Posted by Michael A. Kamperman on September 30, 2009
Despite the constant claims that the economy is in recovery by the happy talking Wall Street pundits, the Main Street economy cannot avoid the Great Unraveling of the new debt-induced global deflationary depression. The word out tonight is GM plans to shutdown the Saturn car brand after a deal to sell the brand to the Penske Group unraveled. Saturn will now join Pontiac on the scrap heap of the depression. Many more jobs will be lost. But the real killer for Main Street is the pending demise of CIT. One of the key lenders to small businesses is the shadow bank CIT. This company is more important to the Main Street economy than Lehman Brothers was to the Wall Street economy. The investment banking services provided by Lehman Brothers were for the most part duplicated by multiple other firms on Wall Street. Lehman simply represented the culmination of the run on undercapitalized banking and investment firms. After Lehman the federal government stepped in and back stopped the major banks and investment firms via the TARP. But the Obama economic team in all of its wisdom has decided not to support CIT with additional funds from the TARP. They have deemed that CIT is not too big to fail and does not pose a systemic risk to the financial system. CIT has well over half a million small business customers that rely on it for credit. Access to credit is the lifeblood of any small business that actually creates real jobs. Small businesses create a lot more net new jobs than large corporations. The Obama administration is being penny wise and pound foolish.
The economy cannot recover until the job creating engine of the U.S. economy is revived. Small business is the number one job creator in America. Yet the Fed and the Treasury have expressed little interest in supporting small businesses. While almost all of CIT’s larger and well capitalized customers will find alternative sources of credit, most of CIT’s small and under capitalized customers will be left to wither and die on the vine. The large banks that received TARP funds have been decreasing their loans to consumers and small businesses. They will not pick up the slack for many of these small businesses. Neither will any of the other large shadow bank lenders that are also re-trenching just like the large banks. We are left to watch the dominoes fall into each other one by one.
The Obama economic team is loaded with academicians and life long government employees. They just don’t get it. In business one often has to spend money to make money. By not risking taxpayer dollars to support small businesses the ranks of the unemployed will continue to grow. The federal government will not only lose taxpayers, they will spend a fortune on the unemployed both directly and indirectly in increased aid to the states. The let them eat cake attitude of the Washington elite will drive unemployment rates in America even higher than they are now. What will it take for this administration to put forward a real job creation plan? We already have 1 in 6 Americans that want a full-time job unable to find one. Mr. President, will we have to wait until the number rises to 1 in 5? The way things are going we could well reach that number in just a few months. Right now the number one issue in America is jobs. So is the number two and the number three issue. Without finding a way to extend credit to small businesses and consumers there is no way to lower unemployment in the U.S.
Posted by Michael A. Kamperman on September 20, 2009
One of the controversial components of the way the unemployment report is calculated is the birth death model. The model was fully adopted in 2003 and is now part of the unemployment report. The model is designed to estimate the number of new small businesses started each month versus the number of small businesses that close down each month. This model has consistently added jobs to every monthly unemployment report and has yet to subtract jobs. Hence the controversy since everyone is seeing more local businesses close down than open up in their neighborhoods. But I think arguing only about quantity misses the point. We should also be debating the quality of new jobs being formed in America. The CEO of Office Depot Steve Odland said this morning on Fox News Sunday that his company is not seeing a recovery in the economy. He said most of the new jobs in America are created by small businesses. Most people starting a small business use either home equity loans or credit cards to start their businesses. This form of credit is extremely tight right now and new sources of credit have not emerged for entrepreneurs. He also claimed very little of the stimulus money is targeted to reach small businesses. Basically, if you lose your job it is currently very difficult to turn around and start a real company that provides a living wage for its owner and workers. Yet the birth death model has not been adjusted for the new credit environment and is still assuming we are partying like its 2006.
The New York Times profiled some of the new jobs created by the recently unemployed now known as accidental entrepreneurs. It noted that the Kauffman Foundation’s Index of Entrepreneurial Activity showed a slight uptick in 2008 over 2007 in entrepreneurship. However, Kauffman said “the patterns provide some early evidence that ‘necessity’ entrepreneurship is increasing and ‘opportunity’ entrepreneurship is decreasing.” Examples of these new companies were a brother and sister who sold 70 bicycle bags to hold keys and wallets for an average of $30 per bag, a former Lehman Brothers employee who started a college recruiting consultation company but has yet to sign up her first client, and a mother and daughter who started a cookie company with sales reaching $300 per month. These new “jobs” cannot provide a living wage and are really sidelines and hobbies. Yet if these people report to the Department of Labor they have started a small businesses they are counted as self-employed and not unemployed. It is no wonder then that Bank of America’s credit card charge-off rate has reached 14.5% and is now deviating substantially from its normal historical correlation with the official unemployment rate which is currently 9.7%.
