workers lose due to inactivity is massive, and represents a tremendous hit to total US productivity. And, unfortunately, as the chart below shows, there are no signs that any moderation for the ever-increasing length of average unemployment is anywhere in sight.

The reason why unemployment is and will be the scourge of the propaganda machine, is that while banks may provide mortgages to individuals with below average incomes and other potential black marks, this time around, having a job will be necessary. If we are right, and if indeed almost 30-some million people have at best recourse to the occasional temp worker paycheck, this will wreak havoc with the first derivative for the US “tail wags dog” economy where housing, and untenable and enslaving housing debt more specifically, is the critical support pillar of the ponzi scheme. Without an improvement in unemployment metrics, there can be no general economic, or sustainable market, improvement, period.

Unhinged: When Concrete Reality No Longer Matters to the Market (and What to Do About It)

By Charles Hugh Smith

I am honored to present one of the very best (and most engaging) summaries of our broken financial system on the entire Web.

Unhinged: When Concrete Reality No Longer Matters to the Market (and What to Do About It)

by Zeus Yiamouyiannis, Ph.D.

Introduction 

Something profound has happened, obscured by all the concerns about economic details and speculation about whether we are in a “deep recession” or a “depression,” a “nascent recovery” or a “W shaped” downturn. We no longer have a global economic system that is tethered to concrete reality. Parasitic, amoral, slight-of-hand value-shuffling (what I would call the “unreal economy”) has effectively trumped the “real economy,” the production and exchange of meaningful goods and services.

Worse, we’ve let it happen with our acquiescence, our hope that we can just ride this one out, and our denial of what we sense intuitively to be true—pervasive fraud in the conduct of global financial business and massive counterfeiting in the establishment of value.

We’ve allowed big banks and affiliated institutions to simply concoct fake wealth out of thin air, and we have legitimized and rewarded these concoctions with a massive transfer of real wealth to a very small but powerful oligarchy through unregulated private bets backed by public taxpayer money, stratospheric fees siphoned from transactions, predatory lending, and private equity cannibalization of once-productive firms.

A global economy mediated by an acceptance of a standardized, reality-based rule of law and value between nations has given way to the shrouded anarchy of transnational banks as overriding powers driven by their own brand of anti-public “interest.”

What constitutes value has migrated from actual value, based in something you earn and related to something you can actually concretely use, to “references to value,” some number merely assigned to some financial instrument attached to some good or service somewhere several degrees removed from its source. (Think “mortgage backed securities” where the actual deeds to properties are no longer even in the picture after extensive “packaging” and repackaging.)

This is all a fancy way of playing the age old game, externalize liabilities, internalize gains, but on an unprecedented and potentially cataclysmic scale. Just as with political coverage that largely deals with the “horse race,” personalities, gaffes, and likeability of candidates over actual policy, financial coverage has concerned itself with a relentless boosterism, tea leaf reading, and a host of other trivialities while the structural rot goes unreported.Abstractions like the “velocity of money,” along with whitewashing indicators like trading volume are used to gauge the health of an economy without sorting out whether such indicators are attached to some productive, underlying activity or asset. This all serves to create a convenient smoke screen for moneyed interests, and progressively makes the “new normal” one that thrusts citizens deeper into debt servitude.

Post Mortem and Review

A post mortem is in order. The elements of this worldwide con game are remarkably simple, not complex at all. Apparently you only need a few things to make a mockery of the entire global economic system, and big banks garnered these few important things through “regulatory capture”:
1) Unregulated, unenforced rules (particularly for derivatives)
2) license to “mark to model” (assign your own values to your assets)
3) ability to peg present value to irrational expected future returns (based on unlimited, exponential growth)
4) infinite leverage (no effective requirements for reserve capital in unregulated “shadow” markets)
5) massive size, so that the bank is “too big to fail”
6) non-transparency and non-accountability.

This combined with the moral, social, personal, and cultural approval of maximizing profit at any cost, incentivizes massive fraud and counterfeiting. How could this be otherwise, given the premises?

