FedUpUSA

Archive for the ‘Productivity’ Category

It’s Called DEFLATION Folks

Posted by Karl Denninger

Never mind the man behind the curtain, who won’t utter the word:

The Labor Department reported Thursday that productivity jumped at an annual rate of 6.9 percent in the fourth quarter, even better than an initial estimate of a 6.2 percent growth rate. Unit labor costs fell at a rate of 5.9 percent, a bigger drop than the 4.4 percent decline initially estimated.

In the real world this means:

• Work harder and get more done.

• Get paid less.

• Suck it up, don’t complain, or you’re fired.

That’s all.

And by the way, reduced pay per unit of work spells DEFLATION.

Now here’s the problem: We have huge public-sector labor unions that are resisting this force.  Yet this force is exactly what has to happen in order to bring the economy back into balance.

We have “advanced” promises made to these people – $200,000+ pensions and other similar obscenities – even though doing so is a ponzi scheme that is impossible to maintain.  We have continually cow-towed and pandered to these unions, including educators, police and fire and all other manner of public sector employees with wage increases that exceed growth in aggregate output per-person when one counts both salary and benefits.

This, of course, cannot continue.  It is yet another example of the expanding gap that opens up between two exponential functions – for those who have forgotten my favorite pair chart, here it is again:

I understand that everyone wants to avoid taking the pain.  I understand that everyone claims that “its not fair!”

None of this changes the facts.  You cannot continually offshore your better-paying labor to China for the purpose of being able to have a $30 DVD player, destroying the $40/hour skilled job base and replacing it with $7/hour burger flippers and espresso-shot-pullers, and maintain the ability to commit compound annual growth rates of 5, 6, 7% or more to public-sector employees.  Doing so inevitably destroys the tax base necessary to meet those commitments, and once the destruction has occurred it cannot be un-done.

You cannot falsely-report “growth” that is in fact no such thing, but rather is simply the addition of more debt, thereby creating false demand that never existed on an organic basis, and continue this process forever.

The person who loses their job can continue to spend as if they have not – for a while.  They can run up the credit cards – for a while. 

They can do so until the credit card company discerns that the ex-employee has no money, and thus will never pay them.  Once that happens the credit card is cut off.

States, municipalities and nations are no different than people in this regard.  We have played this game for 30 years.  We have promised people they could have unlimited health care, unlimited prescription drugs and unlimited, compound increases in salaries and benefits.  At the same time we have permitted our corporations to send their labor base overseas, destroying the income base to purchase these products and the tax base required to pay those benefits.  All of this has been “facilitated” by a financial system that grew from about 7% of the marketplace to well north of 20% (in 2007) before it all fell apart.

Instead of allowing it to fall apart and return to a 5-7% of the market, which would be sustainable, politicians instead created false final demand of about 9% of GDP (~ $1.2 trillion annual increases in deficits on a $14t GDP) and then added $13 trillion of “guarantees” in the form of funny money to the financial system to prevent it from imploding (roughly equal to the entire financial debt in the system, which currently stands around $16 trillion.)  This “prevented” the immediate recognition that the derivatives written by these firms were nothing more or less than a gigantic fraud, as there was no ability to pay – not at origination, not at maturity, not ever.

But none of this game-playing changes the mathematical fact that:

• The money to pay these bets never existed, and never will.  It was a fraud, but our politicians refuse to direct law enforcement (which reports to them) to enforce the law against fraud, as that would “hurt” their campaign donors (they’d go to jail!)
• The offshoring of our production has destroyed both incomes and the tax base.  “Replacing” that with more borrowing is exactly identical to an unemployed person using their credit card to maintain their standard of living.  It will fail – we are simply arguing over when, not if.
• Public sector employees are inherently parasites.  It cannot be otherwise.  The policeman, fireman and teacher do not directly produce anything.  Their employment and the wages and benefits they can collect must therefore inexorably track the actual productive output of the nation.
• Finance in all it’s forms, whether banking or insurance – produces nothing either.  Every dollar of such “activity” comes about only as a parasitic drain on production.  It cannot be otherwise.  Further, speculative activity in all of its forms produces losers in exact proportion to winners – if Goldman makes $100 million speculating on oil prices, someone else loses the same $100 million.  The net benefit to our nation’s economy?  Zero – we merely moved money from one hand to another.

