Given all the finger pointing at the US over monetary printing and the debasement of the US dollar, inquiring minds just might be asking "What is China doing?"
That's a good question, so let's look at monetary numbers translated from Chinese.
The Chinese central banks' printing and respective Chinese bank lending make us look like amateurs. Chinese central bank assets and the money supply are up 25-26% annualized YTD. But this growth rate of money supply and bank lending is what is required to make up for the 8-10% net contraction in output from the collapse in exports and export-related production.
Meanwhile, back in the US, total bank credit is contracting while M2 is up 5% annualized YTD.
Total Bank Credit - Annualized Rate of Change
M2 - Annualized Rate of Change
M2 is actually down since May-August due to the decline in the rate of growth of bank lending over the summer.
If the May-June rate of deceleration were to persist, M2 could conceivably start start contracting by year end or early '10.
In spite of record worldwide stimulus, a global recession is everywhere you look except perhaps in China. The reason is simple. When the Chinese government "suggests" banks should lend, banks lend. This is how command economies "work", using the word "work" loosely. Yes, the US has massive problems, but let's have an honest assessment of problems elsewhere.
Bottom line, China is busy ramping up production for consumers that don't exist: Not here, not in the EU, and not in China (not yet). This love affair with China, a country that will not float its currency or offer freedom of speech, and hides bank solvency issues even more so than the US, is way overdone.
Remind me to reconsider decoupling when China allows freedom of speech and floats the RMB instead of pegging it.
Yet in spite of all the above, nearly everyone is absolutely sure the Renminbi would soar if China allowed it to float. Conceivably it could crash.
Don't Mistake Printing For A Sustainable Recovery
It is a mistake to equate Chinese, US, and Japanese printing for any kind of sustainable recovery.
As noted in Gold And The Watched Pot Theory, "Every country wants to grow by ramping up exports in a world of decreasing consumer demand. To achieve that end, every country wants its currency to be weaker against every other currency. Of course that is logically impossible. Besides, the US consumer is tapped out. European consumers are tapped out as well. And tapped out or not, the Japanese consumer just does not want to buy."
Neither the G-20 nor G-7 did anything to address the massive global imbalances. Something critical is going to blow sky high, when and what remains to be seen.
Finance chiefs headed for Group of Seven talks in Istanbul pushing for a “strong dollar” amid concern its slide will impede their recoveries from the worst global recession since World War II.
“Everyone needs a strong dollar,” French Finance Minister Christine Lagarde told reporters in Gothenburg, Sweden, today as she met European Union counterparts. “We’ll have a chance to discuss this in the coming days.”
Her comments came four days after similar remarks from European Central Bank President Jean-Claude Trichet. Treasury Secretary Timothy Geithner yesterday also pledged support for a “strong” currency.
“Market-moving announcements could be forthcoming,” said Geoffrey Yu, a foreign-exchange strategist at UBS AG in London. “We expect to hear renewed commitments to the U.S. strong dollar policy and the European delegation may be tempted to communicate their worries on further rises in the euro.”
Canadian Finance Minister Jim Flaherty yesterday pushed China to let its yuan appreciate “more quickly” after keeping it little changed against the dollar for more than a year
G7 Wimps Out, Avoids Formal Dollar Criticism
Those hoping to see a firm stand by the G-7 regarding currencies may be hoping for another 20 years.
Group of Seven finance chiefs stopped short of singling out the weaker dollar for criticism and stuck to their mantra that “disorderly” swings in currencies threaten economic growth.
“Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability,” G-7 ministers and central bankers said in a statement after talks today in Istanbul. Officials welcomed China’s “continued commitment” to a more flexible currency, which they said would promote balanced global growth. The statement repeated language used at the last G-7 in April.
“Following the escalated rhetoric, investors may have been braced for some escalation in language,” said Sophia Drossos, co-head for global foreign exchange strategy at Morgan Stanley in New York. “Since we didn’t get it, I look for the trend of dollar weakness to reassert itself.”
G-7 Meritorious Statements
The German Deputy Finance Minister Joerg Asmussen said G-7 "Statements will be published on merit." Please consider the following meritorious statements.
There is no room for complacency since the prospects for growth remain fragile and labor market conditions are not yet improving.
We will keep in place our support measures until recovery is assured.
We reaffirm our shared interest in a strong and stable international financial system.
Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.
We will continue to promote the fundamental norms of propriety, integrity and transparency, as agreed in the Lecce Framework and the Core Values of the Charter for Sustainable Economic Activity.
Is there any merit to throwing a party just to say that? If the G-7 cannot agree on anything meaningful, how the hell is the G-20 ever going to agree on anything?
For more on the complete uselessness of these summits, please see G-20 Summit - We've Seen This Movie Before with an analysis of select entries from the historical record of a League of Nations 1930-1931 Chronology.
Export Dependency Madness
Canadian Finance Minister Jim Flaherty effectively summarized the global G-7 sentiment when he pushed China to let its yuan appreciate “more quickly”.
Every country wants to grow by ramping up exports in a world of decreasing consumer demand. To achieve that end, every country wants its currency to be weaker against every other currency. Of course that is logically impossible.
Besides, the US consumer is tapped out. European consumers are tapped out as well. And tapped out or not, the Japanese consumer just does not want to buy.
Demographics are a huge problem in Japan and ironically paying 0% on deposits does not do much for supporting consumption.
In spite of record worldwide stimulus, a global recession is everywhere you look except perhaps in China. The reason is simple. When the Chinese government "suggests" banks should lend, banks lend. This is how command economies "work", using the word "work" loosely. Yes, the US has massive problems, but let's have an honest assessment of problems elsewhere.
Bottom line, China is busy ramping up production for consumers that don't exist: Not here, not in the EU, and not in China (not yet). This love affair with China, a country that will not float its currency or offer freedom of speech, and hides bank solvency issues even more so than the US, is way overdone.
The world's largest shopping mall, South China Mall in Guangzhou, China, is almost entirely empty. Click on the link to see a fascinating video.
Spend Money Until There Is A Recovery
While politely pointing fingers at China and the US for political purposes, all such language was removed from the official statement. The only thing we can be sure the G-7 will do is keep spending money until there is a recovery.
The US, China, Japan, and UK are all in on that act. However, major cracks have appeared in the dam. Switzerland has intervened in the Forex markets with Japan and the ECB waiting in the wings. Canada is clearly unhappy about both the US dollar and the Renminbi.
Indeed no one seems happy about anything, yet the G-7 managed to put together this meritorious and flowery conclusion:
"We will continue to promote the fundamental norms of propriety, integrity and transparency, as agreed in the Lecce Framework and the Core Values of the Charter for Sustainable Economic Activity."
