US Unemployment High and still Growing

Bloomberg Finance News had an illuminating article today on the dire unemployment situation:

"This glass still looks half-empty to me...and this isn't even the real picture. It's been estimated that the real unemployment rate in the U.S. is closer to 20%. These estimates include “underutilized” workers in the U.S. (i.e., those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking). Prior to the early 1990's, this was the method of calculation. Now the government manipulates the number in order to suit its political aims..."

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More Bad News -- American Deficit Reaching Astronomical Proportions

Some of my friends (in jest) accuse me of unfounded optimism. But I find so much daily evidence that I wonder why nobody has sent me a bottle of the intoxicating beverage that is propelling the stock market to a rebound. The market logic assumes Obama is fixing America, so that the export engines in China and India can roar forward later this year to supply the wonderful American consumer. Global growth is just around the corner. Or is it?

My concerns are echoed by Clive Crook of the Financial Times. Read his latest prognostication for a 10% or higher American fiscal deficit. That plus alarming monetary expansion spells "INFLATION" ahead.

That comes on top of a permanent trillion dollar American trade deficit from oil imports. But why let a few missing trillions spoil a good party? Go buy stock!

The Downturn is Far from Over!

One more time we are hearing that this sharp downturn has reached a bottom and now is the chance to buy - a house, a car, or especially some stocks or mutual funds.

There is some evidence that the economy is not headed for a complete collapse. There are even some monthly indicators that show upward movement.

No one can say for sure when the bottom will be reached in the stock market, but for my money the answer is not yet.

For the economy as a whole -- in terms of employment, consumer spending and GDP, I think the bottom is many months away, or perhaps even a few years away. My guess is that the economic news in the coming months will have far more negative items than real grounds for encouragement.

It is not surprising that governments around the world are trying their best to halt this slide. However, the methods being used in Washington may add fuel to the financial fire. Look out for inflation in the coming years, due to colossal deficits and extreme monetary stimulation. Buy gold or gold stocks to hedge against likely inflation next year.

I still believe we are headed for a small depression, that is a 10% or greater fall in GDP. It might even get worse than that.

The new trade barriers that are rising worldwide will surely dampen any global recovery. Few people realize how much global prosperity in the past fifty years has depended on free movement of people, money and products. If free trade dies, the world will become much poorer.

Fasten your seat belts for a prolonged bumpy ride!

Don’t Buy It!

I retired a few years ago from a career as an international banker and corporate executive. In my economic blogs I have for two years been predicting a momentous global downturn, long before any official sources admitted such a possibility. (They are still partly in denial.)

Now I would offer this advice: Don’t Buy It. That is also my word to myself in these treacherous times.

Whether you are looking at taking a bargain cruise, buying a new TV, another car, a house, or making a financial investment, don’t buy it unless you really need it and can clearly afford it without borrowing. I am not buying much these days except groceries and small things I truly need.

It is not our obligation to rescue the American economy or the world economy. Our obligation is to manage our individual and household budgets prudently.

Many economists are telling us to spend more to get the economy going, but that will only put us further into debt, which is the root of our problem.

We are in an economic hurricane that is still gaining strength. There have been several premature announcements of a recovery in the stock market or housing market, but don’t buy this theory just yet. Obviously I wish this storm would be over soon, but I see no signs whatsoever that it is lessening.

In fact, this feels to me like a full scale depression in the making. I am not suggesting a 1930’s drop in GDP of 40%, although that might be possible; but I do expect a GDP drop of 10 – 20%, which would qualify as a real depression by any measure.

So let me suggest a more prudent way of looking at our predicament. What if the government is in fact virtually powerless to stop this incoming tsunami wave?

Franklin Roosevelt tried mightily for nearly a decade to stop the last depression without much success, although he was arguably the greatest president of the 20^th century. Today many economists and government officials have become perfect “Monday morning quarterbacks” who seem to believe that if they had been in charge, the 1930’s Depression could have been avoided or quickly repaired. Don’t buy those pretentious claims; they are unfounded and misleading, even if well motivated.

Various political leaders are claiming their unique expertise about what should be done to fix this mess, but in fact none of them saw this meltdown coming and they have no basis for claiming such profound understanding.

You should instead respect any leaders who admit honestly that they don’t know how bad it will get, or precisely how to avoid it. Our government should be concerned primarily with offering help to those who are hardest hit. Trying to stop the tsunami in its tracks is patent nonsense.

So where does this leave you and me? Hopefully not waiting for someone else to rescue us. That is our job: to rescue ourselves. And rescue does not mean getting back on top of the house of cards that has tumbled down around us. It means bravely starting over from where we have landed.

