14 over ten…

A horrifying chart…

Brody: You’re gonna need a bigger boat.

From Business week:

Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:

Peter Schiff: The whole service sector economy has to go away…

We have assumed, for some time now, that employment in the service sector was doomed in this crisis. We just came across this quote from Peter Schiff from 2007 which, for the first time, put into words what we have been awkwardly trying to explain on this blog to anyone who would happen by and read it.

Peter Schiff (2007):

December’s larger than expected jump in non-farm payrolls is predictably being touted as evidence of a more vibrant U.S. economy. Unfortunately, the data does not support this conclusion. The bloated service sector added 178,000 jobs, while manufacturing shed another 12,000 jobs. What this means is that 178,000 more workers will be consuming goods while 12,000 fewer will be making them. The result will be larger trade deficits that merely compound already stretched global imbalances and exacerbate America’s inevitable day of reckoning.

A service sector can only exist so long as it is supported by a vibrant manufacturing sector. The reason is simple. People employed in the service sector consume goods but do not actually produce any of them. Therefore they must rely on others, who presumably benefit from their services, to produce goods in their stead.

As an example, suppose that ten castaways were marooned on an island. What if on the day they washed up on shore they all decided to assume the following jobs; lawyer, accountant, banker, economist, actor, philosopher, astrologer, beautician, teacher, and nurse. How long do you suppose they would all remain alive without food, water, or shelter? Someone has to provide those things or everyone will perish.

In modern America, the goods shortfall is being made up by foreigner producers, who only derive a marginal benefit from the American service sector. In December, 43,000 new jobs were added in the education and health care sectors and 50,000 were added in business and professional services. What are all of these people going to export in order to pay for all the imported goods their paychecks will permit them to consume? Is there really that big a demand for American legal services in China? Do the Japanese really need our accounting advice? Do Saudi Arabian children benefit from pre-schools in America? How many sick Germans will seek treatment in American hospitals?

The fact that the U.S dollar rose in response to today’s jobs data is further evidence of how widespread this misunderstanding has become. Currency traders bid up the dollar because they assume a stronger jobs market will engender higher interest rates, which is perceived as dollar bullish. However, they ignore the longer term implications of the larger trade deficits that those service jobs will ultimately produce, which is decisively dollar bearish.

For now, all these excess dollars are being absorbed by foreign central banks precisely because foreign private consumers have little use for them. Today’s jobs data means that the resolve of foreign governments to continue accumulating additional dollar reserves will be that much harder to maintain.

Two years later, Schiff’s views on this subject have not changed, although his prescription may be unlikely. The following is a summary of his talking points from a recent speech:

The U.S. Government is interfering with the free market forces trying to fix the economy. We lived in a phony “bubble” economy. The Government is trying to reflate the bubble. Americans are trying to rebuild their balance sheets and save to build wealth. As any drug addict knows if you stop using drugs you will go through withdrawal. Government is making the situation worse. We don’t need any more stimulus, we are suffering from the stimulus we have already been given. Alan Greenspan and Federal Reserve got everyone drunk on easy credit.

Government has created moral hazard, i.e. Fannie and Freddie. The housing bubble was Fed and nurtured by the government. America is broke and our creditors are acknowledging that. What is going on in the global economy will not last and is beneficial to the rest of the world. Foreign nations will retool factories and create products for themselves. Our ride on the global gravy train has come to the end. The whole service sector economy has to go away. If companies are not profitable they need to go out of business. Nobody talks about the productive jobs the Government destroys by saving jobs at GM or AIG. The  damage this time around can be far greater than Hoover and Roosevelt created during the Depression. Hoover attempted to bail out the economy and business, Roosevelt only followed his failed policies on a much larger scale. Bush has followed bailout policies like Hoover, now Obama’s is following Bush’s failed policies only on a much larger scale.

Japan was in a good position when they busted, we are in the opposite position. We can’t solve a crisis that is the made of borrowing and spending by more borrowing and spending. Our creditors will stop lending to us. Inflation is going to run out of control. Ultimately that inflation is going to cause prices to go through the roof. We will not be able to purchase items to go on store shelves. This not a major collapse, it is a restructuring. The decoupling concept is here, but the US is not the engine it is the caboose.

You need to own assets in countries where economies will thrive and prosper like Asia, and stay away from US assets. This is the beginning of an inflationary depression.

Too failed to bail…

Vodpod videos no longer available.