The actual private sector production worker is now being forced to recognize this.  He’s being told to work harder and longer for less money (per hour) or lose his job.  That’s what the statistics say.  This sort of movement in the private labor force is unprecedented – it in fact exceeds that which formerly was accomplished with computerization in the 1980s and 1990s – and this time it’s actual labor, not the introduction of new technology.

The first step to solving problems is admitting to what they truly are.

The recent pronouncements and announcements out of both the new governor of New Jersey but also California, where they have attempted to play “extend, pretend and charge-it-up” more and worse than anywhere else in the nation make clear that the credit line has run out and we either face the facts – like it or not – or we get the clue-by-four upside the face.

As usual, the politicians thought they could extend, pretend and lie until after the election.  As in 2008, they’re wrong, and if they don’t cut it out we’ll get a repeat of the 2008 disaster but this time around it will be much worse.

Welcome to 2010.

Submitted by Greg Simmons and Brett Buchanan of Scope Labs

Are financial markets a direct reflection of the overall health of a nation? I wish they were not, but I fear they are.

I wonder at times if our nation has entered a state of purgatory –
all of us mulling around in the waiting room to Hell, anxiously
counting the minutes until the grim reaper saunters through the door
sickle in hand his mission to send us off to eternal damnation.
Unfortunately, there is little time to close this door so that we may
stave off this potential fate that looms so near. What we need to alter
this course is a procession of men who possess moral fortitude and
common sense, men of rationality and reason. Men of action who will set
in motion the dismantling of institutions that bleed this nation dry.

Hope is not a strategy. This present state of manufactured optimism
emanating from the White House and our news outlets is contemptible. We
are in dire need of new reformist leadership and of new voices that
will speak the truth. A national purification is long overdue. Time is
not on our side. Look at the track record this nation has racked up
over the last few decades and this economic and moral purgatory in
which we find ourselves might very well mark the beginning of our walk
of death down the long road to Hell.

I make this analogy of a national state of purgatory not in jest,
but rather in practical terms. This nation has gone the way of an
absolute meltdown of morality and ethics. We’ve reverted to a sort of
Wild West where anything goes. From the halls of congress to our
corporate boardrooms our collective morality bar has sunk so low we
cannot go any lower without disconnecting from the great past this
nation is starved to regain. We stand dangerously close to the point
where immorality begets our undoing.

Personally, I am father to a daughter of fourteen years. Brett, my
co-author, is father to a twenty-month old daughter and an
eighteen-year old son. We desperately want to create for our children a
better world. But we are fallible men, and certainly not saints. The
paragraphs you are about to read are not written from some moral high
ground, or a Holier-than-thou pulpit, but rather from saddened hearts
when we see that by walking our own moral tightrope, if we were to
allow ourselves to slip below the bar, however slightly, we would be
just as guilty as the worst perpetrators of our nation’s moral
destruction. Also, when witness to greater moral transgressions, by our
own inaction, we become part of the problem. And we are just two men.
Amplify this by fifty million, one hundred million, or three hundred
million fold and it is no wonder immorality permeates our society.

This article is our personal effort to call people’s attention to
the truth. The brevity of our circumstance is immeasurable by past
reference. Economically, we have never been so challenged. Over the
past few decades a gullible US population cheered the halls of congress
and the Oval Office alike as the incestuous bedfellows of money and
politics ushered in a financial Coup d’état – co-opting our public
trusts with the greed and excess of Wall Street. Profits are now had at
any cost – damn the long-term consequences. Instead of being exposed as
the obvious fraud he was, Bernie Maddoff was coddled by the SEC – an
institution whose role as regulator is a complete failure. As Wall
Street and Washington raped an entire nation, employees of the SEC were
too busy surfing porn on the Internet and running private businesses
instead of doing the jobs taxpayers pay them to do. All the while,
young girls were selling their virginity to the highest bidder in
public cyber-forums where grown men (not hormonally charged teenage
boys) seek out their sexual fantasies in the netherworld of Internet
pornography. What of the wives, children, and even parents of these
men? Do they approve of such questionable actions?

