Posted by Michael A. Kamperman on January 10, 2010
Sometimes it is better to sit back and think rather than to react. My initial reaction was to pound the table on how the latest unemployment report is showing the job situation to be much weaker than the economists and the Obama Administration have led us to believe. The talk of an improving trend in job losses has become so acceptable that the Administration is out taking credit for losing only 85,000 jobs in December and stating that it is a 90% improvement over peak monthly job losses. My reflex is to point out that in order to keep a 10% unemployment rate we had to drop another 600,000 plus people out of the labor force. Despite the stimulus bill aimed at supporting state budgets we lost another 21,000 government jobs. I also wanted to point out that when we hire 1.2 million census workers between now and May, only to let them go by November, we will be temporarily understating the true state of the unemployment situation. The reality is this unemployment report showed no signs that job creation is on the horizon, unless of course you are looking for temporary work without benefits. Will the new census workers receive health insurance, or a pension, or a sense of permanency? But giving a blow by blow description of what is happening in the economic game can cause one to fail to see the forest for the trees. It is the methods we are using to keep the economic game stats that are deluding us into thinking we are better off than we really are. We need an economist of stature to step forward and say we need to rewrite the way we measure the outcome of the game.
Since the beginning of 2008 we have dropped 1 million people out of the labor force. We started 2008 by saying 154 million Americans wanted a full-time job and we ended 2009 by saying only 153 million people wanted a full-time job. We need to add 125,000 workers per month to account for a 1% growth in population. This means we have 3 million more people looking for a full-time job at the end of 2009 than at the beginning of 2008. Effectively we have cut 4 million people out of the labor force because they have become too discouraged to get turned down for the hundredth time. If we add these workers back in then the number of people unemployed would be nearing 20 million and the unemployment rate would be 12.3%. While it may have made sense to assume that if someone wasn’t aggressively looking for work in a vibrant economy that person didn’t want a job bad enough to be counted as officially unemployed, it makes no sense to use the same criteria in a depressed economy when jobs simply are not available and the number of long-term unemployed breaks a new record month after month after month. When they counted the unemployed during the Great Depression they didn’t ask whether or not you had mailed out three resumes in the last three weeks.
Undercounting our unemployed leads us to policy errors. The Obama Administration would be not be so complacent to claim the GDP measured recession is over and we are showing a positive trend in job losses if the nightly news reported the official unemployment rate is now up to 12.3%, a level not seen since the Great Depression. We are hiding our soup lines with food stamps. Over 6 million people say the only income they have is food stamps. They couldn’t eat without them. When the news media and the economic pundits keep pushing the lie that we have avoided another Great Depression they are only prolonging the solutions and open the door to who knows what when it all hits the fan. Sweeping the truth under the rug is only going to lead to more pain and even larger outrage. Are we sure we can control the fury?
Posted by Michael A. Kamperman on August 18, 2009
Many describe the state of our current economic malaise as The Great Recession. Others have used more dire terms like The Second Great Depression, The New Great Depression, or The Great Depression 2.0. But these labels are simply attempts to measure the severity of the global economic collapse to compare it to past economic crisis. Since the economy has not yet recovered, no one can say with certainty how deep the global economic contraction will ultimately be. It is no secret I am firmly in the New Great Depression camp. But I have been thinking we need a new term that describes what the economy is going through, rather than one that just measures how low we ultimately go. Therefore, I am coining the phrase “The Great Unraveling” to describe the economic calamity we are living through. By understanding what we are experiencing it can help people calculate on their own how much further we may have to fall before we reach bottom. The misnomer The Great Recession has many analysts getting out their charts of previous recessions in attempts to predict when this so called recession will end. However, what we are experiencing is not similar to any of the post World War II inflationary era recessions.
“The Great Unraveling” is a term that describes the process the global economy is now working through. This process will continue until it has run its course and the untangling and unraveling of a global economy that has relied on too much debt is completed. Excessive mortgage lending in the U.S and most of the rest of the developed world led to a significant rise in real estate prices. For example, pedestrian 1,000 square foot apartments in New York (Manhattan), London, Paris, and Tokyo started selling for over $1 million and 2,000 square foot 30 year old ranch houses in Southern California that were not near the beach began selling for over $500,000, despite the fact the houses were located in middle class neighborhoods. When there weren’t enough legitimate borrowers left to keep the bubble going, the standards for mortgage lending fell all the way to outright fraud with no money down loans for the purchase of these properties given to unemployed people with bad credit. When the credit rating agencies stamped over 90% of pools of these loans AAA they killed the shadow banking system that supplied almost 75% of the nations credit needs. Hence, our economy is left without the ability to use the house as an ATM machine. The economy will continue to contract as long as the consumer is forced to restore their balance sheet and their access to credit remains tight. We are living through the greatest unwinding of a bubble since the Dutch Tulip bubble. Most of the imbalances of the global economy will be brought back into balance before economic growth resumes.
Proof that debt is still unwinding came from a recent federal government report that loan balances at the 22 largest recipients of TARP funds fell by $45 billion in the month of June. The money supply is still contracting. It took 20 years after the oft forgotten debt induced Panic of 1873 for the global economies to resume strong growth in the 1890’s. It took the start of World War II to catapult the global economies out of the Great Depression of the 1930’s 10 years after it began. If we continue to adopt the Washington strategy of watchful waiting it could take 10 to 20 years before the debt induced deflationary depression we have entered finishes unraveling on its own. It could take longer and civil society could begin to come apart at the seams in the interim. I remain an advocate of shock and awe quantitative easing to stop the otherwise inevitable Great debt Unraveling in its tracks.
