Just got this from Keybank and is published by Dr. Ken Mayland, Clearview Economics LLC.
The economic buzz over the last month revolved around the three d’s: double-dip anddeflation. Not uncharacteristically, much of this talk was overdone.
The current recovery by some measures (see the cover email for the Late-July issue) hassurpassed the performances of the previous two recoveries. Nonetheless, the persistence of a high absolute level of unemployment and the paucity of private job creation has generated considerable disappointment and impatience with the recovery’s performance. The souring of a few indicators, such as the June drop of industrial production and the May-June declines of retail sales have shaken confidence in the sustainability of the recovery. Hence, the talk of a “double-dip.”
When you examine the unfolding of past recoveries, you typically see bumps along the way. After the surge coming out of the recovery starting gate, it is not unusual to see the economy briefly falter. For instance, this occurred in 1976 and 1984—early years in those recoveries. But this fact does little to calm double-dip fears.
The talk of a double-dip dovetails with the talk of deflation (because of an association of economic weakness with price weakness). “Deflation” is not just the price of oil or apples going down. These price changes can reflect the relative abundance (e.g., a bumper crop) or scarcity (e.g., a hurricane-related production shutdown) of these commodities. Deflation is more than the end-of-season markdown on clothes. Deflation is a persistent, broad based decline of the price level. It would be visible in such items as the cost of a haircut or a copy of the Wall Street Journal. The typical cause of deflation is a contraction of the money supply. A one-third shrinkage of the money supply was the main cause of the terrible deflation seen during the Great Depression.
Have we seen, or is there any prospects for seeing any significant reduction of the money supply? Hardly! The Fed, whose job includes controlling the money supply, has ballooned its balance sheet by more than a trillion dollars. The Banking System is awash with excess reserves, which can provide the fuel for money supply growth. And the Fed has recently decided to not let its portfolio of holdings run down with maturities and mortgage terminations. The weakness of demands could bring down some sensitive commodity prices but is not enough to make a case for deflation. There are countries that have very weak economies but still suffer from hyper-inflation!
This brings us back to the U.S. economy. While the economy has hit some soft patch, demands are not weakening. The capacity utilization rate has increased six-and-a-half percentage points over the past year. The economy wants to grow—that’s the imperative created by labor force growth and productivity growth. The economy, however, is also experiencing headwinds. Consumers are “de-leveraging,” in an attempt to repair and rebuild their balance sheets. (In this regard, it is not a high saving rate that retards the economy so much as increases in the saving rate.) Businesses are holding back on hiring as they face an uncertain future with respect to future taxes and the costs of societal changes in the health care insurance compact.
These are the balance of forces fighting it out. Let’s stay focused on the right issues.
Note: When the Q2 GDP revisions are released on 8/27, not only will you see a first look at Q2 corporate profits (by the National Income and Product Accounts definition), but expect to see amajor downward revision of the economy’s Q2 growth estimate. The inventory accumulation for Q2 might come in somewhat weaker than originally reported, but imports will be restated to be much higher. (The first reporting of Q2 GDP had no data on June inventories and foreign trade, only estimates). The bigger trade deficit will be a more sizable call on Q2 domestic purchases, and there, a more hefty drag on U.S. growth. These revisions will distort my GDP estimates for Q3 and Q4. More imports in Q2 (accelerated, because of a feared container shortage) will means less imports later in the year. Less inventory accumulation in Q2, with the same Q3 inventory accumulation estimate, will reduce Q2 GDP growth but lift Q3 GDP growthabove what I show in my forecast table. Part of me wanted to put into Q2 my own estimatesof the revisions, to make the accounts appear more realistic. But my practice has always been to show the official data as the “actual” data.
------------------------
The summer vacation season is drawing to a close, and soon, people will get back to serious, hard work in the push to finish out the year successfully. But August can be a time to be whimsical. In that vein, let me put forth the ClearView Economics plan to get the nationquickly back to full employment. (In another August, years ago, I “solved” the Social Security problem with what I think remains the most creative and efficacious solution yet to be advanced.)
The current unemployment rate is 9.5%. That amounts to 14.6 million persons who want to work that cannot find jobs. But there is also serious underemployment. I don’t accept the U-6 unemployment calculation as being fully representative of all the truly unemployed, but let’s allow another 3% to account for all the underemployment. That brings the total unemployed to 19.2 million persons.
