America's Undiagnosed Economic Cancer

Since the 1990s, the Federal Reserve and Washington--under their respective contemporary leadership--have been veritable tumors on the U.S. corpus economicus. The chemical marriage between our nation's central bank and central government has been--undoubtedly--the primary cause of our precipitous and painful decade-and-a-half economic decline. Tragically, the majority of Americans don't understand our economy's chronic disease.

The Undiagnosed Disease

In the 1990s, the Federal Reserve and the federal government--of which Republicans and Democrats shared control--made concurrent terribly-ill-advised policy changes that precipitated the disastrous bubble-bust paradigm that's been disintegrating our economy over the last 15 years.

That decade, the Fed, led by Alan Greenspan, began the modern Fed tradition of pumping liquidity for long periods of time in the wake of recessions. At the same time, the federal government, whose Legislative Branch was controlled by Republicans and whose Executive Branch was controlled by Democrats, passed the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, a law created in the wake of the Great Depression that prohibited deposit banks from "investing" (read: playing with) depositors' money. (Indeed, there are many similarities between the modern Fed and federal government and those of the years preceding--and during--the Depression.) Armed with cheap capital pumped by the Fed and a carte blanche to throw around other peoples' government-insured money, investors went wild, dumping buckets of Dollars into over-valued tech companies and preposterous dot-coms, multiplying their foolish, nearly-risk-free bets hundreds of times over through a derivatives market that had been recently deregulated by said bipartisan-controlled federal government. Not surprisingly, the tech bubble eventually burst, the financial system crashed, and the American economy began to feel the symptoms of its new economic cancer.

During the early 2000s recession, the Fed and federal government attempted to reinvigorate the economy by inflating another bubble, the housing bubble. Greenspan's Fed once again kept interest rates dangerously low to promote borrowing, even though inflation was becoming problematic. By summer 2008, the median price of a gallon of gas in this country had risen to--in 2014 dollars--$4.70, a 400% increase in 10 years! The price only returned to earth when the economy crashed.

Also in the 2000s, the Fed began vigorously enforcing the Community Reinvestment Act, a passable 1970s law made draconian in the 1990s through legislation passed by--once again--the Republican-controlled Congress and signed by the Democrat-controlled White House. The new incarnation of the CRA forced lending institutions to accommodate sub-prime borrowers, a move that was supposed to stimulate the housing market and create equity for the poor. Instead, the CRA created a proliferation of so-called "toxic" mortgages that found their way into investors' portfolios due to legislation sponsored by Democrats Barney Frank and Chris Dodd--and passed by the Republican-controlled Congress and White House--that reduced the mortgage-buying standards of Government Sponsored Enterprises Fannie Mae and Freddie Mac.

With their standards watered-down, Fannie and Freddie began repackaging toxic mortgages as toxic investment vehicles and selling them to institutional investors, who gladly snatched them up with their cheap, nearly-risk-free capital pumped by the Fed and backed by the federal government. (Sound familiar?) Once again, institutional investors multiplied their foolhardy bets hundreds of times over through the newly-deregulated derivative market. Eventually, the housing bubble, the largest asset bubble in the history of the United States (so far), led to the greatest economic collapse the U.S. had suffered since the Great Depression, a collapse whose aftermath is still apparent in the job market 6 years later.

The Overlooked Primary Symptom

The decay of the job market has been--by far--the most painful symptom of our economic cancer. Yet, it's one that's tragically overlooked by the majority of the population, whose employment hasn't been negatively affected and whose comprehension of our jobs crisis is limited by the consistently-unrealistically-optimistic employment data the government spoon-feeds them via the mainstream media. Indeed, one of the many insidious aspects of this economic depression is that the overall malaise has been--for the most part--a function of the suffering of an oft-underestimated and disregarded statistical minority: the long-term unemployed and underemployed, whose earning potential and contribution to consumer spending and investment have been crushed. Recall the following chart I published a while back:

In 2012, America's 28 million unemployed or underemployed workers, who earned a median of $16,000 from unemployment benefits and/or menial employment, forwent OVER A TRILLION DOLLARS in potential earnings. Nothing has been a bigger drag on the economy than lost earnings, which reduce consumer spending--the largest segment of the economy--in the short-term and, in the long-term, delay "life milestone" contributions to the economy such as home ownership and child rearing. The jobs crisis has been--by far--the most acute symptom of our economic cancer, yet its negative influence on the economy as a whole is often overlooked due to its highly-localized nature.