Japan’s currency rose to a six-month high on a trade-weighted basis last month amid speculation the Federal Reserve will keep interest rates low and the government led by Yukio Hatoyama won’t intervene to stem the yen’s gain.
Japanese Finance Minister Hirohisa Fujii said this week the government may act to stabilize the foreign-exchange market and denied that he supported a stronger yen.
The remarks signal Fujii, 77, is trying to dispel investors’ perceptions that he favors appreciation of the yen and would be unlikely to step into the currency market to stem its gains. After the DPJ came into power for the first time on Sept. 16, Fujii said the idea of a weaker yen helping the nation’s exports is “absurd.”
I place credence on the more recent statements, noting that Toyota could be one reason for the flip-flop.
Toyota Motor Corp., the world’s biggest automaker, is “grasping for salvation” as it predicts a second straight annual loss, President Akio Toyoda said. The automaker is one step away from “capitulation to irrelevance or death,” Toyoda said, citing a study of how companies fail.
The company has gone through the phases of “hubris born of success,” “undisciplined pursuit of more” and “denial of risk and peril,” according to Toyoda, who cited Jim Collins, the author of “How the Mighty Fail.”
The yen’s 7.4 percent gain against the dollar in the third quarter also eroded earnings from exports. “The yen is at a very severe level, and just increasing sales won’t make Toyota profitable,” Toyoda said today.
“We’re going to get financial institutions to provide these firms with more loans,” said Kamei. “Banks won’t have to treat debt on which they provide a moratorium as bad.”
The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as firms Kamei said. It will aim at giving relief to companies with about 100 million yen ($1.1 million) or less in capital.
“As long as I’m financial services minister, I’m not going to leave small companies in the lurch unable to get loans,” Kamei said. “If a bank takes that approach, I’ll hit them with a business improvement order.”
The Swiss franc fell the most in three months against the euro amid speculation the central bank sold the currency to curb its advance. Swiss National Bank Governing Board member Thomas Jordan said last week policy makers will act “with full force” to avoid an appreciation of the franc against the euro.
“Price action and market talk suggests the SNB has intervened today to sell the Swiss franc,” Marc Chandler, New- York based global head of currency strategy at Brown Brothers Harriman & Co., wrote in an e-mail today. “It appears it may be buying dollars and euros. Swiss banks have been rumored to be the featured agents, which fits into the intervention story.”
By holding back the Swiss franc, policy makers are trying to prevent deflation from worsening the steepest recession since 1992 and restore investor confidence. SNB Chairman Jean-Pierre Roth said on June 18 that the nation’s central bankers “fear deflation” and “if we want to fight against deflation we have to stop a further appreciation of the franc.”
All In Favor Of A Weaker Dollar Raise Your Hand
Europe does not want a stronger Euro, Japan does not want a stronger Yen, and Switzerland has surely proven it does not want a stronger Swiss Franc.
Given that China has pegged the Renminbi to the dollar, it is clear China does not want a stronger RMB either. If it did, it would simply change the peg.
I see no hands in support of a weaker dollar.
Dollar Devaluation Countdown
In spite of the above, within a month or two the US$ is supposedly going to be devalued. Please see Countdown To Dollar Implosion Madness for details.
The theory behind the countdown is the "Recent China/US financial Summit meeting in Washington which was requested by China, was not significantly pre-planned".
Is a dollar devaluation was the only thing that could possibly have been on China's mind? What about trade issues, pollution, the recession, or the then upcoming G-7 and G-20 meetings? My vote is for the latter.
2009 US Dollar Devaluation References
Out of curiosity, I did a search for "2009 US Dollar Devaluation"
During Depression I, I would say it was Frank Roosevelt's 40 percent devaluation of the dollar against gold which finally stopped the deflation. After Wild Ben 'Maggot Brain' Bernanke has cut his policy rate to zero, dollar devaluation is the only policy option left to ease our collective pain.
Some sage gold watchers are expecting a major dollar devaluation before the end of the year! Some say it could happen any day now. ... If the globe’s major reserve currency is devalued, no one will escape the impact on their daily lives.
For example, if the dollar is devalued against the euro by 30%, an Airbus will be that much more expensive than its Boeing equivalent. An import from China (the yuan is pegged to the dollar) will also drop in foreign currency prices by 30%, but remain the same in the U.S. dollar.
Devaluation By Decree Impossible
The US dollar floats. There is no way the dollar can be devalued by decree without pegging it to something. For example, the US cannot just come out and say "We are devaluing the dollar vs. the Euro by 30%" without pegging the dollar to the Euro and then defending that target.
Moreover, as noted above, all the G-7 countries except the US want a stronger dollar, not a weaker one. Even if a devaluation by decree was possible, the G-7 clearly would not be happy about it.
Message Of Gold
The reason for the strength in gold is not US inflation. As I have pointed out many times, gold fell from 850 to 250 over the course of 20 years, with inflation every step of the way. Thus, the inflation story just does not fit.
However, it should be clear that a major financial crisis is in store following a long period of competitive currency devaluation and massive debt and derivatives expansion by nearly every major country on the planet.
The G-7 agreed to do nothing to fix this mess, nor did the previous G-20 meeting. Countries are going to do what they are going to do: follow misguided Keynesian logic that suggests one can spend one's way to prosperity even though the problem is excessive spending across the board.
Might the US dollar blow up? Yes it might. But so could the RMB if China floated it, and so could the British pound. No one seems to see the crisis brewing in Japan with a huge demographic problem, a shrinking population, falling exports, and no way to pay back its national debt.
There is seldom a mention of the problems in European banks who foolishly lent money to the Baltic States in Euros or Swiss Francs and now those Baltic country currencies have collapsed and the loans cannot be paid back. European banks also lent to Latin America and those loans are also suspect. Arguably, European banks are in worse shape than US banks, but no one talks about it, at least in the US.
Spain has unemployment approaching 20% yet must suffer through the same interest rate policy as Germany. Seldom does one hear about this either.
Certainly the UK is a complete basket case with its banks on government life support. Iceland has already blown up, who is next?
Most are not aware of the problems in China, Japan, or Europe. However, the problems in the US are universally well understood. Indeed all eyes are on the dollar and everyone is talking about deficits, monetary printing, and especially unfunded liabilities even though the latter is tomorrow's problem, not today's.
Watched Pot Theory Revisited
A watched pot may boil, but it's not likely to explode, especially when everyone watching the pot expects an explosion any second.
Yet, it's easy to see that a financial crisis is brewing.
Somewhere, something is going to blow sky high, but from where I sit, it's as likely to be in the Yen, the Swiss Franc, the British Pound, or something no one is watching at all as opposed to the US dollar specifically.
It's important to remember that no matter how nutty things have gotten during this credit bust, even nuttier solutions are waiting in the wings.