Think of our children turning on the television to see people eating
bile, cow blood, and live bugs for money on game shows like Fear
Factor, or Flavor Flav and his hit reality show where he maintains a
stable of women all of whom physically fight each other to have sex
with him because he’s a celebrity – and a damn ugly one at that. And
finally, there’s always Survivor, the ultimate demonstration of all
things wrong with modern human interaction. A reality show that pits
person against person in a deceitful game of moral destruction where
lack of ethics are rewarded, instead of punished. Survivor, this is
what our nation’s leadership has become. Win at any cost. Damn the
future of anyone but myself.

Morality is in great part the measure of a nation. Have we unlearned
morality? Is this why we find ourselves staring down the abyss?

We are allowing ourselves to become more corrupt by the minute. We
stare into the face of our future being raped, but we do nothing. We
are as corrupt as the corrupters. We accept the unacceptable. We fail
to understand that absolute power, corrupts absolutely. In what will go
down as the greatest financial heist in history our leaders have chosen
to reward corrupt individuals and their hollow corporations for what
are arguably criminal levels of risk behavior by the moneyed elite of
this country. What message does that send to our children, or to anyone
for that matter? Be as corrupt as possible in the US and you will be
rewarded? Be the biggest failure jeopardizing the fate of others then
stand in the corporate welfare line with all the other wealthiest
institutions of the world, your greedy hand extended for a government
bailout check while you simultaneously foreclose on an entire nation?
Talk about the rich corralling the masses. It’s no wonder someone
coined the term “The Sheeple.”

The path we traveled to this purgatorial limbo is both easily
understood and misunderstood. The answers to understanding are
sometimes right in front of us. What are seemingly benign things or
actions, those everyday judgments or decisions we make to do one thing
or another, are not always benign. Tell a little white lie to make that
one sale that will put us into our bonus. Rig the game in our favor so
that we might enjoy a little more opulence for the few decades we have
remaining on this planet. Look the other way while the Federal Reserve
and Wall Street blow economic bubble after economic bubble and in the
process create a six-hundred trillion dollar shadow banking system that
plays by no one’s rules but its own. In the case of Goldman Sachs, and
Wall Street in general, lie, cheat, and steal their way to
profitability at the expense of three hundred million taxpayers. The
fact is that we have become an uncooperative nation willing to take
advantage of anyone for the sake of profit. The idea of building a
cooperative future where everyone wins has been sacrificed at the altar
of short-mindedness.

It might be this purgatorial limbo I speak of is simpler than it
appears. It could be that we are collectively suffering the
consequences of the “Peter Principle”, or getting to the job of
failure. This principle supposes that an individual rises in a
corporate hierarchy to their first level of incompetence. An assembly
worker gets promoted to supervisor then to assistant manager, then
manager, until he next gets promoted to an upper management job for
which he is ill equipped and subsequently gets promoted no further as
he can no longer demonstrate the competence required for the task at
hand. He rather relies on subordinates who are then stuck with an upper
manager who cannot carry out his own duties. Could this be the state of
our nation? Have we been promoted as far as our competence allows? Are
we in fact incompetent to handle our future? Have we now elected a man
just incompetent enough for the Presidency who is being manipulated by
Goldman Sachs, the Federal Reserve, and a circle of (previous) Wall
Street insiders now on the government payroll as cabinet members and
high-ranking advisors? The saddest thing is that we sit idly by whilst
our virtue is being stolen. We do nothing.

A view of the world through rose-colored glasses does no one, any
good. We are not as resilient as we think we are. Instead, we exist in
a world of synthetic productivity where multi-tasking renders us
incapable of doing anything effectively or with any level of
competence. Multi-tasking, that art of simultaneous ineffectiveness is
a counter productive weapon that to a large degree has contributed to
the potential failure of this nation. If you were to listen to Alan
Greenspan however, you would believe that multi-tasking through
technological gains by way of the “new paradigm” was the gold at the
end of the Information Superhighway and that exotic mortgages and the
burgeoning spending class paved the road to riches. We now know these
premises to be empirically wrong.

