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“I read the news today, oh boy…” John Lennon

April 12, 2013

While I had intended to blog about tax reform this week, it will have to take a backseat to news of the past several weeks, which has me thinking financial and economic Armageddon may be getting much closer at hand. (No, I am NOT going to talk about North Korea though that is obviously worrisome, as well).  Consider in just the past couple of weeks, we have had the following rather negative economic news:

  • Japanese Monetary Stimulus Announced –The Japanese have made it “official” and have joined the parade of nations, led of course by the good old USA, that are printing more and more currency to help “stimulate’ their economies. The Japanese have decided to DOUBLE the amount of yen in circulation in the next year, which has already resulted in the yen falling substantially in value over the past several months by some 30% versus the dollar (some of it in anticipation of the announcement). There is ONLY one likely outcome of such a policy in the long run, which has occurred time and time again since the dawn of modern civilization and paper currency and that is very high inflation. Of course, the US is even more culpable having almost quadrupled its monetary base since 2008 and the EU, UK and China are pretty close behind. The insanity continues and Wall Street barely shrugs and in fact, in most cases cheers.
  • Cyprus Bank Failure and Near Bankruptcy of the Nation – Cyprus is pretty small so this really shouldn’t have spooked the markets. However, the notion that deposits held in any bank are subject to a sizeable haircut, is something we haven’t seen in the world economy since the bank runs of the 1930s. This is probably why world stock and bond markets reacted so badly for a couple of days. Further, it served as a reminder of the greater reality: the European economy is in very bad shape. Spain, Portugal, Italy and Greece are economies that are contracting and all have huge amounts of debt which appear unlikely to ever be paid off.  The largest European countries (France and the UK ) are also in recession or are likely to be there soon (Germany). The ECB has been printing euros to bail out various countries’ banking problems and even the conservative Swiss have been printing Swiss francs so that they can hold their exchange rate steady with the rest of Europe. Europe’s debt problems are growing worse by the day.
  • Obama 2014 Budget is Released and its Higher (Really?!) than 2012 – When I saw this item at first I thought it was a misprint, but I am afraid it is all true.  The President is apparently serious as he proposes a significant INCREASE in the level of government spending between 2013 and 2014 to $3.78 trillion. This is a 7% INCREASE from 2012 actual levels of $3.54 billion. I have noted many times in this blog, that we must cut government spending NOW in order to deal with our enormous and growing debt problems. (We need to do other things as well, but this is by far the most important item). Cutting spending in the long-term is meaningless in a federal budgetary context. It is a bit like Lucy holding the football for Charlie Brown; it is a promise that is never kept. The only way to assure that you will make the long run progress needed is to start now. Somehow, the neo-Keynesian economists have managed to convince the Administration and many others including most of Wall Street that if we just keep stimulating the economy that eventually all our economic and debt problems will disappear. This misses the fundamental and structural problems with the economy and deficit that are pretty intractable today and will take many years to solve. The sooner we start down this path of solving these problems, the better off we will be in the future, though I think we are heading for a number of years of considerable pain irrespective.
  • Labor Force Participation Rate hits New Low in March—While the news media often focuses on the unemployment rate or even the monthly new jobs numbers, for most economists the more meaningful statistic is the total labor participation rate which is simply those employed divided by the working age population (age 16 and over). Here, the news has been consistently bad since 2008 and only getting worse.  After reaching peak levels of about 67% during 1998-2001, the labor force participation rate stabilized at above 66% between 2002-2008. However, since November 2008, the participation rate has hit the skids starting with the recession and continuing thru the recovery. As of March 2013 , labor force participation rate has hit a new low of 63.3% -the lowest level it has been since May 1979. The reason is that large numbers of workers are continuing to leave the work force or simply have given up looking for a job. However, even the worsening participation rate understates the severity of the economic and human problem that we face in the US, because many of those employed are now in part-time rather than more desirable, full-time jobs.
  • Workers on Social Security Disability (SSDI) Continues To Rise— An excellent article in the WSJ (April 8, 2013) entitled “Growing Disability Rolls Stunt US Recovery” indicated that 4.8% of the population aged 20-64 years old was on disability in 2012 and this number has continued to grow in 2013. In 2003, the percentage was 3.5%. The trend is worrisome for the economy, because it reduces the productive potential of the workforce and means further increases in medical costs.  At a human level, it is tragic. I spent three months on a paid leave of absence in 2000 due to severe back pain and would not want to see anyone have to endure this or any other disability. The psychological and physical trauma are horrendous. 
  • Stock Market hits new all time highs (S&P 1593 and Dow 14865 on April 11)– This has been greeted as good news and there is much celebration on Wall Street and in the mainstream media. The problem, however, is that the Fed thru its money printing and zero interest rate economy in the US is helping to inflate the next big bubble which is The US Stock Market. In my blog post “Cause I’m Free Fallin’ ” on February 4, I provide more details on the long run fundamentals for the stock market and why I think it will be in trouble soon. However, even in the short run, most analysts expect S&P 500 earnings to decline in the first quarter of 2013 which is hardly a positive development.


And other bad economic news abounds. China’s growth is clearly slowing down and it has a massive housing bubble which is starting to burst (see excellent 60 Minutes segment on this topic from several weeks ago). Further, lest you think the declines in real family median incomes in the US over the past few years are bad enough, consider that these are measured using CPI (consumer price index) which runs about 2 percent per year today. However, the CPI is clearly grossly UNDERESTIMATING real inflation which is already at about 6% for the US. ( I’ll have more on this topic in a later blog post) meaning that real median incomes are falling even more in actuality.

Is there any good news out there? The US housing market has been stronger in the past year or so though most of this is likely due to the massive monetary/low-interest rate stimulus and the strength of the market has largely come from investors NOT first time home buyers and thus is probably not sustainable longer term, particularly once interest rates inevitably start to rise.

The Yanks won three in a row this past week so at least that’s good news (from my perspective at least). From now on, maybe I should stick to reading the Sports section.

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