The Japanese Minister of Finance has proven that in spades by proposing a debt moratorium to individuals as well as firms. The moratorium would postpone repayment of principal and interest on loans, in an effort to spur more bank lending.
Japanese banks’ bad loans won’t be driven higher by a proposed moratorium on debt payments by struggling small companies, said Financial Services Minister Shizuka Kamei.
Lenders won’t have to classify loans encompassed by the plan as non-performing, Kamei, 72, said in an interview yesterday at his office in Tokyo. That means they won’t be forced to boost provisions when borrowers postpone repayments of interest or principal, he said. At the same time, Kamei vowed to push banks to extend more credit to small businesses after bankruptcies hit a six-year high in Japan.
“We’re going to get financial institutions to provide these firms with more loans,” said Kamei. “Banks won’t have to treat debt on which they provide a moratorium as bad.”
The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as firms Kamei said. It will aim at giving relief to companies with about 100 million yen ($1.1 million) or less in capital.
“As long as I’m financial services minister, I’m not going to leave small companies in the lurch unable to get loans,” Kamei said. “If a bank takes that approach, I’ll hit them with a business improvement order.”
Japan Lending Statistics
Japan’s three largest banks, including Mitsubishi UFJ Financial Group Inc., posted combined losses of almost $14 billion last fiscal year as bad-debt charges surged.
Corporate bankruptcies increased 12 percent to 16,146 in the year ended March 31, the highest in six years.
In spite of the above Kamei states: “We’re going to get financial institutions to provide these firms with more loans,”
Unbridled Greed and Stupidity
Kamei blames “unbridled capitalism” for the global credit crisis.
The reality is this crisis was caused by the Fed (central banks in general) and Fractional Reserve Lending policies that fostered an environment of unbridled greed and stupidity. Ridiculous proposals such as offered by Kamei are guaranteed to make matters worse.
Surprise, Surprise, Surprise, Not: The oil hype story as noted in Ridiculous Hype Over Secret Oil Meetings has blown sky high already, just hours after I wrote the above.
Russia has not discussed changing the dollar's role in the global trade of oil, deputy Russian finance minister Dmitry Pankin said on Tuesday. "We did not discuss this at all," he told reporters. Pankin was asked by reporters about a story in Britain's The Independent newspaper, which quoted unidentified sources as saying Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies in the trading of oil.
Big oil producing nations denied on Tuesday a British newspaper report that Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies in trading oil.
It said the proposal was for trade in crude oil to move over nine years to a basket of currencies including the Japanese yen, the Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, which includes Saudi Arabia and Kuwait.
But top officials of Saudia Arabia and Russia, speaking on the sidelines of International Monetary Fund meetings in Istanbul, denied there were such talks.
Asked by reporters about the newspaper story, Saudi Arabia's central bank chief Muhammad al-Jasser said: "Absolutely incorrect." He repeated the same response when asked whether Saudi Arabia was in such talks.
Russia's deputy finance minister Dmitry Pankin said: "We did not discuss this at all."
Algerian Finance Minister Karim Djoudi told Reuters: "Oil producing countries need to stabilise revenues but...I don't see a need for oil trade to be denominated differently.
Analysts said that while individual countries would find it relatively easy to stop using the dollar in settling their oil trades, as Iran has already done, replacing the currency in which oil is priced would require a massive effort.
And apart from the strong political links between Gulf nations and the United States, the lack of convertibility for many Gulf currencies and the yuan tops the list of practical hurdles to making such a shift. Saudi Arabia and some other Gulf states now peg their currencies to the dollar.
To be fair, denial of talks does not mean talks did not happen. However, for reasons mentioned, it was easy to see the Fisk story for the hype that it was.
Here is the key sentence in the above article "Analysts said that while individual countries would find it relatively easy to stop using the dollar in settling their oil trades, as Iran has already done, replacing the currency in which oil is priced would require a massive effort."
While conceptually easy to price oil in something else, it might take a huge programming and retraining effort to do so. For what benefit? The answer is none, because outside of Yap Island stones, it does not matter what it is priced in.
Settlement, as stated above (and also by me years ago) is easy enough to do now. Iran does not want to hold dollars so it doesn't.
Who Wants To Hold Dollars?
I was just asked " Why Would Anyone Want To Hold Dollars?"
The question is actually moot.
The US runs a trade deficit. As explained in How Will China Handle The Yuan? holding dollars is a purely mathematical result of trade deficits.
The US runs a trade deficit with China. That means China must accumulate US assets. China does not have a choice in the matter; it is purely a mathematical function. When the US runs a deficit, mathematically someone must run a surplus.
There is no choice in the matter other than to raise the price of goods so high that consumers won't buy them. Pray tell, what would that do to unemployment and civil unrest in China? What would that do to demand in Europe? It is virtually impossible for China to strengthen its currency to the US dollar without affecting every other currency as well.
Some might suggest that China should buy oil with those dollars, but then what would the Mideast exporters do with them?
The reason China is buying fewer US treasuries recently is that the US deficit with China is shrinking. Again this is a simple mathematical equation, not some massive conspiracy to dump the dollar. Of course China could buy US ports and bridges or oil companies instead of treasuries, but such maneuvers have been blocked by Congress and last I checked no ports or bridges are for sale.
Simple Math Lesson
Math dictates that if the US is running a trade deficit someone else mathematically MUST run a trade surplus.
Whether someone wants to hold dollars or not is irrelevant.
That someone MUST be accumulating US dollars is a mathematically certainty. Suppose you suggest China dump those dollars.
Dump them to who, for what? Iran for oil? Surely you jest. Saudi Arabia? What will the Saudis do with them.
So China accumulates treasuries. And eventually those dollars will come home when China buys US assets, perhaps a toll road or a piece of a US corporation, or perhaps the balance of trade changes.
However, even though the question is moot, the reason why China might want to accumulate dollars is to suppress the prices of the RMB to help Chinese exports, the same reason Japan has. China, as noted above is very concerned about export jobs.
Japan is threatening once again to intervene in currency markets. To do so they would accumulate dollars in excess of what balance of trade might suggest.
The European Central Bank and the Fed are involved in currency swaps right now, to help diffuse the credit crunch.
So there are lots of reasons countries might want to hold dollars. Bear in mind, some of them are senseless, but since when do governments have policies that make any sense?
Once again everyone is hyperventilating over "secret" moves to trade oil in currencies other than the US dollar. Please consider The demise of the dollar by Robert Fisk.
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.
The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."
Supposedly Robert Fisk knows the plans but "Americans have not discovered the details".
Such "secret" talks surface about once a year and nothing ever happens. Yet, even if these talks led to actual actions, they are irrelevant for the simple reason it does not matter one iota what oil is priced in.