The credit crisis can be fairly blamed on the credit rating agencies for placing the AAA rating on pools of loans to homebuyers with no money down, no job, and bad credit. However, it is economists and their failed econometric forecasting models that are preventing additional and meaningful federal government support for job creation. These alchemists defend an unemployment report that relies on the unadjusted birth death model, a GDP report that relies on net exports, and a CPI report that relies on owner equivalent rent as accurate estimates of true economic activity. It is clear these emperors of economic thought have no clothes. We need someone who is respected in the profession to call for a complete overhaul of how we measure the economy. If economists keep inputting garbage data into their models they will continue to get garbage out. Rather than trusting estimates of economic growth for the second half of 2009 and for all of 2010 they should listen to the warning of Office Depot’s CEO that without access to credit the small business job creation engine in the U.S. remains gassed out. We can keep kissing the real economy goodbye until we find a way to get the fuel of credit to small businesses whether they were created because of opportunity or necessity.
Posted by Michael A. Kamperman on September 8, 2009
The Zombie Banks are suffocating the consumer. The latest data for July shows that consumer credit fell $21.6 billion in July. This is an all-time record low. Additionally, consumer credit for June was revised down with credit dropping $15.5 billion. Consumer credit includes almost all forms of secured and unsecured consumer credit, except for loans secured by real estate. The consumer is not being cautious with credit as many in the media report over and over. The consumer is being denied credit by the Zombie banks. The standards for consumers to receive a loan from a bank are getting tighter and tighter. There is no meaningful shadow banking system left to step in and provide alternative credit options to consumers. The consumer accounts for 70% of the nations GDP. Anyone thinking the U.S. economy is going to have inflation and a V-shaped recovery without consumer spending kicking in needs to have their head examined. Without access to credit, the consumer will continue to be forced to spend less and less. The reason the unemployment rate keeps rising is the consumer cannot access affordable credit to provide the spending that creates jobs.
This week Washington will continue to debate healthcare when they should be debating fixing the broken credit markets and finding jobs for the unemployed. The July credit numbers come after the Zombie banks either passed the vaunted Stress Test, or raised the amount of capital required by the Treasury. So why are the banks not lending in this zero interest rate environment? It is because the credit markets remain broken. The smoke and mirrors Wizard of Oz Stress Test trick to not look behind the curtain is a failure for the real economy. Unless real steps are taken by Washington to fix the broken credit markets the economy will remain mired in a deflationary depression.
The solution is to create a “bad bank” and clean up bank balance sheets once and for all. Then, the federal government needs to back the securitization market so banks have a place to sell their loans and recycle the cash into another loan. Finally, if Washington wants to see the economy move forward they need to open up credit to people with subprime credit scores. The moral high ground aversion to loaning to people who have been down on their luck in the last two years is killing the economy and causing large scale unemployment. Many people who said that people with subprime credit scores shouldn’t get loans last year have found themselves unemployed this year as business has dried up. We all know someone who is unemployed. Is our puritanical moral superiority worth seeing those people we know lose all of their savings, their homes, and their self-esteem? I think not. I think it is high time Washington got serious about saying the economic crisis is the biggest crisis facing the country. Then, I think both republicans and democrats need to sit down in good faith and negotiate solutions for the good of the country and not for the good of their own personal 2010 election prospects.
Posted by Michael A. Kamperman on August 28, 2009
Japan just reported unemployment in the country has risen to 5.7%. While this is low by our standards, it represents a post World War II high for the Japanese economy. Additionally, Japan also reported that their core CPI for the last 12 months was -2.2%, which is also a post World War II low for deflation. It is widely expected that the Japanese people will vote out the ruling Liberal Democratic Party and change leadership. The Democratic Party of Japan is led by Yukio Hatoyama, who will become the Prime Minister should his party win. Mr. Hatoyama is promising to not raise taxes, cut wasteful government spending, and reign in the bureaucracy. Basically, Mr. Hatoyama wants Japan to revitalize its consumers to generate internal demand. He envisions Japan’s economy being less dependent on exports to the U.S. This is great news for Japan and for the world economy if the Democratic Party wins and Mr. Hatoyama is successful in implementing his vision. Japan will have a much healthier economy if it strengthens internal demand and is less dependent on exports. The people of Japan are voting to make their economy function more like the economy functions in the U.S.
