FedUpUSA

Archive for August 6th, 2010

Krugman has “explained” why deflation is “bad”.  Well, he’s tried.  But in fact he’s made the case for deflation, especially following insane bouts of INflation.

His idiocy requires a response….

Ok, point-by-point:

So first of all: when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.

Why is this bad?  Real capital formation comes from savings.  Indeed, it is the essence of capital formation of all sorts.  You can’t lend except from excess capital (production ex required spending, that is, surplus) so being less willing to borrow or spend is a net public good over time.

Yes, it makes the Madison Avenue people go nuts, and it particularly makes those people nuts who want to blow bubbles with borrowed money (which always ends in a bust with a huge number of people going bankrupt) but in terms of public policy saving of surplus and thus capital formation should be encouraged, not punished.

A second effect: even aside from expectations of future deflation, falling prices worsen the position of debtors, by increasing the real burden of their debts.

GOOD!

It’s supposed to be expensive to borrow.

Again, there are three sorts of borrowing:

• Productive borrowing.  That is, borrowing for the purpose of purchasing the means of production, where the reasonably-expected outcome is that the productive means purchased will return more than the amortized principal and interest on the loan.  An example of this sort of borrowing is taking out a line of credit to buy a CNC machine which, along with raw materials, electricity, tools and labor turns out precision aircraft parts.  This sort of borrowing is of net benefit to society as a whole, as it generates employment and net increases in GDP after the fully-amortized cost of the loan.

• Consumptive borrowing. This serves only to pull forward demand.  That is, it is borrowing to buy today what one cannot afford until tomorrow.  This produces a temporary distortion in the supply:demand curve.  Since the signal it sends to the economy is false, in that the demand proffered cannot be maintained indefinitely without an ever-increasing amount of debt being taken on (by definition a Ponzi Scheme) it is thus of negative value to society and as a matter of policy should be discouraged.

• Speculative borrowing.  This is borrowing to place a bet that whatever is purchased will sell for a higher price tomorrow than it does today – not for utility value or consumption itself.  This is the most-destructive form of borrowing of all, since it is both inherently a Ponzi scheme and provides for no positive consumption boost whatsoever, as the item(s) purchased are not bought for the purpose of consumption in the first place.  That is, this is not “pulled forward” demand (that would otherwise exist tomorrow) it is entirely false demand that but for speculative borrowing would not exist at all, at any price.  Policy should thus always discourage such borrowing.

Now the right of free action says that there will always be some mix of these three forms of borrowing in the economy.  That is, absent draconian (and unconstitutional) acts one cannot prevent someone from borrowing to speculate, or to pull forward demand.

But the public interest makes clear that society should not provide incentives to borrow for purposes that are against the public interest.  It is for this reason above all others that “zero interest rates” and other similar policy pronouncements, along with inflation, are CORROSIVE and DESTRUCTIVE to long-term economic stability and growth – they DESTROY the incentive to form capital, and it is from capital formation that all legitimate and productive new business interests spring.

Finally, in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.

Oh, so the cure for wages that are above the economic value of the work performed is to keep paying people for work they don’t do, like, for example, government workers who make $250,000 pensions as SCHOOL ADMINISTRATORS?  Exactly where’s the money supposed to come from Paul?

Remember folks:

All borrowing must inherently come from surplus capital – that is, production less the cost of production and sustenance.  IT CANNOT BE OTHERWISE since one cannot manufacture CAPITAL out of thin air – one must PRODUCE it.

There is an underlying problem with people like Krugman: They hate private capital formation and private self-determination with a passion. 

They can’t deal with the idea that government doesn’t have all the answers, even when government is demonstrated to be the problem and blows serial bubbles on purpose, driving policies that offshore tens of millions of jobs.

Then when the bubble bursts they refuse to see the basic math of exponents, and proclaim that we must continue to spend more than we make – even though such policies are mathematically impossible to continue forever, just as all such exponents are into any physical environment bounded by actual fixed size.

Since the Earth is a rock of fixed size, it is thus inherently impossible for such “prescriptions” to work in the intermediate and long term.

Krugman claims to have an advanced degree.  I presume that having such means he passed basic algebra, in which class he would learn how exponents work.

I therefore must presume that the garbage that comes from his mouth is knowingly falsely spewed, and not argued from ignorance.

The only solution to be found in a free market to such idiocy is to lead a boycott of those “media institutions” that give people like him a voice, along with their advertisers.

It’s time folks.

The Market-Ticker

This morning the BLS reported a decrease of 131,000 jobs. However, that reflects a decrease of 143,000 temporary census workers.

Excluding the census effect, government lost 59,000 jobs. Were the trend to continue, this would be a good thing because Firing Public Union Workers Creates Jobs.

Unfortunately, politicians and Keynesian clown economists will not see it that way. Indeed there is a $26 billion bill giving money to the states to keep bureaucrats employed. This is unfortunate because we need to shed government jobs.