I discussed this concept in Oil Pricing Unit Red Herring on November 18, 2007. At the time everyone was going gaga because Venezuela and Iran would supposedly not take dollars for oil. Ten Simple Facts
1) Oil is priced in dollars. 2) Oil trades in Dollars and Euros right now in spite of the pricing unit being dollars. OPEC has recently admitted this fact. 3) Clearly oil does not have to be priced in Euros to trade in Euros, or for that matter priced in Yen to trade in Yen. The same applies to any major currency. 4) Neither Venezuela or Iran hold any dollar reserves. To the extent that either is taking trades in dollars, there is clearly nothing forcing them to hold dollars. By extension there is nothing forcing any OPEC country to hold dollars if it doesn't want to. 5) It takes less than a second for Forex trades to take place. 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency. 6) The above logic applies to any currency and any commodity. 7) Nothing is stopping anyone at any time anywhere from selling dollars for whatever currency they want to hold. Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars. 8) Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else. 9) Dollars are held (or not held) for reasons totally unrelated to pricing unit. Some of those reasons are political, some are based on sentiment, some on trade patterns and trade relationships, and some to suppress the value of local currencies to improve exports. 10) Currencies float and so do the price of oil and commodities. Pricing oil (or any other commodity) in Euros will not cause a price change in dollars. Look at gold which is simultaneously priced in everything as proof.
War Over Pricing Unit?
Fisk concludes with "Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq."
Iran has virtually no trade with the US, nor is there US foreign direct investment in Iran. Pray tell what does Iran need to hold dollar reserves for? Iran's statements amount to political hot air and nothing more. It announced something the world already knew, they already held no dollar reserves. Who should care?
Note that it takes less than a second for Forex trades to take place, and 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency. Logically, it makes no difference if US dollars are converted into Euros one second before a purchase or one second after the a purchase.
Given that it is irrelevant what oil is priced in outside of something illiquid like Yap Island stones, the logical conclusion is the US did not go to war over oil being priced in Euros.
Currencies Are Fungible
Let's put the horse in front of the cart where it belongs.
You can get a price of oil in any major currency you want today because all major currencies are fungible. However, pricing oil in a basket of currencies would do nothing but cause confusion. The idea is ridiculous.
Saudi Arabia, China, Japan, and any other country can hold whatever reserves they want in whatever currencies they want regardless of the pricing unit of oil. Reserves are based on trade relationships not pricing units!
Pricing oil in Euros (or even sillier - a basket of currencies) will not cause anything to happen. If pricing unit changes do happen, they will be a result of sentiment changes in regards to existing dollar hegemony and not the other way around.
Dollar Armageddon is not coming over a pricing unit, nor did the US invade Iraq for that reason. The story is nothing but meaningless hype.
Here goes: Denninger does not phrase my arguments correctly on points 2-5, however he thinks they are immaterial so the points are somewhat moot. The crux of the matter is not whether assets are backed by collateral as Denninger suggests, but rather whether the same money has been lent out multiple times.
Let's follow through with a real life example.
Fannie Mae makes a loan of $1,000,000. Let's be more than reasonably fair and assume Fannie Mae issued bonds for the entire amount, not borrowing a single cent into existence. So far there is no fraud.
$1,000,000 goes to the home builder. That home builder deposits $1,000,000 into a Bank of America checking account. Ignoring sweeps that would allow Bank of America to loan out every cent, let's assume BofA keeps 10% in reserves and lends out $900,000 to a new furniture store on the corner strip mall.
The furniture store owner buys $900,000 of furniture from a wholesaler. The wholesaler deposits $900,000 into a Citigroup checking account. Again, ignoring the likelihood Citigroup sweeps the whole amount into a savings account thereby able to lend out the entire amount (savings accounts have no reserve requirements), let's assume that Citigroup keeps 10% in reserves and lends out $810,000 to a High Roller who takes out a home equity loan on his house that is supposedly worth $3,000,000.
High Roller buys a yacht from a boating manufacturer for $810,000. The yacht manufacturer deposits $810,000 in a checking account at Wells Fargo. Following the same pattern, Wells Fargo keeps 10% in reserves and lends out $729,000 to a plumbing supply company, because home sales are going gangbusters and the plumbing supplier needs more supplies.
I think you can see where this is headed.
On the original $1,000,000 this is what FRL allows to be lent out.
See where this is going? I am going to arbitrarily stop the chain right there, but the total so far is $5,511,000 out of $1,000,000 was lent out.
Karl claims this is not fraudulent because "it's all backed by assets".
Well for starters the value of those assets backing the loans is questionable. Clearly it does not take much of a decline in asset prices to cause some major writeoffs. But let's get to the crux of the matter with a simple example.
Imagine I had gold depository with $1,000,000 in gold and lent out receipts for $10,000,000 in gold for people to buy things. Think that is not fraud whether or not those receipts were backed by pledges (assets) to pay back the gold?
Of course it's fraud, and so is lending out $5,511,000 when only $1,000,000 really exists. By lending out more money or gold than exists, asset prices reach unsustainably high levels before they crash. Sound familiar?
This is where the Libertarian argument "it's OK if two people agree" falls flat. It is not OK because it cheapens the dollar, thereby robbing everyone saving dollars via theft of inflation (making those dollars worth less over time).
Greenspan compounded this already massive problem in 1994 by allowing banks to "sweep" checking accounts (unknown to customers) into savings accounts. This made the problem worse because savings accounts have no reserve requirements at all.
Is it any wonder credit exploded?
For more on the case against Fractional Reserve Lending please see
The deflation "recognition phase" has finally arrived. Kroger foods, Costco, and Walmart are blaming deflation for a drop in earnings. Moreover, many high profile names are discussing deflation, something most thought could never happen.
The U.S. faces the possibility of deflation for the first time since the Eisenhower administration, a threat that may prompt the Federal Reserve to keep interest rates near zero through next year.
Executives at Kroger Co., the largest U.S. supermarket chain, blamed deflation for a 7 percent drop in earnings in the second quarter, while falling prices for food, gasoline, and electronics left August sales unchanged at Costco Wholesale Corp. A sustained price drop might set off a chain reaction in which lower profits force employers to pare wages and payrolls. That would erode consumer demand, exacerbating wage cuts and firings.
“Deflation is definitely a threat right now,” Nobel laureate Joseph Stiglitz, 66, a professor at Columbia University in New York, said in a Sept. 22 interview. “The combination of the deflation threat and the sluggish recovery should keep the Fed on hold for quite a while.”
Mish: Deflation is not a threat because deflation is here by any practical measurement. Deflation is also here by impractical measurements such as falling prices. See Humpty Dumpty On Inflation and Daniel Amerman vs. Mish: Reflections on the Great Inflation/Deflation Debate for a further discussion of a practical definition of deflation, a contraction of money supply and credit marked to market, not falling prices.