It can now be argued that what would seemingly be advancements in
productivity are proving to be setbacks. The Information Superhighway
has led us to an era of technological arrogance. In reality all we have
accomplished is to dilute our ability to carry out simple tasks as we
click from a quarterly sales report due in an hour, to Facebook, to
on-line solitaire, to writing an email explaining to our boss why the
quarterly report will be delayed this day. We are a nation of excuse
makers. We look for someone else to keep us one step ahead of our
accumulating debt that smothers the potential of what could have been
an equitable future. Ironically, it is our technological arrogance that
impedes our ability to produce and manufacture our way to prosperity.

Craftsmen who used to flock to this country to fulfill the needs of
a manufacturing base flock here no more. “Made in the USA” used to mean
something. It meant quality. It was the definition of industrial
capitalism. But now through the wonders of globalization we have
exported our craftsmanship through an outflow of jobs to China and
India as we turned everyone in the USA into real estate agents,
mortgage brokers, and web designers – a perfect playground for bankers
to ply their craft, lending money in every creative manner both
thinkable, and unthinkable. “Made in the USA” has been reduced to the
status of punch-line – synonymous only with “Mortgage Backed
Securities” and other “Toxic Derivatives.”

Is it any wonder we have evolved into the ‘entitled society’? If we
weren’t on the government payroll, or subsidized by the US taxpayer
through social welfare then we were borrowing our way to prosperity.
Enter the God-fearing middle class. Just dumb enough to buy into the
scam a couple hundred million people began signing over their
paychecks, selling their future for the enjoyment of having things now.
We were transformed into non-productive Sheeple, selling our souls for
an easier life in lieu of a better future for our children. At our
current rate of productive attrition we will soon be a nation of
declawed housecats, possessing no skill-set whatsoever to survive in a
world where the ability to produce real goods still reins supreme. Yet
we remain the ‘entitled society’, when we are entitled to nothing.

We forget (through economic amnesia) that throughout history all
societies fail. Nicolaus Copernicus maintained that civilizations
failed when bad money, controlled and understood by an elite few, drove
out good money. The same can be said for morality. Bad, drives out
good. This is a reality of which we should all be acutely aware but
rather are immune to its possibility. We dangerously believe we cannot
fail. That, in fact, is the greatest gamble of all. A roll of the dice
against history, a bet against all natural laws of the universe, all
things are in a state of entropy. All things eventually wither away to
nothing. To possess longevity is to be ahead of the universe. Sadly, we
have constructed a fragile world that produces material things that do
not last. The fiat money we use as the currency of our production is by
design, destructive itself. The Federal Reserve prints greed, nothing
more. But still we covet it. We pursue it as if it had value. And in
this pursuit we destroy earth’s resources as if the laws of nature have
no relevance. We believe there is only now.

We, the entitled society, morally and fiscally bankrupt have borrowed,
spent, and bailed our way into a historical corner. Nero should be so
proud. Our public trusts are nothing more than government sanctioned
check-kiting operations shifting liabilities from one credit card to
another faster than our creditors can say “Federal Reserve.” The
Ponzi-scheme that is our fiat currency system is about to go the way of
what was for a time the symbol of American superiority, General Motors.
It used to be said that what was good for General Motors was good for
our nation. As I claimed in 2005 that GM would go bankrupt I will now
guarantee that the US government is soon to follow. How our ultimate
entropy will take form I cannot say, but form it will. We will default.
We will restructure. It will be at this point our arrogance will end.

From The Daily Capitalist

As my readers know, every so often I really get fed up with what comes out of Washington (Our Nation’s Capital) and feel the need to vent. My recent irritation is a letter Christina Romer, the president of Obama’s Council of Economic Advisers, published in the Wall Street Journal.

