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Unemployment data was released today. The headline numbers were basically unchanged from last month. The political spinmeisters will try and find a diamond in the numbers that can help their cause. But, I think the election in November is already over. From polling data, it looks like Democrats are going to lose the House, keep the Senate, and Obama will be weakened. There are some important numbers to pay attention to in unemployment reports. Instead of focusing on the headline rate, it’s good to look deeper in that table to what is known as U-6. U-6 is the total unemployed. It jumped from 16.7% to 17.1% over the last month. That’s a statistically significant jump.
Last year, there were 503,000 people that were considered “Discouraged Workers”. This year, the number has more than doubled to 1.2 million people. These are people that have given up. They would be working if there was a job for them. Behind the faceless number, no one knows what it encompasses. Are these educated people that can’t find anything? Are they unmotivated because Congress has extended jobless benefits over and over again? An economist would have to survey and dig into that number to know for sure. All I can say is that year over year when you are doubling the amount of discouraged workers it’s a troubling sign.
Another troubling stat for the future is the hourly wage. It was up a penny to $22.76 per hour. This is up 1.7% over last year. However if we expect hyperinflation to hit us in the future, this type of wage increase YOY will not keep pace. Unfortunately, we can’t do much about wages so the smart policy is to avoid hyperinflation. More unfortunate is the fiscal policy of the country, and the prospects for more quantitative easing are leading us down a path to hyperinflation.
When scanning different numbers on the work week, and where unemployment is, there was little change. The rhetoric coming out of the White House is less change. It’s pretty clear that they are extremely out of touch with the American public, full steam ahead on their agenda.
Switching course a little. The remedy for this tepid unemployment situation has been big stimulus spending from the Federal government, and quantitative ease from the Federal Reserve. This devalues the dollar. The Federal Reserve is in a quandary. Even though they have created a lot of money, the velocity of money through the economy hasn’t turned over. The US is in a liquidity trap.
A liquidity trap works like this. The Fed creates money by purchasing US debt from banks. The banks have extra cash. Banks can choose to lend the cash, or reinvest in securities. For the last 3 years, they have reinvested in government securities. This is called “surfing the curve” on the street.
Businesses are not demanding cash either though. They are uncertain about growth prospects for the future. They see higher regulation, and higher taxes. They have decisions on how to invest their cash too. Their choice is expand, buy another business, pay a dividend, or buyback stock. Currently, they are buying other businesses or buying their own stock. Both of these actions are not expansionary.
No demand for cash gives the banks no choice. The liquidity trap is created and the US stepped in it.
How do we get out? The current path we are on is a big devaluation of the US dollar. This hurts Americans. It is a stealth tax on savings and wealth. Competitive devaluation helps no one. The other way is to grow. This path is more difficult, and would require significantly lower taxes, less government spending, and less regulation.
Another reason devaluing the dollar is bad policy is this. The US is not a manufacturing country. Many of the goods we manufacture stay in the US. They are less dependent on what the dollar value is. We import many things. A strong dollar makes imports cheaper, and benefits Americans. Additionally, America does export a lot of services, and highly technological goods. The demand curve for these types of things is inelastic. They are not as sensitive the the value of the dollar, and will be purchased at almost any price.
If you don’t understand elasticity, think about how you feel about something like gasoline. You will purchase it at any price, but as the price goes up you will figure out ways to conserve it.
What benefits from a weak dollar? Agriculture. Manufacturing Unions. Most agriculture is big corporate farming. The notion of the independent farmer is largely gone. Manufacturers that do ship overseas Get a benefit as long as the other nation’s currency doesn’t devalue faster than the dollar. Japan is an example of an economy totally dependent on exports. That is why it has entered the competitive devaluation game.
The unemployment situation will remain bleak until we solve the conundrum of the liquidity trap. Until money turns over and enters the private economy, we will continue down the road of nothingness.
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