What is “full employment?” I think the economy could sustain a 4.5% jobless rate without aggravating the inflation rate. (This is my guess of the NAIRU: the non-accelerating inflation rate of unemployment.) Why not a 0% unemployment target? First, because that would tend to be inflationary. Second, there is always some frictional unemployment: jobs available in Place A and unemployed persons in Place B. Third, there is also seasonal unemployment. And fourth, there is in the American workplace a considerable amount of turnover—people leaving one job for another. So we need to get unemployment down to 4.5%, or 6.9 million persons. Hence, we need to create 12.3 million jobs—or 8% of the civilian labor force.
So here’s the plan. EVERYBODY—from the President down to the chambermaid--takes a 10% cut in compensation! This freed-up compensation expense is then used to re-employ the 8% (12.3 million) of the unemployed. Net-net, the nation’s compensation bill has remained unchanged, and the unemployment rate is now 4.5%! Voila! (Why not cut compensation 8%? I’m allowing for administrative costs of re-hirings and other frictions.) It is as simple as that.
So how realistic is the CV Econ Plan? The first thing to note is that many companies—from manufacturers to law firms to municipalities—have already done this through furloughs and pay cuts, to share the burden of unemployment. What has worked on a firm level could work on a macro level.
Second, there is an inherent fairness to this, as we all share the burdens of re-employing our fellow citizens. If he KNEW his small sacrifice would get some family person who otherwise is hopelessly unemployed back working again, what compassionate worker would not opt for this choice? I would.
Third, this Plan gets at the fundamental reason for unemployment: “sticky wages.” In economics, as demands diminish, either prices or quantities can adjust. It is the nature of the U.S. (and other) labor market that wages remained fixed, so quantities must adjust—generatingunemployment. In one felled swoop, the “economic reset button” is pushed. Prices adjust, so quantities can increase. Who is to say that the level to which wages have risen to is the “right” level?
At first blush, this plan would seem to result in a 10% reduction in the standard of living for the 90.5% of the current workers. Again, with the knowledge that this will lift many good persons from the depths of unemployed despair, maybe this would be a reasonable sacrifice. But wait! With the re-employment of the 8%, the productivity of the American workplace will not drop 8%. It may not drop at all! The re-employment of these workers will increase the supply of goods and services produced (maybe 8%?). Remember Say’s Law? Supply creates its own demand. The net: perhaps no major decrease in the standard of living, at all.
Of course, the whimsical part of the Plan is getting everybody to buy in to it. Can you imagine union workers acceding to the Plan? I have personally and sadly witnessed union members hanging out to dry their less senior colleagues in order to sustain an unsustainable compensation bill.
But maybe, just maybe, individual firms could consider and enact such a compact company wide, and begin to make a dent on the tragic and otherwise somewhat intractable unemployment problem, from the ground up.
----------------------
Wrap your head around these figures:
Cost of Fannie Mae bailout: $86B.
Cost of AIG bailout: $118B.
Cost of GM bailout: $49B.
The number of Americans on food stamps in May: 40.8 million(a record, up 19% y/y).
-----------------------
RE the November elections, what is the “Intrade Prediction Markets” saying about the likely future political make-up of the next session of Congress? This is an actual market where players bet on the outcomes of events. This market early and accurately predicted the election of now-President Obama. In these cover emails to the “ClearView…” publication, we tracked those results.
Now we will track another event: the U.S. House of Representatives reverting back to Republican control. As of 8/25, here is the “price” of this contract:
74.5,
compared with 54.6 on 7/27
compared with 49.0 on 6/22).
This suggests that, based on the betting, there is a 74.5% chance of this “event” happening. These odds are STRONG!
The history says that the probabilities of this event occurring have increased markedly. Stay tuned for future updates. OR follow the day-to-day betting at: http://www.intrade.com/
---------------------
The CHINA report:
So goes China, so goes …? On balance, the Chinese stock market did well over the past month. Meanwhile, from May to June, China sold $55 billion worth of dollar-denominated securities while buying $13 billion in yen. And while you were vacationing, China was declared the world’s 2nd largest economy (at $1.3T, just nosing out Japan, at $1.2T). Average income is about $3,600 per capita, about the same as El Salvador (and compared to $46,000 per capita in the U.S.), but they make it up in volume!
The Shanghai B-Share Stock Price Index is a cap-weighted index. The index tracks daily price performance of all B-shares listed on the Shanghai Stock Exchange that are available for investment by foreign investors. The index was developed with a base value of 100 on February 21, 1992.
---------------------
Quote of the month: “All men having power ought to be mistrusted.” James Madison.
Regards,
Michael Hon
CEO, The Iron Eagle Realty Team
Associate Broker, Market Pro
Certified Short Sale Specialist®
Investment Property Consultant
Direct: 208.919.0458 Office: 208.939.9033 Fax 208.514.1422
www.IronEagleRE.com Michael.Hon@IronEagleRE.com
