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Thoughts from the Frontline

Debt Be Not Proud

September 8, 2012

Choose your language

"In the financial markets, the current economic cycle is still often viewed as if it is comparable to the far shorter cycles we have experienced since World War II. If that was indeed the case, the solution would be to implement fiscal and monetary stimuli now until lending to the private sector and thereby growth rise substantially. However, what is being overlooked is that the total debt/GDP ratio has risen so sharply over the past 75 years that the limit has probably been reached.

"That would mean that the governments and central banks can no longer create high growth; at best they can prevent growth from sliding fast. In addition, the drawbacks for central banks of opening the liquidity taps further are growing, while the effectiveness of the action is waning. Therefore, although we anticipate the Fed to embark on additional easing measures, we believe they will be disappointing in scope and effectiveness. For the ECB, maintaining the EMU and the euro is more important. To achieve that, interest rates in Italy and Spain have to be rapidly reduced. Nevertheless, the measures the ECB recently announced will achieve no more than creating a degree of calm in the financial markets, unless Spain and Italy make substantial structural reforms to their economies. However, there is great resistance to those reforms."

- ECR Research

The unemployment numbers came out yesterday, and the drums for more quantitative easing are beating ever louder. The numbers were not all that good, but certainly not disastrous. But any reason will do, if what you want is more stimulus to boost the markets ever higher. Today we will look first at the employment numbers, because deeper within the data is a real story. Then we look at how effective any monetary stimulus is likely to be.

I am in Carlsbad today at the Casey Research Investment Conference. I got to hear my good friend Dr. Lacy Hunt give a presentation on monetary policy, and he was on fire. I think I persuaded David Galland of Casey Research to give me access to the speech for you, when it is available, and you will want to listen to it. It was one of the best speeches I have heard on current monetary and fiscal policy in a very long time. In this week's letter I will touch on a few of his points and make a few of my own. Let's jump right in, as there is a lot to cover.

How Down Can Be Up If You Create the Rules

The nonfarm payroll numbers showed an increase of just 96,000 jobs in August. This was almost dead on the average for the last six months, which is 97,000, down from 205,000 the previous six months, echoing the pattern of last year and suggesting the numbers for the next two months will be soft as well, just prior to the election.

Almost all…

Discuss This


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Walter Clayton

Sep. 10, 2012, 9:50 a.m.

96,000 jobs added last number, I personally saw 100 programming jobs go from Irving, TX NEC America to India recently, if all fortune 500 companies did the same thing in the same time period (let’s say on average) that would make up the short-fall in the jobs number which was and expected 140 to 150K jobs… “No?”

So what should continue if the “good” jobs in the USA are streaming out of the country to lower cost labor pools (a manager was looking at two prints of “code” he said, “I paid $60 an hour for this—the American code—and he said, ‘OK, but nothing to write home about.’” Then holding code from an Indian source…  He said, “Now this! This is not only better code, it’s ‘elegant’ in it’s style and composition, and I pay $12 an hour for it.”

What do I think will continue to happen to the really good paying jobs in the USA, what do you think? (If my anecdote is as generalized as I think it truly is…)

When the artificially high earnings/wages of all career levels match what “the manager” can get in India… then we will create millions of new jobs.

‘Won’t happen though, will it??



Isao Narikawa

Sep. 9, 2012, 4:40 p.m.

Is it a given that GDP growth will return jobs in large numbers? We’ve been through two great bubbles (dot com and financial) that have inflated our employment picture. These bubbles have been masking the fact that we’ve been negatively impacting employment for decades due to the exporting of jobs and industries to emerging economies. Also our recent emphasis to reduce the size of government is providing additional pressure on employment. What new industries will create the 5 million jobs that Romney said he will create in his first term? I’m not convinced that anyone (Obama or Romney) can create substantial job growth without the creation of new industries or the resurrection of traditional ones.

Tom Morrison

Sep. 9, 2012, 2:12 p.m.

So much commentary in this area focuses on the ration of debt to GDP.  Do we have a chart of the ratio of actual interest payments to GDP?

Steve Weise

Sep. 9, 2012, 11:21 a.m.

John:  Can you steer us toward more source information on the disability story, besides the CBO quote?  Having worked with and in power plants for many years, these industrial facilities have become much safer for workers over the past 30 years.  I venture to say that is true in other heavy industry, construction and manufacturing.  In addition, the loss of manufacturing and construction jobs has reduced workers’ exposure to disabling hazards.  So, why are these rolls going up?  Of course there are legitimate cases as noted in earlier posting.  Is this a sign of government “blind eye” toward fraud in order to cook the books and redistribute wealth or is this a trend explained by changes in what the definitions of qualifying disabilities are, or ???  I get the piece about some workers being accommodated in the workplace & then losing their job, but does that truly explain the data?  Thanks.

Craig Cheatum

Sep. 9, 2012, 10:17 a.m.