Ironically, the let them eat cake leadership in Washington is looking to go in the opposite direction. The Obama Administration has decided to adopt the economic strategies of the very soon to be thrown out Liberal Democratic Party. Rather than fix the broken credit markets so that consumers and business can have easier access to credit, President Obama’s economic team has chosen to have Zombie banks that make loans only to the most credit worthy borrowers while leaving most others left out in the cold. Furthermore, rather than looking to stimulate internal consumer demand as the key solution to our economic woes, the Obama team is preaching a strategy of higher savings for U.S. consumers and more of a reliance on an export driven economy. Never mind that the Obama economists have yet to answer the crucial question export to whom?
The Obama Administration needs to take their cue from the Democratic Party in Japan. Empower the consumer and focus on an economy primarily dependent on internal demand rather than exports. To do this the Obama administration will need to get serious about fixing the broken credit markets. Unemployment will keep rising and deflation will keep going lower until the average U.S. consumer can obtain a loan to buy a new car or a home. Right now if your credit score is under 700 it is very difficult to obtain a loan. Many people cannot obtain loans that still have jobs and have credit scores over 700. Over half of the country has a credit score under 690. How can we sell all of the houses we need to sell when we have a supply of single family homes for 70% of our population and only about 40% of our population can qualify for a mortgage right now? To demonstrate the fallacy of the Zombie bank policy now over 9% of prime mortgages are 30 days delinquent, which is way above the normal average of 2%. Prime mortgages are made to people with good credit scores above 700. But a bunch of these people have lost their jobs because we no longer build houses or cars for the average American. Japan has learned that the traditional U.S. economic model is the best one available. So why are we trying to abandon it to develop a production based export economy?
Posted by Michael A. Kamperman on August 21, 2009
Over 1 in 8 mortgages in America are now 30 days or more past due. The Mortgage Bankers Association has reported that 13.2% of all mortgages are more than 30 days past due, which means people owe two or more payments. So who are these people? Mainly they are parents with children who are still living at home who are not wealthy. While exact data is not available, it is reasonable to assume that perhaps up to 1 in 5 families with children living at home and classified as lower to upper middle class are delinquent on their mortgage. How is this possible if only 1 in 8 people are delinquent on their mortgages? Well, currently about 66% of all households own a single family home. About 83% of married couples own a home. Most of the truly poor people in America do not own a home, although recently some did. Many of the non-poor married couples who do not own a home consist of those recently married for the first time still renting and those near the end of life who are living in assisted living situations. Most of the others are so mobile they do not purchase a home, or they live in natural rent areas like New York City. Basically, it is the dream of most middle class married couples to purchase a home. The data that 1 in 8 mortgages are delinquent is for all mortgages, whether they were made last month or 29 years and 11 months ago. The vast majority of mortgages owed by people who have been in their homes for 15 or more years are not delinquent. Most of the married couples who have been in their homes for 15 or more years have seen their children grow up, move out, and in some cases move back in. Basically, the vast majority of troubled mortgages are to people who have been in their homes for less than 15 years. Most middle class families with children living at home have been in their homes for less than 15 years.
Yet middle class families with children are not only reeling from significant price depreciation on their properties. They are also reeling from suffering a disproportionate blow from the unemployment crisis. Most employers that have laid off workers have based their decisions on seniority. Therefore, job losses are much higher amongst people in their 20’s and 30’s than it is for those in their 40’s and 50’s on average. So the crisis is not only most acute amongst families with all ages of children living at home, but especially amongst families with younger children.
Sadly, Washington seems oblivious to the crisis. Today Ben Bernanke, who was our last and best hope to give the economy the jolt it so desperately needs, predicted the economy would soon return to growth. Apparently Fed Chair Bernanke is too focused on Wall Street and not nearly focused enough on Main Street. How will a world economy that is dependent on the spending patterns of U.S. households with children return to growth when 1 in 5 of these households are struggling to hold on? What kind of consumer confidence can exist in middle class families not affected by the crisis when all of them know a close personal friend or family member that has lost their job? At this point we are back to President Obama, who desperately wants to be re-elected in 2012, as our last best hope. If I were him I would refinance every existing mortgage in America at 4% without an appraisal, a credit check, a new title policy, or a verification of income. And for those people that are delinquent I would simply add the delinquent payments to the mortgage balance and give them a chance to start over. All of the money for existing mortgages is already out the door and in one way or another the American taxpayer is already on the hook for over 80% of all mortgages. We don’t need change we can believe in, we need leadership we can believe in.