So here we have a system where you can 1) make up your own rules, 2) establish any value for any asset you choose, 3) inflate that value a hundred fold based on ostensible future value and returns, 4) leverage that inflated value another thousand or a million fold simply on your say-so, enough to buy up multi-billion dollar firms if you choose, 5) lean on taxpayer bailouts when you get into trouble, and 6) do this without any disclosure or accountability, all based upon a self-interested formula you concoct to enrich yourself.

This is less sin or malfeasance than just plain lunacy. Yet, this is what we have and what we have allowed to gain the upper hand.Literally, following the same formula with a little “solid reputation” sprinkled on, I can value my cat’s litter box at a million dollars, trade on its ostensible increased future value to skim myself a tidy sum in profit and transaction fees, leverage my “marked to model” value of that litter box, a million fold to buy up Chrysler. I can then loot Chrysler, stripping it of its real wealth and infrastructure, gut jobs, etc. for short term boosts to profits, and then walk away a billionaire.I can give any reason or no reason at all for what I’m doing. I don’t have to tell anyone a thing, and no one is going to come after me. If they do “come after me” it will be to lard me with hundreds of billions of dollars of taxpayer money to keep the national or global economy from collapsing.

Talk about throwing good money after bad. The most I can lose is my litter box and now that everyone has a stake in the con, they have every incentive to cover it up and make me whole, both to protect against their anxiety and their feelings they’ve been conned, and to maintain a functioning dysfunctional system.

The Historical Proof

Let me stress again: This is not mere “moral hazard;” this is sheer lunacy of the highest order. Moral hazard assumes a rational framework where the “good” (productivity, efficiency, etc.) is rewarded. We have currently already established and incentivized as “rational” an irrational framework where outright, willful lying, theft, fraud, and counterfeiting are rewarded. The more parasitic and more inefficient I am in this framework, the more I make. The more I trade an asset back and forth, the more fees I get.

Even if those fees eclipse the entire value of the asset in question, I am “rationally” compelled to continue trading as long as someone else is paying. If I can inflate the value of my asset at will and pay Moody’s or Standard and Poor’s to give me a AAA rating who’s going to know?It is sobering to contemplate that the market for unregulated derivatives alone, has exceeded the global GDP at a total volume exceeding 600 trillion dollars and possibly more than a quadrillion dollars (1,000,000,000,000,000 or a million billion dollars).

Exhibit 1: The Private Equity Tax Loophole Scam:

Joshua Kosman, author of  The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis does a pretty good run-down on this scam on NPR’s November 16, 2009 “Fresh Air” .

According to the transcript, private equity firms (the new name for “leveraged buyout firms”) like the notorious Carlyle Group have purchased companies in a variety of industries and are now set to default on about a trillion dollars of their debts, close to the amount of default for the entire sub-prime mortgage market. Taking advantage of cheap money and lax lending, private equity firms will likely bankrupt about half of the 3,100 companies they bought, which currently employ one in ten American workers. Kosman estimates about 1.9 million jobs would be lost as a result.

By squeezing out workers, cutting research and development, private equity firms sell to each other at a massive short-term profit that devastates long-term viability. With the mattress industry, private equity firms bought Sealy, Simmons, and Serta. They then proceeded to essentially fix prices between themselves raising prices while lowering quality and durability. This worked short term, until competitors like Tempur-pedic gained market share and left the overpriced junk offered by their hollowed-out leveraged companies on the shelves. Market share and profitability for Serta dropped below pre-takeover levels.

The same formula is used with hospitals and other industries. Take a productive company with some reputation and loyalty, trash it, counting on lag time for people to depart, and make off with loot when it crashes.Incredibly, going back to our theme of the market being “unhinged” from concrete reality, these private equity firms purchase companies with debt. Literally they put their fractional “money” down, and get the firm they are buying to take on the remainder of the debt! Ostensibly, since interest is tax-deductible, the reasoning goes, tax savings for the company accepting the debt will outweigh the disadvantages of paying down the interest and taking on the risks.Of course, unsurprisingly, reality intercedes in a different direction. The scam is exposed. The equity firm walks away, and the company goes bankrupt. Many jobs are lost, and the whole country pays.

