By Robert McHugh, Ph.D.
November 6th, 2010
Let’s look at some of the Fundamentals of the economy which eventually leak into the market at some future equilibrium price in the future:
The Bureau of Labor Statistics, a division of the Labor Department, announced Friday, November 5th the results of their employment survey and statistics for the month of October 2010. Using just their numbers, they reported that non-farm payrolls rose 151,000 in October. However, they goosed this figure by 61,000 make believe, guestimated, assumed, non-counted fictitious jobs they presume were created by new businesses they think started up, net of businesses that closed down. That brings the non-farm payroll figure down to 90,000. But, of that 90,000 reported new jobs, 35,000 were in temporary service jobs. So, if we take that figure out, we are down to 55,000 new jobs created in October. However, the U.S. needs to create 150,000 new jobs every month just to accommodate population growth, which means that once again, job creation fell short by 95,000 in October. In other words, the employment picture got worse.
The BLS reported that the unemployment rate, by their convoluted calculations, remained at 9.6 percent, 14.8 million good folks out of work. However, they purposely chose to not count 2.6 million unemployed folks who wanted work, looked for full time work within the past 12 months, but did not look during the most recent 4 weeks for one reason or another. For 1.2 million of those 2.6 million, the reason was they were so discouraged, they figured, why bother. The BLS 9.6 percent figure would have risen to 11.28 percent by including those 2.6 million, no arguing the truth there. That is really the number that should be reported. But worse, the BLS does not count the underemployment rate. There were 9.2 million folks who wanted to work full time, but were denied that opportunity involuntarily, by having their full time hours cut back, or by settling for a part-time job while they continue their search for full time work. If we add those good folks to the unemployment ranks, we find that the underemployment rate was 17.2 percent. That means more than one out of every six employable people were either unemployed or stuck in a part-time job when they wanted full time work.
Then there is the immeasurable group of folks who have full-time work, but in a job that is below their skill level, and at a pay rate below what they had in previous full-time work. Add to them those who have full time work on salary (do not qualify for hourly overtime pay), but work more hours now than they did before to cover the responsibilities of fellow workers who got laid off, but also did not get a salary increase. Not sure how many of these good folks are out there, burning out, giving up quality of life just to keep their jobs. Then there are those who have full time work, but have not been given raises because their employers suggested they be happy at their current wage or else they will be replaced by someone else willing to work the same job for less. Call this entire paragraph the quality of work work decline, which I do not believe anyone has a handle on. But if you talk with friends and neighbors, empirically there are a ton of folks in this category, a category whose numbers have increased dramatically since the Bear Market started.
All this adds up to an employment picture that is grim, and getting worse. The impact of course is on consumer spending, which accounts for 70 percent of GDP. The only solution out of this mess is a massive income tax rebate and tax cut, placing the QE2 Dollars the Fed is printing, into the hands of households, and not Wall Street where QE2 is going. If households got the money, they would lower their debts, and increase their spending. That increase in spending would boost small business revenues. Small businesses (who are responsible for 70 percent of hiring) would then start hiring to handle the increase in sales. Small businesses would then spend more, boosting sales of large corporations. Large corporations would then add jobs and go to Wall Street for capital. Wall Street’s profits would grow from investment banking operations, rather than the Trading accounts QE2 are designed to goose. At every level, government tax revenues would get a piece of the action. Voila, prosperity for all!
If I were king, this is what I would do. I would cancel QE2, as that will have no positive impact on the economy or employment. I would then do QE3, a one time only event. It would be designed to choke start a dead economy and deteriorating employment picture that will eventually lead to a Great Depression.
I would have the U.S. Treasury issue at least $5.0 trillion of new Treasury note securities, short to intermediate term, up to 5 years in maturity. This term is chosen because this economic trickle up plan would reap returns to the Treasury in the form of massive tax revenues by year five without the necessity to raise income tax rates, rather while actually lowering income tax rates, when this debt could be retired. I would then sell these $5.0 trillion of securities in the open market, with the Federal Reserve as buyer of last resort, providing demand if necessary. Even if the Fed buys all of these securities, it is okay because the Treasury will be retiring them within five years anyway from the increase in tax revenues it will accrue from a growing and prospering economy.
Then I would take that $5.0 trillion and rebate 1 to 2 years of income taxes to households (not businesses), with a minimum rebate of $25,000 since many folks were unemployed and do not have income over the past two years. Small businesses would end up getting the rebate because there are many who file subchapter S returns that flow to household tax returns. I would then require that half the rebate be used to pay down debt. This would result in stronger financial balance sheets for households and lending institutions. Banks getting their loans repaid would see their non-performing assets decline, and see their loan portfolios decline. That would improve their capital ratios and their liquidity. In conjunction with improved household financial positions, this would put banks in the mood to be accommodative in lending practices, which would help the economy. This would strengthen the FDI’s reserve position as fewer banks would fail.
Households would then take the rest of the money, and feel more confident about the future, and likely spend on items they have been holding back on due to necessary austerity. This would boost small business sales, which would result in job creation to accommodate the increase in sales. This would increase small business demand for the products and services of large corporations. Large corporations would then turn to Wall Street firms for capital and loans, boosting Wall Street’s profits, not from Trading schemes courtesy of the Fed, but from growth in aggregate demand, the economy. Local, State and Federal government entities would get a piece of the action at each level, increasing their tax revenues, allowing them to retire debt and increase infrastructure spending which would create more jobs.
This results is prosperity for all, a growing pie, growing aggregate demand. With the increase in tax revenues, the Treasury then retires the $5.0 trillion of newly issued debt that kick-started this economic recovery plan. The Fed sells its securities back to the Treasury, and the U.S. Dollar retains its value.
This will not happen, because both political parties seem intent on solving economic problems with a top-down approach, where they give trillions of Dollars printed out of thin air to Wall Street who then take the money and earn increased Trading Account profits with mega-purchases and profit-taking sales of stocks and other financial instruments, like some wealthy drunk at the casinos. A great deal of this money will get destroyed, disintegrate at a coming stock market plunge, and the wealthy Wall Street Trading machine will end up leaving the gambling table broke once again, with all the money from the Fed gone for good, leaving a trail of a devalued Dollar, rising unemployment, falling home prices, failing banks and businesses, bankrupt families the next Great Depression. That will lead the Central Planner’s to the bright idea where sovereign nations merge into a new Union of Western States, including North America and Europe, in an attempt at one world government they falsely hope will fix the mess they created. Unfortunately this is probably the path we are on.