“Shameful” posted with vodpod

From Associated Press:

President Barack Obama issued a withering critique Thursday of Wall Street corporate behavior, calling it “the height of irresponsibility” for employees to be paid more than $18 billion in bonuses last year while their crumbling financial sector received a bailout from taxpayers. “It is shameful,” Obama said from the Oval Office. “And part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint, and show some discipline, and show some sense of responsibility.”

The president’s comments, made with new Treasury Secretary Timothy Geithner at his side, came in swift response to a report that employees of the New York financial world garnered an estimated $18.4 billion in bonuses last year. The figure, from the New York state comptroller, drew prominent news coverage.

Shameful.

Outrageous.

Irresponsible.

A sum, we are told, by Jonathan Alter tonight on MSNBC‘s Countdown, that is twice the amount which will be spent on the entire national mass transit system in Barack’s stimulus package.

By way of contrast: The Moron stood silent as contractor built showers for soldiers in Iraq electrocuted them.

Service men who were risking their lives for his Crusade.

Not a word, not a peep.

Is there any wonder that this man, Barack, evokes such adoration among his supporters?

One thing we wish to point out, however, since we on this blog see it as our mission to to strip you of every illusion regarding Washington: We have, so far given $350 billion to these same bankers, and Barack has requested $350 billion more.

That these bankers, in turn, consider themselves so apart from the disaster they helped impose on society that they lavish themselves with bonuses, as their banks spiral across the event horizon of collapse, is simply a function of the fact that this $700 billion is being spent to salvage the assets of the very wealthiest in our society – to prevent those assets from deflating in price.

Washington has decided these banks are too big to fail, and their billionaire and institutional owners are too rich to be poor.

The arrogance shown here, and rightly denounced by the Messiah, hangs on the delusion among the wealthiest tenth of one percent of our human family that they are irreplaceable.

Sooner or later Barack will have to confront this delusion, or submit to it.

Dust ourselves off…and that Visa card too

With Washington’s 60 year old ponzi scheme on Wall Street broken, Barack is faced with the fairly difficult task of salvaging a bleak situation – as he indicated in his inaugural address:

That we are in the midst of crisis is now well understood. Our nation is at war, against a far-reaching network of violence and hatred. Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered. Our health care is too costly; our schools fail too many; and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet.

These are the indicators of crisis, subject to data and statistics. Less measurable but no less profound is a sapping of confidence across our land – a nagging fear that America’s decline is inevitable, and that the next generation must lower its sights.

It is this last point, “a nagging fear … that the next generation must lower its sights,” which goes to the heart of this crisis.

First, you are N. Gregory Mankiw’s penniless uneducated fucking hillbilly – living from paycheck to paycheck. You have no savings, no investments, no assets of any kind except – perhaps – the home you live in. You probably have a negative net worth, with perhaps $9,000 to $10,000 in various kinds of consumer debt. There is a good chance you are under water on your home mortgage, as are 12 million other American families – a figure which Roubini predicts will reach 25 million before the year end.

Second, you likely work for a company which has announced layoffs in the past year, or will announce them some time this year, owing to greatly reduced demand for goods and services you and your fellow penniless uneducated fucking hillbilly co-workers are providing because you are all so deeply in debt you can look to a long life of crippling struggle to maintain any type of income to provide food and necessities for your family.

Third, you live in a state where government is straining under the burden of greatly reduced tax revenues, and the probability of even more difficult fiscal problems owing to the fact that you are earning, borrowing, and spending less.

Roubini puts your situation this way:

Households in the US have too much debt (subprime, near prime, prime mortgages, home equity loans, credit cards, auto loans and student loans) while their assets (values of their homes and stocks) are plunging leading to a sharp fall in their net worth. And households are getting buried under this mountain of mounting debt and rising debt servicing burdens. Thus, a fraction of the household sector – as well as a fraction of the financial sector and a fraction of the corporate sector and of the local government sector – is insolvent and needs debt relief.

It is no accident then, according to Roubini that the country is experiencing its worst economic downturn since the Great Depression:

… The lack of debt relief to the distressed households is the reason why this financial crisis is becoming more severe and the economic recession – with a sharp fall now in real consumption spending – now worsening. The fiscal actions taken so far (income relief to households via tax rebates) do not resolve the fundamental debt problem because you cannot grow yourself out of a debt problem …

It is perfectly understandable, also, that Barack has to address that other “nagging fear that America’s decline is inevitable…” since the continuation of the American empire rest on you continuing to use your credit card down at Macy’s.