Exhibit 2: Fabricated Supply and Demand Scam: The Speculative Run-Up in Oil

Remember in the mid-2000’s when the media kept falling over itself to explain why gas prices were unhinged from oil supply and unrelated to any impinging world and seasonal events. Back then it was all explained away by mumbo-jumbo about the price of refining, and how certain refineries were off line. By 2007, the U.S. had begun a serious inquiry, with some settlements won for price fixing by retailers (the “bad apple strategy” that always leaves the big boys untouched), and, soon after, the prices settled down.

Now we have news of a new unexplained buoyancy in gas prices. This time commentators aren’t even bothering to pretend it has any rational connection with present supply and demand. Oil supplies are abundant, demand is down due to unemployed people staying home, and the summer driving season has yet to arrive. Instead prices are being “expectation driven” by speculators betting future upticks in the world economy, particularly China’s, will increase demand for oil.

The bitter irony of all this future possible value being more important than the present actual value is that this speculation could actually drive prices beyond the reach of people with less money now due to the poor economy and squash the very recovery that would give rise to legitimately higher prices in the future.

Again, a certain kind of twisted, counterproductive logic is allowed to run the market without correction from present, concrete conditions.

Exhibit 3: The Double Whammy Scam: Profiting from Designed Failure and Placing Bets Backed by Counterfeit Value

A recent government suit alleges that Goldman Sachs colluded with a billionaire short seller, John Paulson, to defraud investors and “construct a package of mortgage linked derivatives designed to blow up” so Paulson could make a fortune.Continuing from AP reporter, Bernard Condon’s, article in the Washington Post, (Does Goldman Case Tarnish Cassandras of the Crash? April 21, 2010):

So-called short sellers, like Paulson, profit when stocks, mortgages or other assets they bet against lose value. In other words, the game of guessing which way prices would go was allegedly rigged in this case. That sounds bad enough. But some Wall Street veterans say the real tarnish on our erstwhile housing heroes is the package itself – regardless of whether it was designed to fail. By just linking to mortgages but not actually containing any, the Paulson package and others marketed by banks upped bets on housing to more than even the mortgages in existence, making the overall losses much bigger now that boom has turned to bust.

“Normally short sellers add rationality to a runaway marketplace,” says Charles Smith, who oversees $1 billion at Fort Pitt Capital Group. “But in this case they were adding rocket fuel to the fire.” The fuel here is devilishly difficult to understand. Called synthetic collateralized debt obligations (CDOs), these packages contained a series of wagers on whether thousands of homeowners would continue to pay their loans.

The key thing to grasp about them, and the part that explains how they magnified housing losses, is that they don’t actually own any mortgages and so aren’t limited by the number of such loans. Instead, these investments merely make “reference” to real mortgages to determine which side of the wager wins. (my emphases) 

Did you catch that? This language confirms the divorce of concrete reality and the market: 1) “Linking to” mortgages but not containing any, 2) not actually owning any mortgages but being able to bet on them, 3) making “reference” to real mortgages to determine which side of the wager wins, 4) wagering bets not “limited” by material assets. The last point could theoretically involve an infinite number of bets and infinite returns on those bets.

This is well analyzed except for one point: The core of this dealing is deceptively simple, even if the instruments themselves are deliberately complex. Industry bettors simply concoct counterfeit value by leveraging their own abstract, self-assigned-value assets between themselves in a ping-pong ascending scale beyond the value of the underlying concrete assets.The bet has both replaced and exceeded the thing it refers to. There is no “there” there. Real money is siphoned in fees from the “marks,” the pension funds who are told they are investing in highly rated, stable instruments, and then the U.S. taxpayer is asked to take up trillions of dollars of real debt in order to cover a counterfeit, undisclosed bidding/betting war.Should I be able to make a “reference” to the Bank of England, or food, or oil, simply collect billions of real money if I bet right, and lose my never-there-to-begin-with counterfeit wealth if I don’t?