Of course, the jobs crisis has been painful in ways that far transcend negative influence on GDP growth. (GDP growth, by the way, might not be the best measurement of economic progress anyway.) Far worse than deflating GDP, the crisis has crushed dreams, turned lives upside-down, and created a new economically-lost generation. It's been particularly hard on young men, whose unemployment and underemployment rates have been consistently higher than those of women of most any age, yet are biologically hard-wired and socially-conditioned to be breadwinners. Lamentably, that devastating detail is also often overlooked.

(As a side note, I highly recommend Gawker's extensive collection of stories of young male professionals who have been emasculated by the jobs crisis. The series, entitled "Men Talk About Being Unemployed in Their Prime", serves as a poignant reminder that long-term unemployment and underemployment aren't just data sets; they're critical human conditions.)

The Missed Diagnosis

Tragically, most Americans fail to see past their own political myopia to identify our nation's economic cancer. Republicans and Democrats blame each other, of course, and the majority of Americans are too ignorant of economics to realize that the MSM's question "which party is to blame?" is a fallacious one. A web search of "blame for Great Recession" yields tens of thousands of results neatly divided by party line. In reality, both parties contributed to our nation's economic collapse, and no entity contributed more than the Federal Reserve.

Appallingly, the Fed, now under the stewardship of newly-sworn-in Chairwoman Janet Yellen, is perpetuating the carcinogenic Keynesian monetary policy it adopted under Greenspan and continued under Bernanke. The ultra-wealthy, whose net worth is highly-dependent on the success of the Fed-juiced stock market, have been making money hand-over-fist during this depression. Average Americans, on the other hand, have been getting poorer.  New bubbles have been inflated; new malignant tumors have been created. The cancer spreads unbeknownst to most Americans.

Seth Mason, Charleston SC

Jobs Depression Year 6: More Americans Worse Off Financially

Gallup reports that, in the last year, more Americans have become worse off financially than better off. This revelation--five and a half years after the fall of Lehman--is just the latest evidence that our jobs depression continues. (Article continues after chart.)

For years, I've been calling this period of American history a jobs depression. Before calling me a Chicken Little for using the "D" word, please keep in mind that, while there's no official definition for "depression" in an economic sense, most economists call protracted periods of economic malaise "depressions".

And the last 6 years have absolutely been a protracted period of economic malaise.

Years after the economy bottomed in 2009, the epidemic of long-term unemployment and underemployment continues to afflict the American workforce. Incredibly, 5 years into "recovery", fewer jobs were created last year than the year before. And, as has been the case throughout this depression, the vast majority of jobs created last year were menial in nature. Very few new "breadwinner" jobs.

Keep in mind that the unacceptably tepid jobs recovery that we have had has been merely a result of the inflation of the Fed's latest asset bubble. The Fed's balance sheet just passed $4 trillion...that's 22% of the entire economy! The Fed has been feigning healthy economic growth for years by inflating what Nouriel Roubini is calling the "mother of all bubbles".

Seth Mason, Charleston SC

No Recovery For "Breadwinner" Jobs

Former Reagan budget director David Stockman has been quite outspoken about the Federal Reserve's role in collapsing the economy. Much of his new book, The Great Deformation, explains how the Fed led us into this economic depression and how our central bank is now inflating an asset bubble that will eclipse the mid-2000s housing bubble. This new, larger bubble, Stockman says, will eventually burst and crash the economy once more.
 
In The Great Deformation, Stockman frequently notes that the post-Great Recession "recovery" has been nothing but rampant Fed-fueled asset speculation. In Chapter 31, the former budget director explains that, while the speculation has been a windfall for the wealthiest among us, it's done next to nothing to improve the atrocious job market:

After the US economy liquidated excess inventory and labor and hit its natural bottom in June 2009, it embarked upon a halting but wholly unnatural “recovery.” The artificial prolongation of the Bush tax cuts, the 2 percent payroll tax abatement and the spend-out of the Obama stimulus pilfered several trillions from future taxpayers in order to gift America’s present day “consumption units” with the wherewithal to buy more shoes and soda pop.

