Weekly Review: U.S. Headwinds for 2012

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A rather frightening and somber forecast for the USA in the years to come was published by Econintersect this past week - USA in 2012/2016: An Insolvent and Ungovernable Country.  See first article under author's photo.

In a nutshell, the European think tank LEAP/Europe 2020 sees:

  • US institutional deadlock and the break-up of the traditional two-party system
  • The unstoppable spiral of recession/depression/inflation
  • The breakdown of the US socio-political fabric

Econintersect believes there is enough evidence to support a possibility of an economic death spiral - although it is hard to believe that the lawmakers and Federal Reserve would not intervene to mitigate or reverse this death spiral.  Yet, LEAP/Europe 2020 sees the political system entering a complete deadlock - incapable of action or reaction.

I would like to say I would be surprised if politics got in the way of a solution, but turn on your favorite flavor of news - and listen to the senseless rhetoric.

Employment has been the bee under my bonnet.  No country can survive a widespread lack of jobs.  The USA specifically uses a methodology to define unemployment which is particularly ignorant - as it uses an estimate (survey) and a meaningless definition of who is in the workforce.  We agree with LEAP/Europe 2020 that the real unemployment is near 20%.

If a country cannot deliver jobs, it will likely end in unrest.  Employment is a bigger issue than debt - and the USA "capitalistic" system is particularly good at providing impediments to business creation.  Try to start a handy man business, a restaurant, or even a small delivery service.    You are likely engaged in an illegal activity if you are paid by the little old lady down the street to take care of her.

Better yet, watch your kids get arrested for setting up a lemonade stand.   True capitalism allows the easy creation of a source of income.

For most of the down-and-out unemployed, starting a business is out of the question not only due to the financial impediments, but also the legal ones.  So what  option does this leave for survival?  For most there is just one - unemployment benefits.  Yet, justified by the mantra of fiscal responsibility, even unemployment eligibility periods will be further curtailed.  Consider this post from Bill Mitchell:

The mainstream economic theory that the conservative politicians use to justify cutting benefits claims that the provision of benefits reduces search effectiveness by the unemployed – the benefits “subsidise” unemployment. It follows that if you cut them the workers will search harder and lower their requirements.

There have been many “research” articles published in the self-serving mainstream journals supposedly proving that unemployment support reduces employment by undermining the incentives of the jobless to search for work.

If you read this literature you will realise it proves nothing of the sort. The literature is replete with fudged datasets, spurious techniques and other niceties that the mainstream researchers use to cheat on their findings or mislead the reader as to what is actually being demonstrated.

Some economists will try to tell you that people don't work because they chose to not work.  Some will tell you that unemployment, or reduction of hours worked, is based upon labor choice, of people choosing to work less or not at all.  Why?  It is a consequence of the assumptions of economic theories followed by neoclassical economists.  The theory is the economy operates in a series of equilibrium conditions and involuntary unemployment can not persist in an equilibrium.  It can only be a fleeting, temporary condition.  So, if a large number of people are not working for a significant period of time, it can only be by their own choices.  What, you say, could the theories be wrong?  No, will be the answer.  It is the interpretation of the facts that is wrong if the facts disagree with the theory.

This theory of progression through sequences of equilibrium conditions led to the postulate that the world had reached an era known as the Great Moderation and the era of depressions was no more.  And we all know how that turned out.

I am a conservative - and the USA unemployment issue is bigger than the rhetoric and dogma. The current system for jobs creation is broken.

I prefer not to follow the neoclassical theories that the economy proceeds through a series of equilibria.  Isn't it possible that that the economy is often, even frequently, in some state of instability?  And when that instability becomes extreme, what would be a hot spot in normal economic times can become a fire.    If your house is on fire, and you are out of money - you do not shut off the water because you cannot afford it.

Economic News this Week:

The Econintersect economic forecast for December 2011 (second article under author's photo) predicts weak but improving economic growth.

As of several months ago, ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown.  Given the timing of their call the recession should start sometime before the first part of 2Q 2012. Although Econintersect data is not recessionary (one month look-ahead) - we take this recession call seriously. This week the actual level of ECRI's WLI index declined slightly - but as the graphic shows below, the index has been in a range between -7.4 and -7.8 for the last six weeks. However, this index is still indicating the economy six months from today will be worse.

Initial unemployment claims fell 4,000 (from 368,000 which was revised up from a preliminary 366,000 last week) to 364,000. Looking back, the last time initial unemployment claims were this low was in May 2008.

Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – fell slightly to 400,000. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.

WIUC 12-22-2011

Overall the data this week continued to show a weakly improving economy. There were no recessionary flags. The global markets continue to react to developments in Europe.

Bankruptcies this Week: Delta Petroleum, William Lyon Homes, Privately-held Money Tree

Click here for interactive version of the following table with active hyperlinks.

Weekly table 12-23-2011



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Economy , Business

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