The letter is an apologia for the economic policies she and Summers and Geithner have been recommending to the president. She seems like such a nice lady, and she’s the wife of economist David Romer. Both were econ professors at Berkeley and both studied economics at MIT. But …

Here are some excerpts from her letter, with my comments:

Within a month of taking office, the administration had announced its Financial Stability Plan and signed the American Recovery and Reinvestment Act. The Recovery Act helped stem the decline in spending caused by consumers and businesses reeling from the fall in asset prices and the drying up of credit. Real GDP, which had fallen at a 6.4% annual rate in the first quarter of 2009, began to grow again just two quarters later. …

She seriously believes this. But she has a slight problem with the cause and effect, post hoc ergo propter hoc*, thingie. That is, there is no evidence, theoretical or empirical, that the Recovery Act did anything positive or lasting. Even assuming Keynesian stimulus works, the government hadn’t spent enough money to make it work according to the Keynesian formula. At least that’s what Paul Krugman said. Whatever, no one has ever offered any proof that such stimulus works.

And, as far as I know, PCE (consumer spending) is still very low, asset prices are still declining, and credit is worse.

We’ve already seen from the Recovery Act that spending on infrastructure—everything from roads and bridges to schools and municipal buildings—is an effective way to put people back to work while creating lasting investments that raise future productivity. …

Yadda, yadda, yadda. Again more spending on things the government wants, not the things that the market wants. The jobs are already fizzling. See this excellent article in the WSJ, ironically published on the same day as Mrs. Romer’s piece. The gist is that when the government money ends, the jobs dry up.

Subsequently the president pushed for the Cash for Clunkers program that was successful in boosting demand and job creation. …

All this did was to junk a bunch of good cars, fill the pockets of auto dealers, and appease the UAW. Auto sales are already declining again. It just accelerated future sales of people who would have bought cars anyway.

[A]bout a month ago the president announced the latest in a series of measures to encourage banks to lend to small businesses. …

As we all know credit is still shrinking, not growing. They have tried every trick in the Keynesian book to loosen credit but to no avail. I’m sure this new legislation will be different.

[I]n early November the president signed into law a measure that would provide relief and spur job creation by adding additional weeks of unemployment insurance, cutting taxes for businesses, and expanding and extending the home-buyer tax credit. …

That must have worked really fast, because unemployment, according to the Bureau of Labor Statistics, dropped from 10.2% to 10% in November. Wow, that’s great legislation. But, as we all know, Things Are Not What They Seem. As David Rosenberg pointed out in one of his reports, the government stats look funny because they are so different from what ADP reported. 

Despite these positive developments, the job market remains very weak. … American businesses appear hesitant to hire, and are producing more with fewer workers. …

Didn’t she just say that things are getting better?

Tomorrow [the President] will convene a meeting of business and labor leaders, small-business owners, economists and community representatives to discuss our ideas and solicit others for accelerating hiring. … [W]e need to harness the private sector, bringing large and small firms in off the sidelines to boost job creation. …

This is the part that really upset me. First, this is a typical political move. “Let’s all get together and come up with some great ideas!” No offense to the community organizers out there, but getting a bunch of people in a room like this gets nowhere. The best thing they could do is cancel all meetings, and get the hell out of the way.

But what really got me was the “harness the private sector” comment. I hope she didn’t mean it in the way I’m thinking, but if she didn’t then it’s even worse because she doesn’t realize the implications of her policies. When government gets together with business and labor to create policies for political benefit, it is called fascism, or national socialism. The words she used were rather telling: a “harness” is not something I would want to be in. You know who has the whip.

While the words seem innocent, it is all about losing our freedoms. Here’s the conclusion from a piece I wrote about the takeover of GM (in homage to Ayn Rand):

Sometimes it’s hard to see what is happening in front of your eyes. It seems rather benign and logical when you read about it, but it’s not. Nationalizing GM is just good old fashioned fascism–just like what happened in Italy in the 1920s and ‘30s … And now us. If you think I’m exaggerating, it’s probably because you think everything the government does is OK because we’re having a crisis. As Wesley Mouch said in Atlas Shrugged, “We’ve got to act!” That’s how we are losing our freedom, by a thousand cuts.

*Since that event followed this one, that event must have been caused by this one.