Posted by Michael A. Kamperman on August 20, 2009
Many economists are predicting positive growth for the U.S. economy in the third quarter of this year. Others are saying the recession has already ended and the economy is now recovering. The weekly jobless claims report is indicating those believing the economy is in a state of recovery are clinging to faith, not facts. The latest weekly jobless claims number rose to 576,000 and the 4 week moving average is back up to 570,000. This means the economy is still shedding jobs. Some economic commentators are claiming that as soon as the weekly jobless claims fall below 500,000 the economy will start creating jobs. We are so used to seeing horrible numbers that we now think really bad numbers are good. Weekly jobless claims in the high 400,000 range will still mean the economy is losing jobs, just less slowly than it is now. For perspective, consider that the peak in weekly jobless claims in the recession in the early 1990’s topped out at 509,000 in March of 1991, the only week reported at over 500,000. Yet the unemployment rate rose from 5.2% in May of 1990 to 7.8% in June of 1992. Unemployment rose 2.6% over a 2 ½ year period at a time when weekly jobless claims were averaging over 130,000 less than they have in the month of August. In the recession of the early 2000’s, weekly jobless claims reached a peak of 517,000 in September of 2001, and averaged over 140,000 less than the month of August. Again, the unemployment rate rose by over 2.4% in a 2/12 year period from 3.9% to 6.3%.
The jobs picture in the month of August is much worse than it was during any month in the previous two recessions. All we are witnessing is a slower rate of decline, not growth. The positive GDP reports out of France, Germany, and Japan for the second quarter of 2009 were based on declining imports boosting the “net exports” calculation. If other large economies are buying less rather than more how can growth resume around the globe? The answer is it cannot. As long as credit is tight the job losses will continue.
What we need is a strong focus from Washington on a program that will create jobs. It doesn’t make sense to debate whether tax cuts or stimulus spending is the best method. What we need to debate is the current stimulus plan is not working. It is not creating jobs; it is not saving nearly enough jobs. It is better to be weaving down the road in the right direction than to be heading in the wrong direction. Right now Washington is asleep at the wheel and needs to wake-up. While it is true that economic growth precedes job growth, it is not true that economic growth occurs when job losses are still mounting. History says weekly jobless claims that are averaging 570,000 are a strong indicator we are still losing a substantial amount of jobs.
Posted by Michael A. Kamperman on August 5, 2009
We are not in an economic recovery, not by a long shot. If estimates are correct the unemployment numbers for July will show somewhere between 300,000 to 450,000 job losses. That would not be a sign of slack hiring but of continued firings. Hiring is a lagging indicator once a recovery takes hold. Continued firing is a clear sign there is no recovery. Confusion about the concept of “net exports” in the GDP data is leading many to misinterpret the state of the economy as being more positive than it really is. U.S. imports and exports peaked in the third quarter of 2008, with exports reaching $1.913 trillion. In the fourth quarter of 2008 total dollar exports fell to $1.706 trillion, followed by a drop to $1.509 trillion in the first quarter of 2009 and a drop to $1.483 trillion in the second quarter of 2009. Yes, the rate of decline is slowing. But the GDP data claims “net exports” added .45% to GDP in the fourth quarter of 2008, added 2.64% positive growth in the first quarter of 2009, and finally added 1.38% to positive GDP growth in the second quarter of 2009. Our actual exports have fallen by over 20% in the last three quarters and yet our GDP calculation claims “net exports” have added 4.5% to our economic growth. The firing data offers a clearer picture of the true state of the economy. Firing is not a lagging or leading indicator, it is a current indicator. If the July unemployment report estimates are accurate, then the economy was still falling and not in a state of recovery in the month of July. Yet July is part of the third quarter when the average forecast of economists is calling for positive GDP growth.
Many look to China as a source of economic strength and positioned to lead a global economic recovery. The latest data out of South Korea says otherwise. According to Bloomberg news, “exports to China, South Korea’s biggest overseas market, fell 15.7 percent from a year earlier in the first 20 days of July. Exports to the U.S. slid 26.5 percent in the period while shipments to Japan fell 32.6 percent, today’s report showed.” China claims a 7.9% second quarter growth rate and yet, just like the U.S. and Japan whose economies are in an acknowledged deep slump, China is importing much less than it did last year.