Its all about consumer confidence, but you are not looking all that confident right now.

Well, its time for you to cast off that funk, ignore your misgivings, stop listening to your fears, and engage your logic:

According to Mr. Roger Bootle, “This recession demands that we employ logic and spend our way out of it.

Where Barack demands, “Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America,” Mr. Bootle clarifies for us, that this is less a demand for dust free clothing, and more a plea we stop letting dust accumulate on our Visa cards:

A recession is a situation in which output, spending and income are all below normal or below potential. If output and income are to go up then someone must spend more. There is simply no other way. As a matter of logic. The only sensible debate is about who should spend more, on what, and how they can be persuaded to do so.

If you think in terms of aggregates, there are four candidates to do the increased spending: consumers, companies, the government, and foreigners. And for the world as a whole, there are no foreigners. So if we say that governments cannot be allowed to borrow more, because they are too much in debt already or because they waste the money, then we are left with only two candidates.

If we also say that consumers cannot be expected to spend more because they need to repair their financial position, then we are down to only one: companies. If companies could be prodded into increasing their spending on investment that could be a good thing. But in current conditions the chances of getting companies to expand their spending are slim. They react to the state of demand, which at the moment looks dire.

One can at least respect Barack on one point: Where Mr. Bootle implores us to return to our shopping, the Messiah more honestly frames the task at hand as work.

The difference is telling, don’t you think? Shopping focuses our attention on the product of our activity, the end result of our labors, and on the satisfaction of our needs, wants, and desires – fine dining, fancy cars, and 42 inch wide-screen high-definition plasma televisions.

Getting to work, however, focuses our attention on the effort and struggle of meeting those needs. It begins with want, and hunger, and ends that way as well – only when we switch from work mode to shop mode do we experience the pleasure and satisfaction we crave.

Which is why, on that bright blue morning in 2001 when madmen flew passenger planes into buildings for no good reason, the Moron begged us to go shopping.

Had he simply said, “Y’all git back to work, now. Ya’ heah?” we might not remember his years with quite the fondness we hold in our hearts today.

Unlike American economists, who conceal their profound hatred and disgust for you in arcane deeply mysterious symbology and tortured professional jargon, Mr. Bootle is rather breezy and forward with suggestions on how to fix this American decline:

Suppose we want increased consumer spending but do not approve of increased borrowing. The answer must be reduced saving. But I thought that we didn’t want that either! The logic is inexorable. To get higher consumer spending than would otherwise have been the case then collectively consumers will have to save less or borrow more. In the current environment, trying to boost saving is the economics of the madhouse.

Yes, it is insane for your to pay down your debt, it is insane for you to try to build a cushion against the loss of your job; it is insane for you to put money aside to educate your children, prepare to replace your car, or maintain your health care under the COBRA program – when you get laid off.

Stop saving and start charging!

I offer two morals and a suggested way forward. First, do not confuse the situation facing you as an individual with the position facing society as a whole. Second, do not confuse what needs to be done on grounds of equity or long-term economic health with what needs to be done to lift us from recession and prevent it becoming a depression. Some things which might contribute to the first objective would undermine the second.

There is a clear path ahead. In the short term, we must rely on an increased government contribution to demand through higher borrowing (although more by tax cuts, please) and increased consumer spending.

So, instead of reducing working time as the economy sheds millions of jobs, you need to get off your fat lazy ass and immediately go out and buy something – anything – with your Visa card today – it really is the only way to stem America’s decline.

And government should do the same – borrow flamboyantly and go on a – now – $900 billion dollar spending spree to create 4 million new jobs, at the cost of $225,000 per job.

A once in a lifetime Mother of All Shopping Sprees.

Or, to put it another way:

“Y’all git back to work, now. Ya’ heah?”

(The part of George W. Bush in this entry is played by Sheriff J.W. Pepper)

Washington’s new plan: Lending the poor back the money stolen from them

From Mish’s Blog:

To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.

All this talk about Strategy, Implementation, Recruitment, Procurement, operations, compliance, and other details masks the essence of the plan. And even though “A program as large and complex as this would normally take months — or even years — to establish“, the Secretary for Financial Stability is going to ramrod something through as quickly as possible.

Unfortunately, no matter what seat of the pants strategies they come up with, I can guarantee in advance that the unforeseen consequences of whatever decisions they make, simply will not be any good. Besides, it is axiomatic that plans to rob Peter to pay Paul, can never really work in the first place, regardless of how much time is spent crafting them.

