John Mauldin, in his latest Outside the Box newsletter, presents Gary Shilling’s investment strategies for 2011. Mr Shilling’s picks are based on this expectation: In our view, the overarching reality [...]
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John Mauldin has a far-reaching review of the world economy that should be read. He concludes, correctly in my opinion, that we and the rest of the world are out of fiscal and monetary options:
We have just about used up all our “rabbits in the hat” as far as fiscal and monetary policy are concerned. We now need to focus on what we can do to get out of the way of the private sector, so it can find ways to create new businesses and jobs.
“Getting out of the way of the private sector” would break things loose. However, few in Washington are willing to cede the power and control necessary. Power once gained is hardly ever given back.
There are no solutions left except to take our medicine so that we might get better. That, as I have pointed out elsewhere, is politically unthinkable. Hence we head toward an economic collapse.
Mr. Mauldin points out there is little current political will for more government spending. However, when economies begin to implode, desperation will change the climate. Desperate politicians will do desperate things, probably things we cannot imagine today. Unfortunately, all they can do is make matters worse for citizens and for themselves.
Tyler Durden likens our condition to that of France. No, not today’s France, but the one which ultimately culminated with the French Revolution of 1789:
It may come as a surprise to some that the very same type of central planning that Bernanke, and his central banking brethren, are trying to inflict (and failing) upon the world, was the same that was attempted on so many occasions in history, most poignantly, and catastrophically in the late stages of the French monarchy. Needless to say the attempts by one man to control a far simpler French economy well over two centuries ago failed, yet ironically, not even then did the economy reach our current level of collapse. Which begs the question: how long until our own “Sun Chairman” finally forces the hundreds of millions of great unwashed out of their hypnotic trance following the realization that their “equity” in the great American experiment, their pensions, lifetime accrued benefits, retirement funds, and of course savings, have been completely wiped out, and another historic ‘storming‘, only this time not of the Bastille, but of the Marriner Eccles building, the focal point of all that is broken with not only America but the world, finally ensues. Just as over 200 years ago, the longer the wait, the greater the ultimate loss for the working class… and the bloodier the ultimate outcome for the modern day iteration of the clergy and aristocracy, also known as contemporary politicians and bankers. And to those saying we are getting ahead of ourselves, we borrow a phrase from the lexicon of unconventional wisdom: “this time is never different.”
The unemployment rate is unacceptably high. Officially it is reported at 9.2%. Unofficially, it is closer to 20% when the discouraged and underemployed are factored in.
We are near Great Depression levels but without the discomforting sight of citizens standing in food lines. Instead, citizens are in grocery store lines with their government-issued credit cards (food stamps). While it may seem more civil and less disturbing, it should not. The shame of standing in a food line is gone, but the pain and suffering is little different from what our ancestors experienced in the 1930s.
Like the 1930s, this unemployment problem will not be easily or quickly solved. Despite the tales about how President Roosevelt solved the unemployment and economic problems, inspection of the data reveals that not to be the case. Siphoning off massive amounts of manpower to fight WWII lowered the unemployment rate as calculated by government statisticians but did nothing for the standard of living. It was not until the end of the war that the economy began to recover and the true unemployment rate declined. Interestingly this scenario developed during record government spending reductions. The economy recovered as a result of the most massive cutbacks ever seen, despite what politicians and their hack economists tell us is necessary today.
From the beginning of the Great Depression until WWII was a period of about ten years. Add another six or so years on until economic recovery began and you have a period of about 15 years. That is what it took for true recovery to commence. Will it be as long this time? That depends on what policies the government pursues. Up to this point, policies have been as wrongheaded as one might conceive. Unless and until many current policies are reversed, there will be no recovery in the economy or in the employment picture. The country’s standard of living will continue to decline.
Reversing many of the economic policies put in place over the last several years is necessary. If that is done, and done properly, the unemployment problem will be with us for a long time. If it is not done, it will be with us forever! (I know, flexible prices would return us to full employment again but at a much lower standard of living. My statement assumes that government and labor unions will not allow downward changes in union contracts, minimum wage, etc. These legal obstacles would prevent a return to full employment.)
Barry Habib, courtesy of John Mauldin’s newsletter, uses history as a guide to how long it might take for unemployment to reach various rates. I encourage you to read Mr. Mauldin’s entire newsletter as it has some excellent information on the European situation as well as more detail on unemployment rates.
I must interject that history may not be the best of guides because our economy is less responsive than it was in prior periods. One of the great advantages of the US economy was its flexibility. Historically, this flexibility provided the ability to respond to change better and more rapidly than other more regulated economies. That advantage has been diminished if not eliminated over time with the increased burden of government regulation and restriction. In that sense, using history may bias the analysis toward the optimistic side. (This difference is sometimes cited by those who argue that the economy is suffering from a secular rather than cyclical shift.)
With that qualification in mind, here is a portion of Mr. Habib’s commentary (read the original piece for assumptions and a thorough understanding):
“We often hear projections on reaching a lower level of unemployment within a certain time frame. Let’s look at a chart to see how many jobs it would take to reduce the current 9.2% rate to a lower level over some different periods of time.