The economic strategy being employed by the White House is being driven more by the political advisers than the economic advisers. Today the President and his Administration began making a concerted effort to convince Americans the economy is doing better than expected, and the stimulus plan is working as intended. Considering the stimulus plan was supposed to keep unemployment around 8% in 2009 and it will soon reach 10%, just what is the objective of this plan of denial and obfuscation? The objective is to paint the picture the President has a solid plan for the economy. No, he doesn’t. What the President needs to do is say the economy is in much worse shape than expected and that is unacceptable. He should say the stimulus plan, while helpful, is proving to be not nearly effective enough in stopping the economy from declining. He should say he is willing to stake his Presidency on restoring jobs in America and will do whatever it takes to make that happen. President Obama, I will tell you what your political advisers should have already told you, your Presidency is already staked to the unemployment rate.
Posted by Michael A. Kamperman on July 29, 2009
The current health-care reform debate is stuck with one-dimensional thinking. For example, President Obama is stating that if we don’t reform health-care then the Medicare Trust Fund will run out of money within 10 years. But doesn’t the “Medicare Trust Fund” exist on paper only. It’s not like the Medicare Trust Fund is an endowment with a diversified portfolio. For years the federal government has been including the revenues collected for Medicare and Social Security in its budget and issuing them IOU’s in the form of Treasury bonds. Let’s face it, both Medicare and Social Security are programs of the federal government and neither will run out of money unless the federal government runs out of money. The federal government is not going to run out of money within the next 10 years. The next form of one-dimensional thinking is that national healthcare expenditures that are rising faster than the overall rate of inflation is “bad thing” for America and its economy. It would be if we imported most of our healthcare. But in fact the vast majority of health-care spending in America is geared toward our domestic economy. In fact, health-care is the only sector of the economy that is still growing jobs. As long as the quality of care keeps improving it doesn’t matter if it costs more. If I am willing to pay up for a big screen HDTV, why shouldn’t I pay up for high-tech health-care? Will America be better off if we cut health-care spending and send even more people to the unemployment lines?
The next form of one-dimensional thinking is that most of the Americans that are without health insurance are suffering. Nothing could be further from the truth. Everyone who needs medical attention can walk into an emergency room and receive treatment, whether they can pay for it or not. A friend of mine is a surgeon. He told me he has 5 different rates for removing an appendix. The first price is his stated full price. This is the price that someone without health insurance, but with money, pays him. He says almost no one ever pays this rate. The next price is the price large insurance companies negotiate with his practice. The next price is the price Medicare dictates it will reimburse him for an appendectomy. Then, an even lower price is the price Medicaid will reimburse him. And finally, there is the charity price, which is $zero. He gets up in the middle of the night if the hospital calls and removes an appendix regardless of what portion of his fee he will be collecting. So health-care insurance reform is only geared to the non-payers and the full price payers. Since I have health insurance, the higher fee Blue-Cross/Blue Shield pays him covers the lesser fee paid by others. I am already “taxed” by my health insurance premiums by paying a higher rate for an appendectomy. The working poor, whether they are legal citizens or illegal immigrants, have no money and they don’t pay because they have few if any assets at risk to a lawsuit. Healthy young men and women often go without health insurance because they don’t perceive the cost/benefit of having a policy as being worthwhile. So the only people health-care reform will really benefit is the middle-class with assets to lose and no policy due to choice, pre-existing conditions, or because they were dropped by their existing policy holder due to risks and costs. And, the ones who are unfairly gaming the system are employers of the working poor who pay nothing for their workers health-care even though they all receive because of the health insurance “premium tax” paid by others.
Why don’t we have hospitals build clinics for the working poor funded by savings from treating sore throats in the emergency room and by a tax on employers that don’t provide health insurance? Why don’t we tell the insurance companies it is illegal to drop coverage for health reasons for anyone they gave a policy to? Why don’t we offer a subsidy to health insurance companies to help cover the costs of a mandatory window whereby anyone with a pre-existing condition has to be offered coverage? Why don’t we tell insurance companies everyone must be offered the same rate for health insurance whether they are an individual or a large employer? What I don’t want to see happen is some grand cost cutting experiment with health-care that drives the country into an even deeper depression as nurses hit the unemployment lines. What I also don’t want to see is an America that goes to Vegas to gamble, goes to the Super Bowl, goes to get tummy tucks and manicures and pedicures, but then turns around and tells Grandma she needs to walk off into the woods to die because we can’t afford end-of-life care.