Who is the “house” in this casino in which someone can wage a series of bets on assets that actually exceed the value of the assets themselves? It’s always going to be the American taxpayer, the public, bailing out an unregulated, morally and financially reprehensible private market. Usually when someone says, “You really hate America,” it’s a disgruntled conservative with a chip on his shoulder.

Well, these profiteers actually make huge sums of money by destroying America, robbing it blind, and then sticking the American citizen with the check for any downside bets. Now let’s see why very little is currently being done to correct this.

One Nasty Hangover: Cultural Capture, Complicity, Rage, and Wondering When the Perps Will Walk

As with any successful “mark” in a con, the initial reaction by the abused is shame and efforts to pretend a scam did not happen. With the American people there is also more than a trace of complicity. People got high on visions of unlimited wealth and got a taste of their skyrocketing wealth, fictional and bubble-driven as it might have been. Some even used their houses as ATM’s.

This stems from a creeping and cleverly warped version of the American Dream, that we all could get wealthy without working if we were lucky or clever enough. In the orgy to get in on a “good thing,” people didn’t ask the serious question about whether this collusion was a morally, socially, and spiritually bad way to live your life, not to mention an abominable way to treat others and future generations.Turns out the “good thing” is bad for everyone involved, even the crooks. People will begin to wake up to this as more jobs get lost and the fig leaves of fanfare-driven recovery fade into an uncomfortable reality—the United States and the world has been ripped off trillions of dollars, more than can be paid back even on the backs of overworking two-income families.Rage is beginning to replace shame as the promises of recovery keeping meeting the stubborn reality of high unemployment, frozen lending, plunging commercial and residential real estate, skyrocketing college tuition, and expensive oil. People are beginning to wonder, “Where are the prosecutions; where is the accountability?” Why are citizens being counseled to liquidate their retirements to pay for their upside-down mortgages while corporations walk away from billion dollar real estate busts? Why is public money being used to bail out banks that engaged in purely private, unregulated betting?

Part of the answer is revealed in the case of Bradley Birkenfeld. Birkenfeld was an inside-the-inner-circle employee of the UBS, a Swiss Bank and one of the largest banks in the world. Swiss banks pride themselves on their “discretion” and privacy, a policy that allowed them to hide stolen Nazi wealth for decades.So it’s clear that we are only talking financial and not moral “discretion.” In fact, Swiss banks continue to be a haven for tax cheats, international arms dealers, and anyone looking to park their ill-gotten gains outside the prying eyes of international law.

After counseling clients including American politicians how to divert their money into UBS to avoid taxes, and even acting as a “concierge” to buy expensive objects for clients, Birkenfeld finally blew the whistle on the operation.In interviews on CBS’s 60 minutes and Amy Goodman’s Democracy Now, Birkenfeld and his lawyer outlined the depth the corruption. From the April 15th, 2010 Democracy Now interview with Stephen Kohn, Birkenfeld’s lawyer:

Nineteen thousand American millionaires and billionaires had these offshore accounts. You had to be very wealthy to set one of these up. The government created an amnesty program, so if you voluntarily turned yourself in, you escaped any prosecution and even public exposure. No one would even know who you were. On the other hand, to Mr. Birkenfeld, who didn’t even have an account, Mr. Birkenfeld, who turned it in, he was sentenced to prison and was not offered immunity. So that’s the dichotomy.

Dichotomy indeed. There existed in UBS tens of billions of dollars of hidden, tax-dodges for the American clients alone, and all those clients got was a slap on the wrist and more “discretion” around their identities from U.S. law enforcement? UBS itself was merely fined 780 million dollars and forced to give over its names, a drop in the bucket for their almost 2 trillion dollar holdings. For all those wanting a progressive resurgence of the level playing field and the rule of law, there is little evidence of accountability to nourish one’s desire for justice. Hopes for real top-down prosecution are fading, but is there another tack the public can take?