But there has been no recovery of the Main Street economy where it counts; that is, no revival of breadwinner jobs and earned incomes on the free market.

What we have once again is faux prosperity. In fact, the current Bernanke Bubble is an even sketchier version of the last one and consists essentially of the deliberate and relentless reflation of financial asset prices.

In practice, this amounts to a monetary version of “trickle down” economics. By September 2012, personal consumption expenditure (PCE) was up by $1.2 trillion from the prior peak, representing a modest 2.2 percent per year (0.6 percent after inflation) gain from the level of late 2007. Yet half of this gain—more than $600 billion—reflected the massive growth of government transfer payments, and much of the rebound which did occur in private consumption spending was concentrated in the top 10–20 percent of households. In short, the Fed’s financial repression policies enabled Uncle Sam to fund transfer payments for the bottom rungs of society at virtually no carry cost on the debt, while they juiced the top rungs with a wealth effects tonic that boosted spending at Nordstrom’s and Coach.

The Fed’s post-Lehman money printing spree has thus failed to revive Main Street, but it has ignited yet another round of rampant speculation in the risk asset classes. Accordingly, the net worth of the 1 percent is temporarily back to the pre-crisis status quo ante.

Conservatives often scoff at the phrase "1 percent". But it's absolutely true that Fed liquidity pumping has been great for the wealthiest Americans but bad for the rest of us. The reason is simple: 1) inflation--a natural byproduct of liquidity pumping--is good for most investment classes but bad for nearly every other sector of the economy, and 2) the wealthiest among us have the majority of their net worth in investments that benefit most from inflation: equities, commodities, and real estate.

Needless to say, successful speculation in the fast money complex is not a sign of honest economic recovery: it merely marks the prelude to another spectacular meltdown in the canyons of Wall Street next time the music stops.

In the following subsection, Stockman details the sunset of American "breadwinner" jobs:

The precarious foundation of the Bernanke Bubble is starkly evident in the internal composition of the jobs numbers. At the time the US economy peaked in December 2007, there were 71.8 million “breadwinner” jobs in construction, manufacturing, white-collar professions, government, and full-time private services. These jobs accounted for more than half of the nation’s 138 million total payroll and on average paid about $50,000 per year—just enough to support a family.

Breadwinner jobs also generated more than 65 percent of earned wage and salary income and are thus the foundation of the Main Street economy. Yet after a brutal 5.6 million loss of breadwinner jobs during the Great Recession, a startling fact stands out: less than 4 percent of that loss had been recovered after 40 months of so-called recovery.

The 3 million jobs recovered since the recession ended in June 2009, in fact, have been entirely concentrated in the two far more marginal categories that comprise the balance of the national payroll. More than half of the recovery (1.6 million jobs) occurred in what is essentially the “part-time economy.” It presently includes 36.4 million jobs in retail, hotels, restaurants, shoe-shine stands, and temporary help agencies where average annualized compensation was only $19,000. This vast swath of the jobs economy—27 percent of the total—is thus comprised of entry level, second earner, and episodic jobs that enable their holders to barely scrape by.

The April jobs report exemplifies the dearth of good jobs. While April is historically the strongest month for hiring, this April saw a woefully insufficient number of jobs created, more than half of the new jobs in either the hospitality industry (think: bartenders, waitresses, etc.) or temp jobs. Again, that was in the strongest month for hiring 5 years after Lehman.

The balance of the pick-up (1.1 million jobs) was in the HES Complex, which consists of 30.7 million jobs in health, education, and social services. Average compensation is slightly better at about $35,000 annually and this category has grown steadily for years. Its increasingly salient disability, however, is that it is almost entirely dependent on government spending and tax subsidies, and thus faces the headwind of the nation’s growing fiscal insolvency.

When viewed in this three category framework, the nation’s job picture reveals a lopsided aspect that thoroughly belies the headline claims of recovery. A healthy Main Street economy self-evidently depends upon growth in breadwinner jobs, but there has been none, even during the bubble years before the financial crisis. The Bureau of Labor Statistics (BLS) reported 71.8 million breadwinner jobs in January 2000, yet seven years later in December 2007—after the huge boom in housing, real estate, household consumption, and the stock market—the number was still exactly 71.8 million.