Moreover, deflation is not a threat in a second sense. Deflation is needed to purge the excesses of the last credit cycle. Attempts to defeat deflation by force will only prolong the agony while accumulating government debt, just as happened in Japan's two lost decades.
Finally, deflation is not a threat in a third sense. Falling prices are a natural state of affairs because of rising productivity over time. Inflation is a direct (and unnatural) state of affairs caused by the Fed and fractional reserve lending.
Bloomberg: Consumer prices are experiencing deflation, with the consumer price index sliding for six straight months from year-earlier levels, the longest stretch of declines since a 12-month drop from September 1954 to August 1955, according to the Labor Department.
Regional Federal Reserve Bank Presidents Janet Yellen, of San Francisco, James Bullard, of St. Louis, Richard Fisher, of Dallas, and Charles Evans, of Chicago, have expressed concern in past weeks about the possibility of declining prices.
“Disinflationary winds are blowing with gale-force effect,” Evans, 51, said in a Sept. 9 speech in New York.
Mish: Prices are falling in as sustained period for only the second time since the great depression as shown in the following chart.
CPI-U Percent Change From A Year Ago
Bloomberg: While the economy contracted 2.7 percent during the 1953 recession, it shrank 3.8 percent in the current recession, the most since the 1930s. Economists at New York-based JPMorgan Chase & Co. and Goldman Sachs Group Inc., the second- and fifth- biggest U.S. banks by assets, say there’s so much deflationary excess labor and plant capacity in the economy that the Fed won’t raise interest rates until at least 2011.
Mish: Although deeper than the 1953 recession, the GDP pullback is not as deep as the recession ending in 1949. Thus "the most since the 1930s" is factually incorrect. Nonetheless, this is a historically hard pullback as shown in the following chart.
GDP Percent Change From A Year Ago
Bloomberg: “The potential for a deflationary downdraft continues for several years” if economic growth doesn’t accelerate, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said in a Sept. 29 interview with Bloomberg Radio.
“There’s been a significant flattening on the long end of the curve,” reflecting concern about deflation, said Pacific Investment’s Gross, 65, who is buying longer-maturity Treasuries in response.
Mish: Here is a weekly chart of $TYX (30-year treasury), $TNX (10-year treasury), $FVX (5 year treasury), and $IRX (3 month treasury) that shows the flattening.
Yield Curve Flattening
click on chart for sharper image
The above chart is one I run constantly, in real time, on my computer. The curve represents weekly closes. The flattening from the actual peak is even greater. The intraday high in the 10-Year Treasury Note is just over 4%.
By the way, that chart is a few days old. The 30-year long bond is now sitting right on 4.0% and the 10-year note is at 3.22%, 78 basis points of flattening since May.
Bloomberg: The slowing in core prices is more of a concern, said Michael Feroli, an economist at JPMorgan. The core rate fell following three prior recessions in which unemployment rose above 7 percent. That “suggests that core inflation could well be below zero within two years,” Feroli said in an interview.
Mish: The "Core CPI" strips out food and energy from the CPI. As a practical matter, this makes little sense. Nonetheless, with falling rents and pressure on autos and nonessential goods, I expect to see the core CPI below zero sooner rather than later.
Bloomberg: “My personal belief is that the more significant threat to price stability over the next several years stems from the disinflationary forces unleashed by the enormous slack in the economy,” Yellen, 63, said Sept. 14 in San Francisco.
Wages for U.S. workers fell for eight months in a row, dropping 5.6 percent from October 2008 to June 2009, according to Commerce Department figures. In contrast, wages continued to grow in the 1954-1955 deflation period.
“A weak labor market in a competitive environment puts downward pressure on wages,” said Stiglitz, who won the Nobel prize for economics in 2001. “So, the possibility of another actual decline in wages cannot be ruled out.”
Mish: Disposable Personal Income is negative for the first time since the late 1940's. Disposable Personal Income Percent Change From A Year Ago
Bloomberg: The deflation danger is compounded by household debt, said Paul Ashworth, senior U.S. economist at the consulting firm Capital Economics in Toronto. U.S. homeowners owed $13.9 trillion in the third quarter of 2008, compared with an average of $8.5 trillion in the 57 years the Fed has kept records.
“As incomes start to fall, that debt gets bigger in real terms: You have a smaller income to pay off that debt,” Ashworth said. “Deflation combined with high indebtedness can be very problematic.”
Mish: Indeed “Deflation combined with high indebtedness is problematic.” The solution is to not blow debt bubbles rather than attempting to keep them inflated as Geithner and Bernanke are doing. The way to not blow debt bubbles is to get rid of the Fed and fractional reserve lending.
Bloomberg: Rodney McMullen, president of Cincinnati-based Kroger, blamed price reductions for second-quarter earnings that fell 10.5 percent short of analysts’ estimates.
“We certainly sold more units. But lower retail prices and profit per unit pressured” results, McMullen told analysts in a Sept. 15 conference call. “We began to see deflation.”
At Wal-Mart Stores Inc., the world’s largest retailer, “headwinds” from deflation were in part responsible for a 1.4 percent drop in second-quarter revenue to $100.9 billion, chief financial officer Thomas Schoewe told analysts Aug. 13.
Mish: Kroger, Costco, and Walmart are all blaming deflation for decreased earnings. Gee, who could have possibly predicted that? Certainly not your average inflationista.
Furthermore, Treasury yields (although up from December) are still at previously unprecedented lows.
The CPI is massively overstated here, not by my preferred measure (Case-Shiller CPI), but rather by the BLS's preferred measurement.
Deflation Denial Phase Is Over
In light of all of the above, the deflation "denial phase" should now be over for all but the most stubborn inflationistas. The "recognition phase" has finally arrived. The Bernanke "panic phase" is waiting on deck.
We are already in uncharted territory, and the risk is what the Fed, Congress, the Treasury department, the Administration, and central bankers globally do to prevent something that needs to happen: the liquidation of malinvestments and debt.
Thus the "real threat" (and risk) is not deflation, but rather the foolish attempts by Keynesian clowns to circumvent what needs happen.
Japan is proof that such efforts are futile. Note that Japan is once again back in deflation, and all the government has to show for its efforts is debt equaling 150% of GDP. Falling prices, lower wages, lower asset prices, and especially debt liquidation are not to be feared, they are a necessary part of the healing process, lest the country stagnate for years.
In Bill Gross Bets On Deflation I posted some links on falling rent prices courtesy of Lansler on Real Estate. Here is a recap.
Rents Falling Everywhere
Given that the official measure of CPI is based on rents not housing prices, please consider the following collection of links courtesy of Lanser on Real Estate: Really? Rents fall almost everywhere.