Posted by Michael A. Kamperman on August 11, 2009
The Federal Reserve has a dual mandate; economic growth and price stability. There can be little question that the economy would benefit if the Federal Reserve increased its program of quantitative easing (printing money) at tomorrow’s meeting. But what the markets and the media are missing is that the Federal Reserve needs to print more money to maintain price stability. Price stability requires limiting the amount of inflation or deflation that impacts the purchasing power of a dollar for a domestic U.S. consumer. This should not be confused with whether the value of the dollar is rising or falling versus other currencies like the euro, the pound, or the yen. Printing money to maintain price stability will seem counter-intuitive to most observers of the markets and the economy. The knee-jerk response is usually that if the Fed prints more money we will eventually have hyper-inflation. The Federal Reserve needs to ignore the voices of ignorance at tomorrow’s meeting and follow the lead of the Bank of England and print more money, and lots of it. The reason is the U.S. economy is experiencing levels of deflation that are approaching the levels of deflation last seen in the early 1930’s during the Great Depression. Most people have missed this fact due to the use of owners’ equivalent rent in the CPI index, which dramatically understates the decline in home prices in the U.S.
The official CPI numbers state that prices fell 1.4% in the last 12 months in the U.S. The CPI currently uses owners’ equivalent rent to calculate the price of home ownership. Owner’s equivalent rent accounts for over 23% of the CPI Index. In the last 12 months this calculation has risen 1.9% and has contributed a positive .4% to annual CPI. Say WHAT? That’s right; the official CPI statistics calculate that it is more expensive to purchase a home today than it was 12 months ago in the U.S. An alternative measure of home prices is the Case/Shiller index. This index has fallen over 17% in the last 12 months and much more accurately captures the trend of the costs of purchasing a home for a U.S. consumer. If the CPI used changes in home prices in the CPI index rather than owners’ equivalent rents, then the positive .4% housing contributed to CPI in the last 12 months would actually have been a negative detraction of approximately 3.9%. This means the real rate of deflation in the U.S. over the last 12 months is 5.7%, not 1.4%. If our CPI were reported as minus 5.7% over the last 12 months, then Washington would be much more concerned about deflation.
From 1929 to 1933 the U.S. economy experienced mid single digit deflation for 4 years in a row. But the official CPI Index in the 1930’s used home prices to calculate the cost of purchasing a home for a consumer, not owner’s equivalent rent. The federal government changed the calculation for the cost of homeownership in the CPI Index in January of 1983. We will find out tomorrow if the Fed understands that deflation over the last 12 months is tracking the levels of deflation of the Great Depression. If they get it they will surprise the markets and increase the level of their quantitative easing program. If they don’t get it, then they will stand pat. The Obama Administration has already checked out on further assistance to the economy in the near term. Mr. Bernanke is our last and best hope to battle the economic crisis. My objective in detailing this is not to be value added by helping people understand and interpret the statistics they are looking at. My objective is to give all Americans a wake-up call and say we are facing a New Great Depression and we need to insist Washington takes action.
Posted by Michael A. Kamperman on July 27, 2009
An analysis by the Wall Street Journal showed that the total loan portfolios of the nation’s 15 largest banks shrank by an aggregate of 2.8% in the second quarter. Most of the lending that did occur in the quarter went to mortgage refinancing and credit renewals for existing business customers. Less than half of the loans that were made represented new commitments by the banks representing new transactions for the economy. The banks claim that demand remains weak from potential borrowers, and potential borrowers claim the banks have overly restrictive lending standards. The truth is both viewpoints are true. Many of the highest quality borrowers are looking to contract, not expand. Meanwhile, the banks have significantly raised the bar on what it takes to qualify for a new loan, whether it is a consumer loan or a business loan. According to the WSJ, loan portfolios at the nation’s 15 largest banks have decline by 10% from year ago levels after acquisitions are netted out. The fact that lending is still contracting at the same pace as it did in the last couple of quarters means there is a real possibility the economy contracted at a similar pace as well. Economists are looking for a much more benign contraction in U.S. second quarter GDP. I would not be surprised if the number is much worse than expected, just like it was in Britain.
Fed Chairman Ben Bernanke, in a much hyped Town Hall style meeting to be broadcast this week on the PBS News Hour program, claimed that back in 1929 and 1930 the world was experiencing a normal recession. Then, major Central Europe lenders (Austrian Creditanstalt) faltered and further panic set in causing the Great Depression. His thesis is that since the large “banks” have been rescued the crisis has been averted. But we have no way of knowing if the rumors of trouble with certain banks indeed kicked off the Great Depression. It could be that the event was just the next inevitable phase of the crisis and the back then hoped for “green shoots” of 1931 vanished. We have built up significant hope in 2009 that the worst is behind us and blue skies are just around the corner. However, the shrinking credit extended by our largest banks is painting a very different story.
What I think Chairman Bernanke is missing is the world of lending has changed since 1931. Back then most of the credit extended in the economy came from commercial banks. If the commercial banks were lost the economy would be lost with them. However, in the 2000’s the vast majority of lending has come from the shadow banking system fueled by the asset-backed securities market. This market is dead and as CIT can attest the shadow banking model is broken. Yet our largest banks have not only failed to pick up the slack, they too are shrinking the credit they extend to the economy. Perhaps the real cause of the Great Depression was the inevitable “Great Un-Ravel” (yes I just coined that term) that was destined to occur one way or another as a global economy with too much debt ran into contracting economies and deflation. Just like early 1931, we have a global economy with massive imbalances that are still unraveling. We just don’t know what will be the next shoe to drop.