I agree that liquidity enhancements only have a minor (or possibly negative ) impact on the economy.  We’ve had some $10 Trillion of borrowed money (so it doesn’t compete with the private sector for funds) over the last 10-12 years for funding of tax cuts for “job creators”, two wars in the Middle East, Medicare Part D subsidies to the health care providers, and Wall Street bailouts.  None of this stopped the financial crisis, can be linked directly to jobs (except the net job growth during the Bush years were government jobs, some 350,000), or to an improvement in the economy.  A small part of the borrowed funds went to protecting those laid off and infrastructure spending.  From an economic standpoint, one could say that most of the money has been squandered.  The problem is likey lack of aggregate demand.

The real problems we face could be characterized as bubbles that our leaders in government and the private sector are not debating (and should be), but are caught in what could at best be termed name-calling.  All of these bubbles severely undercut our competitiveness and lack of aggregate demand:  We spend twice as much on health care:  We spend more on the military and national security than all of our competitors combined:  Federal tax revenues have been declining for decades:  We start off each year at -4% GDP because of our trade deficit (it’s hard to get to zero for sure):  70% of an economy based on consumer buying is way out there:  Corporations pay only 10% of federal revenues:  Average middle class salaries are what they were 30 years ago—without a vibrant middle class this economy is going nowhere:  Welfare programs are way too large for individuals and corporations;  and, outstanding derivatives are in the range of $300-700 Trillion (systemic risk). 

Other countries (Germany, Switzerland) support country competiveness by having universal health care, universal college education or trade school training and apprenticeship.  We are slipping in competiveness while others are rising (Taiwan, South Korea).

Term limits of 4 years with two terms maximun (not concurrent) would help a lot, as well as a variable Federal tax rates to pay as you go so players can’t game the system.

This is just a partial list of ideas, everyone can add their own to the debate.  But the question that should be asked; Does it improve our competiveness?

Craig Cheatum

Jane Fox

Sep. 9, 2012, 9:31 a.m.

When I hear that the Meals on Wheels program is one programs on the Republican’s chopping block I shudder. The reasons given is the tax breaks to those who can create jobs will simulate the economy to make more jobs for everyone. This is so insane. People who use Meals on Wheels do so because they cannot work. So it really doesn’t matter how many jobs are out there, these “lazy good for nothing disabled and elderly” will not take advantage of all these jobs. Like the gentleman who posted earlier, Scott’s brother will never be able to utilize all the jobs the job creators will make.

paul fyke

Sep. 9, 2012, 7:49 a.m.

See also - the September 2011 BIS Working Papers # 352 - “The real effects of debt” by Stephen G Cecchetti, M. S. Mohanty, and Fabrizio Zampoli.  Unfortunately, most of this research does not focus enough on the additional drag imposed by both the demographics of retirees and the increasing number of people utilizing the social safety net.  This is a major issue for the US.  Each one of these components - the level of debt, the increasing number of retirees, and the increasing number of people on the dole - are all coming together like the weather factors in the perfect storm.  And sadly, we have a President, for whom i voted, who has ignored these issues, except for lip service, for 4 years.  Another 4 should do the trick for sure.  What my very liberal friends fail to appreciate is the fact that staying on this course almost guarantees that we, like Greece, will wind up in a position where we can’t pay anybody what has been promised.

Gordon Davis Jr

Sep. 9, 2012, 7:18 a.m.

I think central banks around the world have figured out that the only viable exit to the sovereign debt crisis is worldwide currency debasement.  No, they’re not going to tell us that, but I suspect that’s the unwritten policy despite the inflationary dangers.  If that’s the case, then QE will be with us for years to come.  If you’re trying to figure out a reason to be bullish on the stock market that may be it, although it scares the heck out of me.

chris bolles

Sep. 9, 2012, 6:59 a.m.

As the Eurozone waddles from 17 bloated governments toward a single, Titanic-bloated government, the implications of the following, in human terms, are horrifying:
    “...the authors confirm that public debt overhang episodes are associated with growth over one percent lower than during other periods. ... duration of the average debt overhang episode across all 26 episodes lasted an average of 23 years…”

jefferis peterson

Sep. 8, 2012, 9:16 p.m.

You wonder why the little guy, like me, totally does not trust the market? Because it looks like is rigged and rigged for political reasons by a priestly economic class, whose intelligence, or should I say, wisdom, is questionable at best.  It reminds me of the Wizard of OZ, all pretense and posturing, until a little dog exposes his nakedness behind the curtain.  The Fed is not supposed to manipulate the stock market, but that is what it appears to be doing. These are acts of either complete desperation or crass political partisanship. If the former, I understand they cannot control unrestrained US Gov spending, and are only grabbing at straws, but if they latter, in an effort to appease the current administration, they will lose what little legitimacy they have left.
Like Draghi buying up all the debt of the insolvent nations, this cannot end well… A temporary reprieve, a sucker’s rally, and a walk to the guillotine lies ahead.