A shrinking number of jobs and a growing supply of apartments will continue to push the Puget Sound region's rents down next year as vacancy rates climb, industry experts predict.
Job losses killed our market, and development buried it," Mike Scott, of Dupre + Scott Apartment Advisors, told landlords at an industry conference Tuesday.
The average monthly rent across all apartment types in King, Pierce and Snohomish counties fell from $988 to $959 during the 12 months ending in September, and a continuing decline through 2011 will further cut that figure to $889, Dupre + Scott projects.
While demand for apartments is falling, the supply is rising.
So far, 4,100 new units have opened this year, and more than 2,000 others are expected to become available by year-end, according to Dupre + Scott.
The firm estimates that about 20 percent of the 6,000 condos completed in the past three years are also on the rental market now.
The combination of job losses and new units has upped the region's vacancy rates from 6.6 percent last spring to 7.2 percent now, and heading toward 9 percent next year, the firm said.
To attract renters, landlords have lowered rents, and six out of 10 are offering concessions worth an average $757, according to the firm's research.
New York City Landlord Chimes In
On August 27, I received an email from a landlord in New York City about falling rents and concessions. Please consider a snip from Landlord From NYC Chimes In On Falling Rents.
Hi Mish,
I'm a landlord here in NYC (as well as an avid reader of your blog) and I actually feel the 7-10% drop mentioned in the article understates the case somewhat. Based on what I'm experiencing, I'd say that rents are down 10 to perhaps as high as 20% from their peaks.
Twilight Zone Statistics
With home prices crashing year-over-year and both housing rents and apartment rents droping as well one might think that falling rents would be reflected in the CPI.
Inquiring minds are investigating 2009 BLS CPI Data to see if theory matches reality.
In what should be no surprise to anyone, the BLS is not in the ballpark. Here are some numbers and a chart.
CPI Data for September 2009: The rent index was unchanged and the index for owners’ equivalent rent increased 0.1 percent.
CPI Data for August 2009: The rent index was unchanged and the index for owners’ equivalent rent increased 0.1 percent.
CPI Data for July 2009: The indexes for rent and owners’ equivalent rent were unchanged.
CPI Data for First Half 2009:
click on chart for sharper image Unbelievable Statistics
The BLS is reporting that rent from the first half of 2009 is up 3.1 % from the first half of 2008.
The BLS is reporting that OER from the first half of 2009 is up 2.1 % from the first half of 2008.
Rent of primary residence (rent) and Owners' equivalent rent of primary residence (rental equivalence) are the two main shelter components of the Consumer Price Index (CPI).
Rental equivalence. This approach measures the change in the price of the shelter services provided by owner-occupied housing. Rental equivalence measures the change in the implicit rent, which is the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market.
Relative Importance Of Shelter Components In The CPI
Note that OER is the single largest component of the CPI at 23.83%. OER plus rent of primary residence is a whopping 29.96% of the CPI.
With home prices crashing, a massive inventory of unsold homes, and a massive shadow inventory of unsold homes on top of that, does anyone think that rental prices of homes is rising?
Bear in mind that everyone but the BLS seems to know that rent prices are dropping like a rock.
Not The First BLS Error
This is not the first major error by the BLS. I have been harping for two straight years that a massive revision in jobs was coming because of a fatally flawed Birth/Death Model.
Last Friday, the BLS announced they would revise the number of jobs lost during the recession by a whopping 824,000. Please see Huge Downward Jobs Revisions Coming for details.
Most were shocked by this announcement. The only shock to me is how low the number is. Look for an upward revision (or for the BLS to smooth the number over time).
Effect On The CPI
Rents of primary residence are clearly falling and OER should be falling as well. Given that OER and rent make up 29.96% of the CPI, the Year-Over-Year CPI is massively overstated at -1.5%.
We’ve just interviewed Janet Tavakoli for our first episode of The Keiser Report. If you don’t know her, you should. She wrote a fantastic book, Dear Mr. Buffett. Max and I are on our second read of it. You really must get this book if you want to understand derivatives from one of the foremost experts on it who writes in plain English about how these financial tools became instruments for widespread fraud that then led to financial crisis. She also gives loads of positive advice and insight.
Here is a summary she provided for MaxKeiser.com on where she thinks we are today two years since the crisis began:
"Regarding the outlook, my analysis is grim. I am not a doomsayer, I follow the cash, and so far, I’ve been correct, and the government has been wrong. Here’s the situation. We are at greater risk of a total meltdown due to a deflationary collapse than we were in 2007. After the greatest Ponzi scheme in the history of the capital markets, we’ve seen history’s greatest fiscal and monetary expansion, but it hasn’t worked. Debt levels of consumers and business exceed the capacity to repay."
Travakoli makes six points about deflation. I concur with all of them. Here are three of them.
Our fundamental financial and economic problems, i.e. overleveraging, lack of transparency, have not been solved.
Since 2008, capacity utilization has plummeted; businesses have no pricing power; U.S. lost 6.7 million jobs but numbers are underreported; personal income tax receipts are down 21%; corporate tax receipts are down 58%; U.S. deficit will exceed $1.8 trillion; govt. spending is now 185% of tax receipts; 13% of mortgages are seriously delinquent and/or in foreclosure; huge decrease in personal net worth; 15 million mortgages exceed the home value. We’re on a massive debt spending spree.
Income on all levels is not sufficient to make debt payments.
Inquiring minds will certainly want to play the videos where she also addresses the role of derivatives.
Janet Tavakoli Part 1
Janet Tavakoli Part 2
By the way, the reason we are worse off than in 2007 is because of the Fed's, response, the Treasury's response, the Obama Administration's response, and the Congressional response.
That's quite a lethal combination.
None of the structural problems regarding consumer debt, excess capacity, or malinvestments have been addressed. Instead the government's solution is to pile on more debt and bail out failed institutions at taxpayer expense.
One cannot cure a debt problem by going further in debt. It's as simple as that.
"At its core," Tavakoli observes, "the mortgage crisis is no more sophisticated than a schoolyard swindle, and the SEC is the principal." She effectively contrasts the imprudent use of leverage across investment banks, government sponsored enterprises, and hedge funds with the value investing philosophy of Warren Buffet, driving home the point that much of our recent economic activity has been destructive of wealth. "Price is what you pay," Buffett explained, "Value is what you get." Our recent financial system, Tavakoli asserts, has paid high prices for little value.
Her book is an excellent, readable overview and explanation of what's gone wrong and also a warning about what may be to come. She explains:
"As long as Wall Street enhances revenues with leverage to prop up kingly bonuses, as long as there are few personal consequences for CEOs (and board members and other top executives) for shoddy risk management, as long as CEOs are allowed to walk away with millions, nothing will change. The fact that shareholders are wiped out is no deterrent, and moral hazard will live on (p. 206)."