If you do the math, you quickly realize that the proposed $800 billion American stimulus package divided among a population of 300 million is less than $3,000 per person. How can that provide $40,000 jobs, or rescue $100,000 mortgages in default, plus pay for a new health care system, alternative energy research, and a host of other benefits that we desire? The expenditure per person to do all of that would be astronomical—many trillions. It just isn’t possible.

But the trillion dollar American government deficit will surely contribute to growing inflation and send the price of gold still further up. So if you are going to buy anything, buy gold, because the dollar is becoming worth less and less.

We have a choice. We can sit in a heap and cry about how desperate the economy is becoming or look at history and realize that we are still incredibly lucky. The economist Jeffrey Sachs has estimated that we are ten times better off than our ancestors were in 1750. We are even far better off than our grandparents. They faced war and depression and survived. We can too.

Our principle source of hope is in what we can do for ourselves and for those around us. This must happen at every level, with every person, company, family, community and at every level of government. We need to find entirely new ways to contribute to this stark new economy, whether in paid or voluntary work.

With a “can do” attitude, extreme frugality, and an enterprising spirit, we have every chance to survive and to rebuild our lives.

What Lies Ahead: Recession or Depression?

There is an old aphorism that when your friend loses their job, it is a Recession but when you lose your job, it is a Depression.

In fact, the term “Depression” has almost gone out of use now, except for referring to a psychological state, or, in historical reference to the “Great Depression” of the 1930’s.

Prior to 1929, there were a number of “depressions”, but since the Great Depression, we don’t even use this “D” word anymore. In fact our governments and economists have mostly avoided the word “recession” as well. However, now everyone concedes that we are experiencing a full-blown global recession, at minimum.

But might we be plunging into something worse than a recession?

Since the 1930’s governments have used three methods to contain economic downturns:

· Fiscal stimulus based on the theory developed by John Maynard Keynes, a British aristocrat-economist who advocated major government intervention to manage recessions and depressions. He recommended tax cuts and/or more deficit spending to give consumers the ability to spend and thus to restore a general sense of confidence in the economy.

· Monetary stimulus which also was strongly advocated by Lord Keynes, but later considerably refined by University of Chicago economist Milton Friedman, who greatly influenced the development of Macroeconomics. Milton Friedman argued that monetary growth needs to carefully pace productivity growth and consumer demand, or else inflation becomes rampant, since excessive expansion of the money supply is inherently inflationary. His theories enabled developing world countries suffering from hyperinflation to stabilize their currency and to achieve balanced growth. Now Friedman’s officially enshrined concepts guide the European Central Bank in setting their monetary targets.

· Managing consumer and market psychology. This is the favourite technique of all modern governments. I would love to attribute this populace control method to Machiavelli, but there is considerable evidence that spin control was already well understood thousands of years ago by Chinese and Roman emperors.

If I were an academic, I would love to write a book on the thesis that American governments since the 1980’s have been trying to stamp out recessions permanently, but regrettably without success.

Instead, they have created an unhealthy economy where excessive monetary and fiscal stimulus produced unnaturally high growth of the housing and stock markets. This paved the way for the current global financial meltdown. (This ill advised policy was more fully described in my blogs last January and February.)

We are now likely plunging into a global depression. Time will tell if it will become a great depression on the scale of the 1930’s, rather than like the more ordinary-sized depressions of the 19^th Century.

From my experience as a banker and CFO, I doubt that the global capital markets and financial institutions can be fully repaired in less than three to five years. Meanwhile, companies will have little access to either credit or to new capital. Industrial production will soon suffer drastically, as is already evident with automobile sales declining for lack of credit.

This crisis has now become much, much more than a “subprime mortgage” problem, although that may have been the trigger. Banks are starting to fail worldwide and central banks are desperately offering billions in fresh credit (printing money) to stave off a complete financial shutdown. So fasten your seat belts. This may be the mother of all bumpy rides.

Far too little has being written about this impending depression in the mainstream press, but I suggest reading an article published October 5, 2008 by Tony Jackson, in the Financial Times of London “Parallels with 1929 highlight need for radical thinking” (http://www.ft.com/)

But don’t panic. Our ancestors lived through worse crises successfully many times. We currently enjoy a standard of living unparalleled in world history. If necessary, many of us could cut our expenditures by a quarter, which is probably what we will need to do for several years. Communities and families need to work together to alleviate suffering for those hit the hardest.

We must find ways to restructure our economy on a more reasonable basis. The recessions that were avoided during the past few decades by excessive government intervention would have made industrial and financial restructuring more gradual. However, now we need to do it aggressively, depending on massive government guarantees. Our challenge is to put our financial and business structures back together right.