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Destruction of Household Wealth
Inquiring minds are diving into the Z.1 Flow of Funds Accounts of the United States for the Third Quarter 2008. It's a mammoth 124 page publication. The publication came out on December 11th but some probably have not seen it yet.
The following chart comes from page 113 of the PDF..
R.100 Change in Net Worth of Households and Nonprofit Organizations in Billions of dollars; not seasonally adjusted
click on chart for sharper image
The chart shows a massive reduction in net worth of households over the last 4 quarters.
2007 Q4 -$1.46 Trillion
2008 Q1 -$2.42 Trillion
2008 Q2 -$0.39 Trillion
2008 Q3 -$2.81 Trillion
$7.08 Trillion in wealth has vaporized in the past year. Figure 2008 Q4 to be as bad as Q3. If so, roughly $10 Trillion in household wealth will be vaporized in little over a year. And looking ahead, there is no reason to believe the stock market, the housing market, or the economy will show signs of recovery anytime soon.
Destruction of wealth has clearly affected consumer spending as discussed in Consumer Demand For Nearly Everything Plunges.
It's important to keep the above in mind before getting hyperinflationary ideas about Obama's Expanding Recovery Plan now aiming to create 3 million jobs. Obama needs to create 3 to 4 million new jobs just to counterbalance another 3 to 4 million layoffs that I foresee for 2009. I doubt Obama can do that quickly, if indeed at all.
Bleak Employment Situation
Economists expect unemployment to rise to 9% but I think 10% or higher is more likely. And that 10% is based on the "official" number.
Table A-12 of the Department of Labor Monthly Employment Report is where one can find a better approximation of what the unemployment rate really is. Let's take a look
click on chart for sharper image
The official unemployment rate is 6.7%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.
Line U-6 is 12.5% and rising rapidly. I expect U-6 to hit 15-17%. Depression condition? You bet.
Bleak Wage Conditions
Many corporations are cutting or freezing wages. Here are a few examples.
FedEx to cut wages in face of downturn
FedEx (FDX) on Thursday moved to slash employees’ salaries and other benefits in the face of what Fred Smith, chief executive, called “the worst economic conditions in the company’s 35-year operating history”.Weyerhaeuser cuts dividend, freezes salaries
The pay cuts affect 36,000 of FedEx’s 290,000 employees and range from 5 per cent for mid-level salaried workers up to 20 per cent for Mr Smith. FedEx will also eliminate merit-based increases for US salaried employees in 2009 and suspend matching contributions to 401(k) retirement accounts for a year.
Timber giant Weyerhaeuser (WY) reduced its quarterly dividend from 60 cents to 25 cents and froze all executive and salaried wages at 2008 levels.Alcoa announces 2009 salary freeze
Weyerhaeuser said the continued housing slump and a weaker pulp market will result in “significantly lower-than-expected fourth-quarter earnings” and the company “expects challenging market conditions to continue through 2009.” The company’s board also reduced capital spending next year from $425 million to between $200 million and $250 million.
Due to the downturn in our global economy and unprecedented market conditions, Alcoa (AA) is taking a number of extraordinary steps to manage the company’s fixed cost base. Following careful review and serious consideration, a decision was made to freeze all salaried employees’ pay in 2009. Pay on which there is a contractual or statutory increase entitlement will be exempt from the freeze.Alcoa excerpts are from an internal memo signed by Gena C. Lovett, Plant Manager, Alcoa Cleveland Works.
We regret the need to take this action but believe it is prudent during this difficult and challenging period. We will continue to seek opportunities to manage our cost base in response to our market environment.
In addition to the above, Goldman Sachs (GS), Merrill Lynch (MER), Morgan Stanley (MS), Citigroup (C), and other financial institutions are cutting bonuses and laying off employees.
Unpaid Leave In California
In response to a growing fiscal crisis in California that is expected to hit $40 billion or more if left unchecked, California Governor Arnold Schwarzenegger ordered all state workers to take two days of unpaid leave each month to conserve money. In addition, two more California cities face bankruptcy, LA county shelters brim with families, and CalPERS (California Public Employees' Retirement System) managed to lose 103% on residential investments.
What CalPERS was doing buying property on leverage, God only knows. For more details on the massive mess in California, please see California Implodes In Multiple Ways.
Wage Freeze Proposed For San Francisco Unions
The San Francisco Chronicle is reporting Wage freeze proposed for S.F. unions
San Francisco's unionized city workers, including police officers, firefighters and nurses, should decide whether to forgo $35 million in cost-of-living raises in the coming months or face massive layoffs that would save the same amount, under a proposal announced Friday by Board of Supervisors President Aaron Peskin.Depression Conditions
About $14 million of that money would go back into the spending accounts of their various city departments. The rest would be used to create a "San Francisco Safety Net Stabilization Reserve" - a fund that would help stave off deep cuts to programs for the poor. It's the latest proposal to help the city through what has been called the worst financial crisis since the 1930s.
Expect more city and state unions across the country to face the same set of choices as San Francisco: freeze or cut wages, cut benefits, or face massive layoffs.
Falling or frozen nominal wages across a broad range of industries is a symptom of a deflationary state, if not outright economic depression.
And those falling wages in conjunction with rampant overcapacity, massive destruction of wealth in housing and the stock market, and panicked boomers facing retirement who will continue to cut spending, makes it highly unlikely Obama's stimulus plan will result in hyperinflation anytime soon.
Indeed, it's a struggle to even get inflation out of this mess. Those focused on money supply alone are simply not looking at enough factors.
Courage To Choose Wisely
Expect to see panic by central bankers and government officials who will refuse to let this play out like it should. I discussed this in Fiscal Insanity Virus Rapidly Spreading The Globe (Part 1) and Fiscal Insanity Virus Rapidly Spreading The Globe (Part 2).
Almost one year ago Minyan Peter was discussing The Courage To Choose in a timeless article well worth another look.
2008 has now gone by and the scorecard is not pretty. From auto bailouts, to bank bailouts, to corporate governance, to California, New Jersey, and other states postponing problems for a full year, it's a struggle to find many if indeed any major decisions made in 2008 that were both courageous and wise.
We can hope that 2009 will fare better, but judging by actions from central bankers all dead set on debasing their currency in a foolish Beggar Thy Neighbor scheme to keep the US consumer consuming at all costs, preliminary indications do not look particularly promising.
Mike "Mish" Shedlock
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