I have not yet read the book but I respect the opinion of Brett Steenbarger greatly. I am going to order a copy of Dear Mr. Buffett and read it. Meanwhile, I am adding that book to my recommended reading list, the first on my list that I have not read before placing it there.
One final thought: If you are a trader or have plans to be a trader, do yourself a favor and bookmark Brett Steenbarger's blog. He is a psychologist and discusses something no one else does, the Psychology of Trading. His book has been on my recommended reading list for some time.
Case-Shiller CPI is formulated by substituting the Case-Shiller housing index for Owner's Equivalent Rent in the CPI. For a complete description of the reasons and methodology, please see What's the Real CPI?
The chart and commentary below is courtesy of my friend "TC" who writes:
CS-CPI continues to fall albeit at a less rapid pace and measures -5.1% YOY. Meanwhile the government’s CPI-U also continues to fall at a slower pace and measures -1.5% YOY. The divergence is to due to the government’s housing metric of Owners’ Equivalent Rent (OER) continuing to show price increases (+1.7% YOY) vs. Case-Shiller data showing price decreases (-13.3% YOY).
click on chart for sharper image
Since the Case Shiller housing market peak in June 2006, OER is up +7.7%, while the Case-Shiller index is down -30.9% - an amazing 3860 basis point divergence!
CS-CPI YOY has now fallen for 11 consecutive months and 14 of the past 18. Meanwhile the government's CPI-U YOY has fallen for 6 consecutive months.
Thanks "TC".
With rental prices and food prices starting to drop, I expect to see CPI-U (the official CPI) to continue to decline. Moreover, with the coming end of the $8,000 housing tax credits for new home buyers and a phase-out of treasury monetization by the Fed, a reversal in the housing index is likely.
It's highly unlikely that home prices have bottomed in the bubble areas as well as most major cities, even though some select markets, especially Florida areas that have been hammered mercilessly, may be in a bottoming process now.
Dr. Housing Bubble outlines a solid case for "the bottom is not in" viewpoint in Shadow Inventory Case Study. Please take a look. It's a good read.
Treasury Secretary Timothy Geithner said signs of economic recovery are “stronger” and have appeared “sooner” than expected, while reiterating it’s not yet time to roll back stimulus programs.
Financial conditions have improved “dramatically,” particularly in the U.S., where the housing market has stabilized, Geithner said in a statement issued in Istanbul today. Still, jobless rates are “unacceptably high” and the financial system remains damaged. As a result, it’s too soon for governments to withdraw stimulus, Geithner said.
“Planning for an eventual exit is the responsible and necessary thing to do, but we are not yet in the position where it would be prudent to begin to withdraw fiscal and monetary policy support,” Geithner said in remarks released after a meeting of finance ministers and central bankers from the Group of Seven nations.
“Exit will not be like flipping a switch,” he said. “Instead, as conditions stabilize and growth strengthens, we will unwind the extraordinary policy measures we’ve taken, phasing them out carefully to avoid a damaging cliff.”
Signs, Signs, Everywhere A Sign
One might expect to see a few signs given the $trillions in expansion of the Fed's balance sheet along with the massive stimulus programs coming from Congress.
However, cash-for-clunkers just blew up and we will soon find out what housing does after $8,000 handouts are taken off the table, and the Fed's monetization of treasuries stops.
Certainly the stock market has recovered, but it is highly debatable if the stock market is any kind of leading indicator. I will have more in a look at leading indicators next week.
If one wants to consider signs, look no further than the treasury market which is flashing a huge warning message with a flattening of the yield curve. The 10-year note has fallen from a high of 4 to 3.22, 78 basis points of flattening.
If the treasury market was expecting a sustainable recovery, yields at the low end would not be sitting near 0 with yields on the top end falling like a brick.
This is the same warning message people have ignored before.
Yes Timothy, there are signs. However, the signs I am looking at suggest this recovery is not what you make it out to be.
Here is an email from "FJ" regarding his attempt to enter the mortgage modification program at Fannie Mae. "FJ" writes:
Hey Mish,
I always found it humorous when you posted people's dealing with their mortgage lender, hence my personal submission.
We applied for Fannie Mae's mortgage modification program only to be denied during the probation period for paying too early. Evidently, paying your mortgage one day early signifies an "over willingness" to pay (i.e. keep current) and from FNM's perspective. That means you can afford the original payment.
Here was my response:
"Look man, I'm on my second layoff in 2 1/2 years and my wife's company is hanging by a thread so I think I'll stop paying you now. For the next 6-12 months I'll save what would normally be spent on carrying/maintaining our underwater mortgage, while you run through the process of foreclosing.
My loan's non-recourse so no worries there. And we'll have no problem renting a home just as nice for 1/3 the cost. The way I see it, I need incentives to stay."
And that's where I left it.
FJ
"FJ" if you can really rent for 1/3 the cost you should get some professional advice about walking.
Note that the lenders (Fannie Mae, Freddie Mac, Bank of America, Wells Fargo, etc.) are stuck in a Morton's Fork.
Once someone decides to stop paying, the loan may be irrecoverable no matter what incentives the lender offers down the road. On the other hand, if the lender offers new terms to anyone who asks, everyone will ask. Either way the lender loses. Moreover, the lender may not easily be able to figure out which option is worse.
The only time the lender is not forked is when someone has a lot of equity in the house issues a threat. Otherwise the lender has to choose between two very unpleasant alternatives, perhaps without even being aware.
Once again today's job numbers show Collectively, Economists Are A Perpetually Optimistic Lot. Payrolls were expected to drop 175,000, the median of 84 estimates in a Bloomberg News survey of economists. Forecasts ranged from decreases of 260,000 to 100,000.
Jobs losses this month totaled 263,000, worse than even the most pessimistic economist projection.
Actually, economists missed by another 13,000 because revisions subtracted 13,000 from payroll figures previously reported for August and July.
Moreover, the unemployment rate hit the highest level since 1983.
What really caught my eye though is the expected backward revision coming February 2010.
The Labor Department today also published its preliminary estimate for the annual benchmark revisions to payrolls that will be issued in February. They showed the economy may have lost an additional 824,000 jobs in the 12 months ended March 2009. The data currently show a 4.8 million drop in employment during that time.
The projected decrease was three times larger than the historical average, the Labor Department said. Most of the drop occurred in the first quarter of this year, probably due to an increase in business closings, the government said.
At this point in the cycle birth death numbers should have been massively contracting for months. The BLS is going to keep adding jobs through the entire recession in a complete display of incompetence.