Stockman is saying what I've been saying all along: the economy hasn't been "right" since the Fed's tech bubble burst in the early 2000s. He's saying that all we've seen in the new millennium has been cycles of artificial booms and busts built on shaky fundamentals that have never allowed a full recovery of the job market. Stockman elaborates on the shaky fundamentals in the concluding paragraphs of the subsection:

The faux prosperity of the Fed’s bubble finance is thus starkly evident. This is the single most important metric of Main Street economic health, and not only had there been zero new breadwinner jobs on a peak-to-peak basis, but that alarming fact had been completely ignored by the smugly confident monetary politburo.

Alas, the latter was blithely tracking a feedback loop of its own making. Flooding Wall Street with easy money, it saw the stock averages soar and pronounced itself pleased with the resulting “wealth effects.” Turning the nation’s homes into debt-dispensing ATMs, it witnessed a household consumption spree and marveled that the “incoming” macroeconomic data was better than expected. That these deformations were mistaken for prosperity and sustainable economic growth gives witness to the everlasting folly of the monetary doctrines now in vogue in the Eccles Building.

To be sure, nominal GDP did grow by 40 percent, or about $4 trillion, between 2000 and 2007. Yet there should be no mystery as to how it happened. As has been noted, total debt outstanding grew by $20 trillion during that same period. The American economy was thus being pushed forward by a bow wave of debt, not pulled higher by rising productivity and earned income.

Indeed, the modest gain of 7.5 million jobs during those seven years reflected exactly this debt-driven dynamic and explains why none of these job gains were in the breadwinner categories. Instead, about 2.5 million were accounted for by the part-time economy jobs described above. On an income-equivalent basis these were actually “40 percent jobs” because they represented an average of twenty-five hours per week and paid $14 per hour, compared to a standard forty-hour work week and a national average wage rate of $22 per hour. Thus, spending their trillions of MEW windfalls at malls, bars, restaurants, vacation spots, and athletic clubs, homeowners and the prosperous classes, in effect, temporarily hired the renters and the increasing legions of marginal workers left behind.

Likewise, another 5 million jobs were generated in the HES (health, education, and social services) complex. Here the job count grew by 20 percent, but it was mainly due to the fact that the sector’s paymasters - government budgets and tax-preferred employer health plans - were temporarily flush.

However, these, too, were “debt-push” jobs that paid modest wages. While the steady 2.6 percent annual growth of HES jobs during the second Greenspan Bubble did flatter the monthly employment “print,” it was possible only so long as government and health plans could keep spending at rates far higher than the growth rate of the national economy.

Fed-fueled rampant asset speculation inflated the housing bubble, which burst and crashed the economy, making the prospect of securing a "breadwinner" job but a dream for many intelligent, educated, perfectly employable Americans. Now, the Fed is enabling what notable economist Nouriel Roubini is calling the "mother of all bubbles".

Seth Mason, Charleston SC

U.S. Share Of World GDP Has Fallen 32% Since 2001

Mark McHugh of Across the Street outlines America's economic decline--in both real terms and relative to the rest of the world:

The Cost of Kidding Yourself

In Open Thread on Wednesday, November 28, 2012 at 1:34 pm 

Five years ago, every American would have considered a trillion-dollar budget deficit a national tragedy.  If you believe the CNBC parrot show, NOT having a trillion-dollar deficit is now a sure sign of the Apocalypse.  I speak of course of the cleverly dubbed “Fiscal Cliff,” which panicked CNBC apologists are required to mention no less than 5,000 times a day.  We’re told ad nauseam that going over the cliff will drag the US into recession.  Here’s what we’re not told: The US has been in recession 9 of the last 10 years.  It’s in recession this year, and no matter what CNBC’s financial terrorists say or the idiots on Capital Hill decide, it will most certainly be in recession in 2013.

Creating the illusion of economic growth is easy if you can print money.  It’s a prank you can play on an entire country.  Cut the value of the currency in half and the economy’s size will appear to double.  If it doesn’t, you’re in recession (whether you know it or not).   Cavemen probably understood this concept better than America’s best economic minds.