Posted by Michael A. Kamperman on July 22, 2009
I personally like President Obama, a lot. He loves and plays basketball, and so do I. He is smart, articulate, inspiring, and personable. If he fails, America fails. If America fails, we all fail. So yes, absolutely I do not want to defeat him, I want him to succeed. But I’m afraid the economy was pushed into the back seat tonight at the President’s health care conference. We all know health care financing is screwed up in America and needs reform. We do not need to treat sore throats for people without both health insurance and money in the emergency rooms of hospitals all over the country. We do not need to see lower middle class people lose their life savings if they have an unexpected health care emergency. But a robust American economy is what pays for the best health care in the world. The President is wasting political capital on an important issue, but not the most important issue. The current estimates are that 1.5 million Americans will run out of unemployment benefits before the end of the year without receiving a job offer. Tonight, the President claimed that the stimulus bill not only saved jobs, it has created jobs. Mr. President, the only measure of job creation for a President is for the unemployment rate to go down, not up. Any other measure is arguing how many angels can sit on the head of a pin.
Unfortunately, the President is signaling that the economy will have to take a back seat to his more pressing issue of health care financing reform. Mr. President, there is no more pressing issue in America than good paying jobs. I will tell you what your advisers, so called, don’t have the guts to tell you. If unemployment keeps going up rather than down, then you will be a one term wonder. So please do not tell the American people your administration has “created” jobs. Instead, please create them.
Mr. President, how can you actually create jobs? First, fix the broken credit markets. Second, understand that America is the world’s leading economy, not an economy that “is unprepared to compete in the 21st Century.” We are the world’s leading economy in high tech and biotech. We have chosen to outsource our manufacturing to China and others and we can rescind that decision at anytime. The way forward to escape the new great depression is not to become the next export driven economy. My question to you is export to whom? My advice is shake up your Whitehouse team and get some economic advisers that will give you straight talk. You are not the next FDR. When FDR became President the country had an unemployment rate well over 20% and everyone knew we were up the creek without a paddle. But this is not the spring of 1933, it is the spring of 1931. In 1931 the vast majority of Americans did not realize they had already entered the Great Depression. Currently, the vast majority of Americans do not realize we have entered a new great depression. When they figure this out they will blame you, not President Bush. I’m not saying you shouldn’t reform health care. I am saying that if you don’t rescue the economy, then you can kiss your second term goodbye.
Posted by Michael A. Kamperman on July 2, 2009
The U.S. lost another 467,000 jobs in June. The unemployment rate rose to 9.5%. While the headlines were bad enough, the devil was in the details. According to the U.S. Department of Labor statisticians, the number of people in the labor force shrank by 155,000 even though the population grew by an estimated 203,000. People are giving up looking for work. The number of people working for federal, state, and local governments shrank by 52,000. Tax revenues for state and local governments are falling. The State of California alone is trying to close a $27 billion projected budget shortfall for the new fiscal year that started yesterday with some combination of program cuts (jobs). The average work week went down to 33 hours per employee. For the first time in a long time average hourly earnings were unchanged from the previous month. The clincher is the average weekly paycheck fell by $1.85 to $611.49. Finally, the number of people unemployed 27 weeks or more rose by 433,000 to 4.4 million. To put that stat into English, well over half of the people that lost their job last November have been unable to find a job.
With weekly wages now beginning to fall the ability of people to pay back their debts is diminishing. And these are the people that still have a job. The natural reaction to working in an environment where you are uncertain about keeping your job, and you know there are no raises, is to save more and spend less. The natural reaction to being unemployed for more than 6 months is to lower your sights and to look for a position that pays less and is in a less desirable working environment. Real wages fell during the great depression and it was one of the main reasons the economy was never able to fully recover. The U.S. is now on the cusp of declining wages. If hourly earnings actually begin to decline along with the number of hours worked, then shaking off deflation will become extremely difficult.
There is an available solution. The Federal Reserve could print enough money to buy up almost all of the outstanding U.S. Treasuries. Additionally, the federal government could establish a “bad bank” and take all of the toxic real estate related securities off the books of the banks and replace them with a long term loan of freshly printed cash. The banks would then have time to pay off their problem assets and they would have cash to lend into the real economy. The federal government could also guarantee newly issued state municipal debt and new mortgage-backed and auto-backed securities. The U.S. does not have to suffer and see its economy slide into the abyss. But we will continue to sink until our leadership in Washington quits staring like a deer in the headlights at the economic crisis and gets moving.