Nothing has worked: “Freedom or unemployment,” Tom Walker responds…

We received an email from Tom Walker, a leader of the Work Less organization in Canada, who has provided further evidence of the consequential moment which may be upon us:

[S]ubstantially reducing the hours of work is a NECESSARY, not an optional or “wouldn’t-it-be-nice” response to the current financial crisis. That necessity, however, is no guarantee that it will occur. People have to organize to demand that it happens. The reason it is necessary is spelled out plainly but densely in a few lines contained in Marx’s Grundrisse, “Capital itself is the moving contradiction [in] that it presses to reduce labour time to a minimum, while it posits labour time, on the other side, as sole measure and source of wealth.

Hence it diminishes labour time in the necessary form so as to increase it in the superfluous form; hence posits the superfluous in growing measure as a condition — question of life or death — for the necessary.”

Each individual capitalist firm must find ways to cut costs through the introduction of labor saving techniques. But value continues to be measured in labor time expended. Productivity increases the quantity of wealth produced with an hour’s labor but not the quantity of value. So economic growth requires the expenditure of ever more labor time even those ever less labor time is required for the production of socially-necessary wealth. In the 19th century, this contradiction could be “resolved” through periodic crises that devalued capital. But with the advent of state interventionist policies in the 20th century, the escalation of the scale of the productivity overhang and the immensity of the consequences of a full self-correction, including the very real possibility of a revolutionary response to the crisis, it has become constitutionally impossible to “let events run their course.”

It cannot be emphasized too strongly that the root of the crisis lies in the nature of abstract labor time. Solutions to the crisis involve either “buying time” — which is to say not solving the problem but putting off the solution to a future date — or transforming SUPERFLUOUS labor time to disposable time. Unemployment is not disposable time but the failure to transform superfluous labor time into disposable time will result in the massive displacement of labor to unemployment.

The choice is that stark: freedom or unemployment. It sounds like it should be a no brainer. But people are SO afraid of freedom that they might let unemployment creep up on them while they’re wracking their brains trying to think of some other resolution to the crisis than freedom! We can’t let that happen. We’ve seen where it leads: fascism and war.

“Nothing has worked…”

Perhaps, I am wildly off-base on this, but I really fear I am not.

From the Boston Globe:

No government gesture in recent days – no matter how many billions of dollars were involved – could calm investor anxiety over the health of banking institutions and the global economy.

“It seems that nothing worked this week,” said Allen Sinai, chief global economist at Decision Economics Inc. in Boston. “What has emerged over the last week or so is that the US is in a full-fledged recession. It’s no longer tentative.”

I will continue to carp on this: reducing hours of work is not simply one solution to the current bout of economic bad news, it is the ONLY solution. Without immediately pushing through such a reduction, working families in every country will see their conditions begin to deteriorate horrendously.

From Naked Capitalism:

De Grauwe argues in particular that trying to recapitalize banks while the liquidity crisis is on merely throws money into a black hole. The new equity goes poof when the liquidity worries resurface (as they have, each time in more virulent form).

The Great Depression never ended; it was only papered over with fiat money and credit – a strategy which has worked for some sixty years, but has finally begun to collapse.

Now, governments around the world will be forced to do what they should have done in the 1930: Reduce working time.

This is not an optional measure, this is not “nice to have,” this is not a, “we hope to get to it someday,” policy, which can be promised to working families during election years, like an American health care system that actually covers every one, THIS IS WHAT THIS COLLAPSE IS ALL ABOUT.

We do it, or it will be imposed on us by this crisis – in the form of massive layoffs, as governments at every level go bankrupt in a cascade of of horror, along with the biggest employers and banks.

Trillions in productive assets – GM, Ford, international trade – are threatened by this crisis – simply shuddering to a halt, and dumping millions of working families in every country into the streets, as capital does to itself what we have failed do to it.

This needs to be done NOW before the effects of this crisis begin to impact working families.