Conclusion: A Possible Silver Lining

How can a world-wide economy unhinged from concrete reality perhaps result in positive changes (after, no doubt, a lot of pain)? The answer is fairly brief. Part of the problem involves mooring our own notions of the good life to our material subsistence and/or success. The notion that living luxuriously equals the epitome of the good life, has stunted our development and kept us infantilized, even with the many technological, artistic, social, and cultural advances we have made.

We still spend a vast majority of our time grinding out a living in so-so jobs that do not challenge us intellectually or creatively and that displace quality energy and time we could be spending with family, friends, community, and world.We can make things, even necessities, cheaper than we ever have, yet we are spending more time working. In the 1990’s and 2000’s, productivity skyrocketed in the U.S., but real wages remained flat or declined. Now we see why. We have become debts serfs to financializers and market manipulators, who don’t even bother having a material stake in the game.

We can see two things from this if we are prepared to mature:1) The good life, and even the economy itself, do not have to be primarily tied to material existence, and 2) We can do most if not all the things for ourselves that “experts” are being paid to do. We can decide to rent or share housing and watch each other’s kids. We can decide to drastically reduce our consumption, thus saving the environment and de-polluting our daily life. We can move our money to community banks, directly invest into microfinance, or lend to each other through “circle lending,” cutting out the big banks and brokerages.

We can help each other fortify and maintain our health through community programs and “medical tourism”, cutting out health insurance and medical industry parasites. We can set up or join intellectually and socially edifying cultural groups. In short we can exercise civil disobedience, refuse to be stooges, create our own spaces, and and recommit to spend time and energy where our true heart lies, free from the delusional temptations of a corporate-driven reason for life that has shown itself to be both conclusively abusive and unfulfilling.In the end, they need us, and we don’t need them. This is the only “this life” we are going to have. It’s a lot more adventurous and enhancing to be a cultural creative then a debt slave. So, what are we waiting for?copyright 2010 Zeus Yiamouyiannis. Permission to link to this essay is hereby granted to anyone who includes the author’s name, copyright and the URL to this site.

PIMpCO States The Obvious

By Karl Denninger

Note well folks: This is called “duh”, or “the second time nobody should be surprised.”

Ramin Toloui, a senior portfolio manager at Pimco, said the European Central Bank’s decision to buy government debt could be backfiring. Instead of encouraging private investors to keep their government debt, the programme might be leading to more sales, he said.

“The risk is that investors are using the ECB as a vehicle to exit their positions,” he said.

I’m puzzled by such a comment, and why he would call this “a risk”.

After all, PIMpCO bought up agency debt (MBS) and Treasuries here in the US in front of The Fed doing the same thing, then sold into the bid. 

Why would anyone expect any different reaction this time around?

If this is “backfiring”, then what did PIMpCO expect out of this “policy”?

The entire point of the ECB’s “intervention” was to allow the banks (in particular) who had irresponsibly bought up debt from a bankrupt government (that could never be paid) to get out of their bad investments at or near “par.”

This can only happen if either Greece’s debt is somehow defaulted (that is, we have a nasty deflationary event somewhere) or the ECB monetizes the debt (which has other nasty implications – not necessarily inflationary, but ugly in any event.)

The ECB’s actions are clear to anyone with more than two firing neurons in their brain, and it had nothing to do with “saving” the Euro.  That act was intended to and focused on saving the European Banks that had purchased debt that had no chance of being paid on the original terms and, since it was alleged “sovereign” and “risk free” they then levered that up to moon.  As such they were not just facing losses, they were facing bankruptcy.

This is precisely the same line of garbage that Bernanke and Friends ran when they started buying Treasuries and Agency Securities.  They did not do this to “stabilize” the dollar or the economy, they did it so that the banks that bought those agencies, including banks outside the United States, would be made whole at taxpayer expense for their purchases of securities from two bankrupt entities – Fannie and Freddie.

There is no difference in the intent of the parties here and there, and nobody should have expected a different result.

Yes folks, it has come to this – the most accurate analysis of our economic situation is now coming from a comedy show.  Thank you John.