Here is a great chart that Bill McBride @ Calculated Risk puts out periodically to contrast the current employment debacle with previous post- war recessions:
This is what an energy bankruptcy looks like, folks. It’s not Congress’ fault other than their inability to level with you about the real problem, which is parked at the end of your driveway.
You can drive or have a job, it’s that simple.
The pols can promise what they like but unless someone can deliver 4 more Saudi Arabias pumping furiously there will be no end to this recession and it will get far, far worse.
You won’t get the truth from the Establishment but you can find it here!
The next surge in unemployment will take place when QE becomes official. Unemployment is behind the loss of velocity that John Hussman pointed out last week.
… the hallmark of a liquidity trap is that holdings of money become “infinitely elastic.” As the monetary base is increased, banks, corporations and individuals simply choose to hold onto those additional money balances, with no effect on the real economy. The typical Econ 101 chart of this is drawn in terms of “liquidity preference,” that is, desired cash holdings, plotted against interest rates. When interest rates are high, people choose to hold less cash because cash doesn’t earn interest. As interest rates decline toward zero (and especially if the Fed chooses to pay banks interest on cash reserves, which is presently the case), there is no effective difference between holding riskless debt securities (say, Treasury bills) and riskless cash balances, so additional cash balances are simply kept idle.
A related way to think about a liquidity trap is in terms of monetary velocity: nominal GDP divided by the monetary base. (The identity, which is true by definition, is M * V = P * Y. The monetary base times velocity is equal to the price level times real output).Velocity is just the dollar value of GDP that the economy produces per dollar of monetary base. You can also think of velocity as the number of times that one dollar “turns over” each year to purchase goods and services in the economy. Rising velocity implies that money is “turning over” more rapidly, so that nominal GDP is increasing faster than the stock of money. If velocity rises, holding the quantity of money constant, you’ll observe either growth in real output or inflation. Falling velocity implies that a given stock of money is being hoarded, so that nominal GDP is growing slower than the stock of money. If velocity falls, holding the quantity of money constant, you’ll observe either a decline in real GDP or deflation.
Unemployment benefits are a transfer of funds from one liquidity trap being carried by the benefits themselves to another liquidity trap/bank vault. Unlike a worker in a going concern there is no value or new money added, no excess return directed toward that worker.
Benefits or no, the cost of unemployment is borne by the economy as a whole as that (ex) worker will still make demands against the system he once supported. Unemployment is self- reinforcing. The lack of workers/wages represents a net loss of final demand which in turn causes more business failure and more unemployment.
Cheap money creates a perverse incentive. Companies ask, ‘Why hire a worker when money can be hired, instead?’ When Hussman sez, “banks, corporations and individuals simply choose to hold onto those additional money balances …” what he implies is that these entities are being paid to do so, by the effect the liquidity trap has on the value of money itself. Liquidity traps are self- reinforcing.
If the value of the funds in the traps shrinks – due to F/X for instance – this is compensated by the increase in the amount of funds in the traps. If the value of funds increases – which I observe taking place regardless of F/X – the traps represent a capture of real wealth that has been extracted from the public by way of the central bank(s).
The traps are asset bubbles that in their time will deflate. Long before the promoters of these Ponzi schemes will have fled with the funds leaving the ‘dumb money’ with empty bags …
State and municipal government bigs will go to Washington next year, hats in hand, looking for their next fiscal fix. The Tea Baggers are out for blood against public worker unions so the cost of ‘dope’ will be exorbitant. More will head for the unemployment line. Meanwhile, if the returning Congress fails to pass legislation before January extending unemployment bennies, the situation could get ugly.
The Tea folk should be careful of what they wish for. The old Reagan- Gingrich bromides have lost their potency. Without meaningful conservation of energy – to balance the energy books – there will be no recovery but accelerating deflation that sweeps all before it.