“The colors on the chart help us see how likely this scenario may be. For example, the numbers in the red boxes indicate that this has never been done before during the time frame desired. Green boxes indicate that this is close to a historical average. Blue boxes are an optimistic, but achievable goal. Grey boxes have numbers that have been reached in the past, but very rarely. The yellow box indicates that this has happened only once before – and that is over 50 years of data…meaning a very slim 2% chance.
“We often hear of a return to a 6% unemployment rate. Well if the goal is to do this in 4 years, then the US would need to create just under 250,000 jobs per month on average during this period. There are 47 rolling 4 year periods during the past 50 years. For example 1961 – 1964 is one. Then 1962 – 1965 is the next, and so on. During this time, a level above 250,000 jobs per month average for a 4 year rolling period only happened three times. There were a few more times when the numbers were close, but the chance of this happening was less than 10%. If history is a guide, the promises and projections we have been hearing, will have a very low probability of becoming a reality.
“History tells us that bringing unemployment down to 8% over 4 years is just about 50/50. This is very worrisome. And back to our earlier example of bringing the rate down 2% in 3 years – The 200,000 monthly job gains needed during a 3 year period of time has about a one in three chance of happening, according to the historic data.
“Let’s look at the total needed to get to 7% unemployment in 5 years, or about 171,000 jobs per month average. There are 46 rolling 5 year periods during the past 50 years. There were 17 times where the creations were above the number needed to reach the goal. That is just a little better than a one in three chance. Not very good odds, and worse – this is what many projections are based upon.
Jul 212011
John Mauldin presents this introduction to a paper by Lacy Hunt. The Hunt article is a good read for econophiles:
Long-time readers are familiar with the wisdom of Lacy Hunt. He is a regular feature of Outside the Box. He writes a quarterly piece for Hoisington Asset Management in Austin, and this is one of his better ones. Read it twice.
“While the massive budget deficits and the buildup of federal debt, if not addressed, may someday result in a substantial increase in interest rates, that day is not at hand. The U.S. economy is too fragile to sustain higher interest rates except for interim, transitory periods that have been recurring in recent years. As it stands, deflation is our largest concern …”
As I write, Europe is starting to unravel. This is going to be much worse than 2008, at least as far as Europe is concerned, and odds are high that it will be very bad for the US. And the markets are still acting as if the problems in Europe can be resolved. The recent bank stress tests were a joke, as they assumed no Greek or Irish defaults. This simply can’t be. There is a banking crisis of massive proportions in our future.
As Lacy notes, we are testing the economic theories of three (I think von Mises should be added) dead white guys. The dominant theories are being shown to be wrong. The sooner we acknowledge that the better. But don’t hold your breath waiting for the major economic schools to come to grips with their failure.
This is a real problem, and there is just no way to avoid it. I wish I had more positive things to say.
Feb 162011
As political events in Egypt play out, including likely contagion to other parts of Africa and the Middle East, attention is diverted from the real threat to our country — government insolvency. From Jeff T. Allen, writing in American Thinker:
There will soon be a crisis affecting US citizens beyond any experienced since the Great Depression. And it may happen within the year.
Unlike the Great Depression, however, we will enter such a shock in a weakened state, with few producers among us and record mountains of debt. More cataclysmic is the specter of inadequate food, as less than 4% of us farm …
Fantasy Land
Political lip service will not solve this problem, only spending cuts will. Yet lip service is all we get. President Obama’s State of the Union address spoke of the problem but not to the problem. Obama offered no spending cuts, while proposing a host of new spending programs. The release of his budget reflects more of the same – phony promises but no real action
President Obama continues to revel in his world of fantasy and duplicity while the economy and world crumbles. Mr. Obama appears delusional and more interested in political posturing than constructive effort.
Newly elected Republicans seek $100 billion in immediate cuts but struggle to get to this level. Smaller numbers elicit calumny from Democrats and the media. Democrat Majority Leader Harry Reid reacted this way to the potential cuts:
“In many cases, these proposals may mean taking workers off the assembly line or taking teachers out of the classroom or police off our streets,” Senator Harry Reid, the Nevada Democrat and majority leader, said.
Characteristically, Reid touches the political hot buttons in an attempt to scare people. While Reid is correct that low-level cuts will be harmful, it is for an entirely different reason than he suggests. Small cuts ensure a government default, civil unrest and economic collapse.
Head-in-the-sand politics must end. Feigned ignorance and cowardice will not serve politicians well. Reality is on the way and they are apt to be run over by it. For politicians like Majority Leader Reid, the remainder of this article may be detrimental to your health. Do not proceed without a cardiac care unit on standby.
Fiscal Conditions
John Mauldin, in his recent newsletter, argues that public spending in welfare states has reached a turning point:
Clearly, we are looking at a watershed event in public spending in the United States, United Kingdom, and Europe. Because of the Great Financial Crisis, the usual benefit of a sharp rebound in cyclical tax receipts will not happen. It will take much longer to achieve any economic growth that could fill the public coffers.
Welfare states are faced with life-or-death problems that may not be soluble. To understand the gravity Continue reading »
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Mauldin on Greece
Mish on Mauldin
The Golden Goose is Dying and Time is Short
The Debt Supercycle
High Unemployment Forever Or For A Long Time
Lacy Hunt on Economics
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