“Most of the additional job loss… appears to be due to in part to an increase in the number of business closings,” said BLS Commissioner Keith Hall in a statement.
The BLS’s birth/death model underestimated just how many businesses were folding — particularly during the January through March quarter — as the recession worsened.
Economists had been bracing for a downward revision, but not necessarily one of this magnitude, which means the U.S. has likely shed more than 8 million jobs since December 2007. For example, in a note Thursday, Goldman Sachs economist Ed McKelvey said he expected the revision to be “on the order of -150,000 to -200,000.”
“It’s a huge number, much more than usual,” said Nigel Gault, chief U.S. economist at IHS Global Insight. The government’s models “tend to assume dying firms get replaced, but that didn’t happen.”
Mr. Gault said the revisions suggest the economy was doing even worse in the first quarter than previously assumed, and cast doubts on the recovery.
Look for the BLS to partially correct previous errors in the January jobs report (coming out in February). Note that the BLS claims "Most of the drop occurred in the first quarter of this year, probably due to an increase in business closings."
Probably?
In other words the BLS is going to revise the number by 824,000 and does not even know why even though supposedly it knows when and by how much.
At any rate, that is an extra 68,666 jobs per month the BLS was off between March 2008 and March 2009 with most of the drop coming January-March 2009.
If the BLS conveniently changes the participation rate, the reported unemployment rate may not even drop.
Sorry folks, I was one month early. In January I forecast the unemployment rate would hit 9.8% by August. Meanwhile, even though it was clear the Fed was wildly off base in its adverse scenario, the Fed upped it total to a mere 9.2% to 9.6% for the year as noted on May 21, 2009 in Fed's Economic Forecast Worsens; Still Ridiculously Optimistic.
The Fed's forecasts, released as part of the minutes from its April meeting, show that its staff now expects the unemployment rate to rise to between 9.2% and 9.6% this year. The central bank had forecast in January that the jobless rate would be in a range of 8.5% to 8.8%, but the unemployment rate topped that in April, hitting 8.9%.
Even the Fed's revised forecast has now proven to be optimistic although there are still three months to go.
Nonfarm payroll employment continued to decline in September (-263,000), and the unemployment rate (9.8 percent) continued to trend up, the U.S. Bureau of Labor Statistics reported today. The largest job losses were in construction, manufacturing, retail trade, and government..
Establishment Data
click on chart for sharper image
Highlights
263,000 jobs were lost in total vs. 216,000 jobs last month.
64,000 construction jobs were lost vs. 65,000 last month.
51,000 manufacturing jobs were lost vs. 63,000 last month.
147,000 service providing jobs were lost vs. 80,000 last month.
39,000 retail trade jobs were lost vs. 10,000 last month.
8,000 professional and business services jobs were lost vs. 22,000 last month.
3,000 education and health services jobs were added vs. 52,000 added last month.
9,000 leisure and hospitality jobs were lost vs. 21,000 added last month.
53,000 government jobs were lost vs. 18,000 last month.
A total of 116,000 goods producing jobs were lost (higher paying jobs). It was nearly a clean sweep again this month with education and health services jobs contributing a mere 3,000 jobs to the plus side.
The one cheery bit of news in the above numbers is the loss of 53,000 government jobs. Unfortunately, this trend is likely to reverse in a major way with as of yet unannounced son-of-stimulus and grandson-of-stimulus jobs packages.
Note: some of the above categories overlap as shown in the preceding chart, so do not attempt to total them up.
Index of Aggregate Weekly Hours
Work hours dropped .1 to 33.0. Short work weeks contribute to household problems. Moreover, before hiring begins at many places, work weeks will increase.
Birth Death Model Revisions 2008
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Not sure what happened to the format of the following table but here are this months birth/death revisions.
Birth Death Model Revisions 2009
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Birth/Death Model Revisions
After the typical in January in which the Birth/Death Model revisions bore some semblance of reality, the Birth/Death numbers remain in deep outer space.
At this point in the cycle birth death numbers should have been massively contracting for months. The BLS is going to keep adding jobs through the entire recession in a complete display of incompetence.
Think consumers are not cutting back on discretionary spending?
Please note that one cannot subtract or add birth death revisions to the reported totals and get a meaningful answer. One set of numbers is seasonally adjusted the other is not. In the black box the BLS combines the two coming out with a total. The Birth Death numbers influence the overall totals but the math is not as simple as it appears and the effect is nowhere near as big as it might logically appear at first glance.
BLS Black Box
For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle.
The BLS has admitted however, that their model will be wrong at economic turning points. And there is no doubt we are long past an economic turning point.
Here is the pertinent snip from the BLS on Birth/Death Methodology.
The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.
The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.
Household Data
Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent.
The civilian labor force participation rate declined by 0.3 percentage point in September to 65.2 percent. The employment-population ratio, at 58.8 percent, also declined over the month and has decreased by 3.9 percentage points since the recession began in December 2007.
In September, the number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed at 9.2 million. The number of such workers rose sharply throughout most of the fall and winter but has been little changed since March.
Persons Not in the Labor Force
About 2.2 million persons were marginally attached to the labor force in September, an increase of 615,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.
Among the marginally attached, there were 706,000 discouraged workers in September, up by 239,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The other 1.5 million persons marginally attached to the labor force in September had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.
Some "Recovery"
In a typical recovery, the participation rate should go up not down. The reason is people hear there is a recovery, hear things are getting better, hear the talk about "green shoots" and think there might be a job if they go looking.
Instead we see the participation rate drop by .3 and the civilian labor force drop by 571,00 workers. In normal condition, the civilian labor force ought to be growing by 120,000 a month due to increasing population and immigration.
Is this a "recovery"?
Table A-5 Part Time Status
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The chart shows there are 9.18 million people are working part time but want a full time job. A year ago the number was 6.3 million. This series has stabilized for the last 6 months.
The key take-away from this series are the millions of workers whose hours will rise before companies start hiring more workers.
Table A-12
Table A-12 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
Grim Statistics
The official unemployment rate is 9.8% and rising. 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.
It reflects how unemployment feels to the average Joe on the street. U-6 is 17.0%. Both U-6 and U-3 (the so called "official" unemployment number) are poised to rise further although most likely at a slower pace than earlier this year.
Looking ahead, there is no driver for jobs and states in forced cutback mode are making matters far worse.
Unemployment is likely to continue rising until sometime in 2011.
Depression Level Statistics
I consider these job losses to be depression level totals. Admittedly conditions are not as bad as the great depression, but this is certainly no ordinary recession by any economic measure including lending, housing, bank failures, jobs, the stock market, commodity prices, treasury yields etc. For more on this idea please seeHumpty Dumpty On Inflation.
GoldMoney: The Best Way to Buy Gold and Silver
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