Meanwhile, a couple of commodities to keep an eye on besides crude are coffee and cotton. Prices are subject to a pricing trifecta: bad weather for both crops in major growing regions, higher fuel prices effecting transport and the flood of cheap ‘hot money’ capital flowing into producing countries, stoking inflation. Here’s the word on cotton:
… Hanesbrands, the maker of Champion, Hanes and Playtex, says price increases will be in place by February, and prices could go up further if cotton prices remain where they are.
Other apparel makers say they have held the line on prices this year, but next year will be different. The V. F. Corporation, the maker of 7 for All Mankind and The North Face, says most brands will probably cost more next year, and its cotton-heavy jeans lines are particularly susceptible to increases. Jones says its increases could be in the high single digits or more.
The problem is a classic supply and demand imbalance, with the price of cotton rising almost 80 percent since July and prices expected to remain high. “World cotton production is unlikely to catch up with consumption for at least two years,” said Sharon Johnson, senior cotton analyst with the First Capital Group, in an e-mail.
Cotton inventories had been low because of weak demand during the recession. This summer, new cotton crops were also depleted because of flooding in Pakistan and bad weather in China and India, all major cotton producers.
It’s not just your yearly pant that will become more pricey, here is the coffee chart from TFC Charts:
Supply crunch: With U.S. coffee stockpiles at multi-year lows and world coffee exports down 5.2% in July compared to a year earlier, worries about a supply crunch have driven prices higher.
“It’s the age-old principle of supply and demand,” said Hector Galvan, a senior trading adviser at RJO Futures. “The larger coffee-growing nations like Colombia and Brazil are having really significant issues getting good crop out to the market.”
And while a large crop is expected in Brazil next year, he said poor weather conditions could further cut production in Vietnam and Central American countries from 2010 to 2011.
The current behavior of prices reflects uncertainties concerning short-term coffee supplies,” Néstor Osorio, executive director of the International Coffee Organization, said in a statement.As uncertainties persist, investors are placing significant bets on where prices are headed, said Galvan, with prices approaching the psychologically important $2-a-pound level. “With all these supply fears, investors are jumping on the money train – even mom and pop investors want to jump on because of how evident the [production] issues have been over the last couple months,” he said.
Futures for December delivery settled at $1.95 a pound Thursday.
Sooner or later our latte is going to jump as this kind of increase is hard to absorb by coffee retailers. Of course, at some point the market for $3 dollar coffee will collapse as people start drinking less. Take that Paul Krugman!
Here’s the cotton chart:
Both these commodities have gone from being merely bullish to super- bullish over the past few months. Frenzy about QE is driving these commodity prices as well as the low cost of carry trade funds. You look at this price action and you wonder about the efficacy of super low short term interest rates. They have long since reached the point of diminishing returns.
I don’t see these prices as inflationary, rather as consequences of supply being unable to keep up with demand, in this market the issue is weather effecting supply. There is no wage pressure behind these rises other than in producing countries. Coffee is an inexpensive luxury, customers can work around price increases at small cost to themselves. Cotton customers can adjust to higher prices by switching brands or doing without.
On the other hand, businesses suffer as their margins are squeezed. Eventually more and more and more and more brands find themselves in trouble.
This is a characteristic of our finance/energy crisis, the effects have been felt at the business margins, effecting employment, labor earnings and profits.
EDIT: It looks as if Americans who cannot identify John Maynard Keynes will get a chance to learn from tail risk:
Let me get this straight: the voodoo economic crowd who have been proven time and again to be scoundrels and outright criminals are back for a rerun. Who sez there are no second acts in American lives?
In a way I feel sorry for the newbies since they really have no clue, understanding only their own propaganda. The force that is their own cowardice is largely what will undo them – and us too in the process. Ours is an ironic country in an ironic universe but the weight of irony will fall most heavily on those who chose not to understand what form irony manifests itself.
I feel less sorry for the holdovers who had a choice to grasp the truth and show courage. This is the common connection of the new and the old, the universal cowardice of the political body, institutionalized and ossified.
Perhaps in two more years America can find some politicians with some guts.