Hidden beneath the surface the BLS Black Box – Birth Death Model added 6,000 jobs. This is one of the saner birth/death revisions in recent months. However, January and July always are.

The civilian labor force participation rate (64.6 percent) and the employment-population ratio (58.4 percent) were essentially unchanged in July; however, these measures have declined by 0.6 percentage point and 0.4 point, respectively, since April.

The drop in participation rate this year is the only reason the unemployment rate is not over 10%. The drop in participation rates is not that surprising because some of the long-term unemployed stopped looking jobs, or opted for retirement.

Nonetheless, I still do not think the top in the unemployment rate is in and expect it may rise substantially later this year as the recovery heads into a coma and states are forced to cut back workers unless Congress does substantially more to support states.

Employment and Recessions

Calculated risk has a great chart showing the effects of census hiring as well as the extremely weak hiring in this recovery.

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The dotted lines tell the real story about how pathetic a jobs recovery this has been. Bear in mind it has taken $trillions in stimulus to produce this.

May, June Revisions

The change in total nonfarm payroll employment for May was revised from +433,000 to +432,000, and the change for June was revised from -125,000 to -221,000.

July 2010 Report

Please consider the Bureau of Labor Statistics (BLS) July 2010 Employment Report.

Total nonfarm payroll employment declined by 131,000 in July, and the unemployment rate was unchanged at 9.5 percent, the U.S. Bureau of Labor Statistics reported today. Federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment edged up by 71,000.

Unemployment Rate – Seasonally Adjusted

Nonfarm Payroll Employment – Seasonally Adjusted

Since September 2009, temporary help services employment has risen by 362,000.

Establishment Data

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Highlights

• 131,000 jobs were lost
• 11,000 construction jobs were lost
• 36,000 manufacturing jobs were added
• 38,000 service providing jobs were added
• 6,700 retail trade jobs were added
• 13,000 professional and business services jobs were lost
• 30,000 education and health services jobs were added
• 6,000 leisure and hospitality jobs were added
• 202,000 government jobs were lost. Of them, 143,000 were temporary census workers

Note: some of the above categories overlap as shown in the preceding chart, so do not attempt to total them up.

Index of Aggregate Weekly Hours

Production and non-supervisory work hours rose .1 to at 33.5 hours and average hourly earnings rose $.02 at $19.02.

Birth Death Model Revisions 2009

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Birth Death Model Revisions 2010

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Birth/Death Model Revisions

The BLS Birth/Death Model methodology is so screwed up and there have been so many revisions and up it is pointless to further comment other than to repeat a few general statements.

Please note that one cannot subtract or add birth death revisions to the reported totals and get a meaningful answer. One set of numbers is seasonally adjusted the other is not. In the black box the BLS combines the two coming out with a total. The Birth Death numbers influence the overall totals but the math is not as simple as it appears and the effect is nowhere near as big as it might logically appear at first glance.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals).

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another.

Household Data

Both the number of unemployed persons, at 14.6 million, and the unemployment rate, at 9.5 percent, were unchanged in July.

In July, the number of long-term unemployed (those jobless for 27 weeks and over) was little changed at 6.6 million. These individuals made up 44.9 percent of unemployed persons.

The civilian labor force participation rate (64.6 percent) and the employment-population ratio (58.4 percent) were essentially unchanged in July; however, these measures have declined by 0.6 percentage point and 0.4 point, respectively, since April.

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged over the month at 8.5 million but has declined by 623,000 since April. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

[Mish Note: In January the number was 8.3 million]

Persons Not in the Labor Force

About 2.6 million persons were marginally attached to the labor force in July, an increase of 340,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the
survey

Table A-8 Part Time Status

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The key take-away is there are 8,529,00 workers whose hours may rise before those companies start hiring more workers.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

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Grim Statistics

The official unemployment rate is 9.5%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. U-6 is 16.5%.

Looking ahead, there is no driver for jobs. Moreover, states are in forced cutback mode on account of shrinking revenues and unfunded pension obligations. Shrinking government jobs and benefits at the state and local level is a much needed adjustment. Those cutbacks will weigh on employment and consumer spending for quite some time.

Expect to see structurally high unemployment for years to come.

Keep in mind that huge cuts in public sector jobs and benefits at the city, county, and state level are on the way. These are badly needed adjustments. However, economists will not see it that way, nor will the politicians.

Recap

The private sector hiring increase of 71,000 is very weak for a recovery. That number is not enough to keep the unemployment rate steady. However, the unemployment rate comes from the Household Survey (a phone survey), not from actual payroll data.

For a comparison of BLS jobs to ADP (the largest payroll processor in the US), please see…

ADP vs. BLS Job Reports – Who to Believe?

ADP vs. BLS Tracking Errors – Who to Believe – Update

With the revisions in May and especially June, this report was even weaker than it looks on the surface. This economy is sputtering, not recovering, in spite of trillions of dollars of stimulus.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Glenn Beck – August 5, 2010