Latest in unfolding slide toward Depression level unemployment:

Naked Capitalism:

• England, which has been more candid in talking about the financial crisis than other countries (the governor of the Bank of England has said, for instance, that living standards will fall) issued a blunt assessment earlier today. The scary update is that even overnight lending is starting to break down.
• Another sign of market panic: even though Fannie Mae and Freddie Mac are now officially wards of the state and the Treasury has assured that they will not fall into a negative equity standing, the general credit market stress and flight to quality means that their mortgage backed bonds are trading at elevated spreads. However, mortgage rates are lower than in July due to the rally in Treasuries.
• Those who wrote $400 billion plus of protection on Lehman’s credit default swaps had been expected to make a substantial payout in the 80% to 85% of face value range, but the preliminary auction showed even worse results.
• Economist Paul De Grauwe, who has been an astute and harsh critic of central bank’s models and priorities, makes a very simple point and draw a conclusion. Banks are not lending to each other out of mistrust. Various measures to increase liquidity and backstop banks have not made them look any more favorably upon their brethren, A modern economy needs a banking system. De Grauwe argues in particular that trying to recapitalize banks while the liquidity crisis is on merely throws money into a black hole. The new equity goes poof when the liquidity worries resurface (as they have, each time in more virulent form). The only way to break the cycle is for governments to take over banks, or a least most of the big ones.
• The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.

New York Times:

• GM verging on bankruptcy, in talks for merger with Chrysler: Speculation about a possible bankruptcy filing by G.M. has mounted in recent weeks because of the automaker’s dwindling cash reserves. The automaker had $21 billion in cash on hand at the end of the second quarter, but it was burning through more than $1 billion a month.

Huffington Post:

• Stocks post their worst week ever

Boston Globe:

• State layoffs imminent, lieutenant governor says
• Nothing worked this week: No government gesture in recent days – no matter how many billions of dollars were involved – could calm investor anxiety over the health of banking institutions and the global economy.

What does Mr. Market want?

Ben Graham’s Mr. Market is an interesting guy, whose biography was imagined, thusly:

Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success.  He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business.  Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but.  For, sad to say, the poor fellow has incurable emotional problems.  At times he feels euphoric and can see only the favorable factors affecting the business.  When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.  At other times he is depressed and can see nothing but trouble ahead for both the business and the world.  On these occasions he will name a very low price, since he is terrified that you will
unload your interest on him.

That Mr. Market is some kind of accommodating guy – always ready to give his opinion of the actions of Washington, Britain, Iceland, Germany, France and the EU.

Every time these learned gentlemen inject more cash into the banks, Mr. Market responds by wiping out more paper wealth in the world markets. It would seem as if Mr. Market, and all the other Sir, Monsieur, Herr Markets around the globe are saying: “Enough with the liquidity! We have been drowning in debt instruments since the Great Depression!”

However, our leaders in the financial capitals of the world market are hard of hearing; and insist on continuing to fight the Great Depression with greater amounts of cash.

That’s right: the Great Depression never ended – all the “economic growth” we have experienced since 1929 is mere flooding of the market with paper.

And more paper is not going to fix it.

Stop digging…

Well known adage: When you find yourself in a hole stop digging.

Yves Smith has posted an interesting tidbit on how the bailout of Wall Street may (will?) simply divert needed capital from useful productive purposes – which feed, clothe, house us all – to buying toxic assets in order to rescue the friends of Washington.

It is amazing given the dire warnings of the economic impact of the credit crunch on ordinary American, that the governement should choose just this time to make it worse by shoveling what little credit is available to bail out its dependents in the very biggest banks.

Oh, no it isn’t – I forgot.

It was already clear, if Washington takes $700 billion dollars to bailout Wall Street investment bankers, fewer options would be left for a fiscal stimulus package in a slowing economy with rising unemployment?

But, according to this reading the situation will be far worse than that:

When money is tight, however, as it is likely to be for some time, withdrawing $700bn from the funding pool to support failed, past investments has a more serious effect on the economy, because capital flows are restricted by market illiquidity and investor trepidation. If that reduces asset prices, it exposes more loans to losses. If it prevents good investments by crowding them out of any chance of getting funding, it reduces economic activity. Either way, it makes the economy less efficient.

So whatever economic dislocation is looming on the horizon, the bailout plan which will be passed tonight by the Congress – having been larded with enough pork to keep a family of 100 million well fed for a year – will actually make things worse by generating more paper losses and cutting off credit to the very sectors of the real economy the Greek chorus of the plan’s supporters claim will be saved, and make it more difficult to stimulate the economy.

All the traditional tools available to government having been gobbled up in the circus of idiots, the only hope for a smooth, controlled collapse of the sixty year old debt bubble is to immediately reduce the work week to 16 hours, eliminate all taxes on working families, and abrogate all debts foreign and domestic – immediate action is required, because once this thing begins to unravel, economic collapse will follow swiftly.