The only way to accurately measure changes in a nation’s economy is to do so relative to the world (see Notes for non-nerds below before protesting).  According to the World Bank, the U.S. represented 31.8% of the world’s economic activity in 2001. By the end of 2011, that share had dropped to 21.6%, meaning America’s slice of the world economy is 32% smaller than it was a decade ago, and getting smaller every day.  Note that America’s housing bubble did nothing to boost the U.S. on the global stage.

As horrific as these results are, they’re better than Japan’s, whose “lost decade” proved only to be prologue for its “lost-er decade.”  Japan’s share of the world economy fell more than 35% from 2001 to 2011 (literally worse than Zimbabwe) and has now shriveled 54% from its peak.  But Japan’s real collapse did not coincide with the bursting of its stock and real estate bubbles in 1990 and 1991 respectively.  The decline actually began in 1995 when policymakers allowed government debt to exceed 90% of GDP (a milestone the U.S. quietly passed in 2010). 

The more they “fixed” it, the more it broke.  17 years later, the only thing Japan has proved is that smart Japanese economists are about as real as Godzilla.  Time and time again, the country has chosen collapse over admitting failure. On November 19, 2012, Bloomberg reported, “The Japanese government will spend 1 trillion yen ($12.3B) on a second round of fiscal stimulus as it tries to revive an economy at risk of sliding into recession.”  It would be funny if it wasn’t so tragic.

The United Kingdom gets third place in the 2001-2011 major economies’ “Race to Oblivion”, although with a less than 3.5% share of world GDP it’s hard to call this a major economy with a straight face anymore.  While the U.K. printed its way to 24% loss in world GDP, France and Brazil both passed the nation where an actual troy pound of sterling silver now costs about 235 “pounds sterling”.  With government debt expected to reach 88.7% of GDP in 2012, once-Great Britain will soon be seated at the kids’ table at economic summits, if it gets invited at all.

All three of these countries are in death spirals for the same reason:  They believe that they have the ability to avoid recession by simply printing their own money.  As America’s 100-year numbskull (and current Federal Reserve Chairman) Ben Bernanke once mused:

“…the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

True dat, Ben….unless there’s “cost” associated with turning the nation’s currency into the world’s laughing stock….

Oh wait, there is.  So just for fun, let’s project the last ten years growth rates forward another ten years:

And there you have the real New World Order (sorry Freemasons).  In ten years China’s economy will be bigger than those of the U.S., Japan, and the U.K. combined.  What are the chances they will drink the same kool-aid we are presently guzzling?  Will they need, or even tolerate, the opinions spewed by our pundits and politicians?  And more importantly, will the U.S. dollar still be the world’s reserve currency?

Being a war-mongering banana republic isn’t all it’s cracked up to be, and despite what CNBC’s fast-money fuckwits may think, the stock market is not America’s report card.  Wall Street is the white elephant that America can’t afford to feed anymore and China doesn’t have the slightest interest in buying (just take a look at the Shanghai Composite).   Continuing to yield to its tantrums will undoubtedly destroy us.

Fun Facts:  Total U.S. GDP growth in the 20th century was $9.93 Trillion, while the  government accumulated $5.5 Trillion in debt.  In the 21st century, the US has borrowed $10.7T and has a grand total of $5.30T in GDP growth.

***

Notes for nerds: Most of the calculations presented were derived from data compiled by the World Bank which can be viewed or downloaded here.   World GDP was set to 100% and each country’s percentage determined simply by dividing by world GDP.   Japan’s debt as a percentage of GDP from Fred (225% was used for 2011).  Estimate of U.K.’s 2012 Debt/GDP from here.  U.S. GDP stats from USgovernmentspending.com (2012 estimate adjusted for 2% growth).  US debt from Debt to the Penny.

Notes for non-nerds:  How much World GDP changes from one year to the next depends entirely on what is being used to measure it.  For example, World GDP expanded by 109% from 2002 to 2011 in USD terms, but contracted (-59%) in terms of gold.  Using the Euro would produce different results (+59%), as would using barrels of oil (you figure it out).  Looking at countries relative to World GDP is an honest measure of their changes.  To say that Japan is still growing (at least in terms of Yen), but everyone else is growing much, much faster in terms of Yen distorts the reality that  Japan is undeniably shrinking relative to the world (no matter what currency is used).

 Seth Mason, Charleston SC