Sunday, August 9, 2009


This weekend we would like to take a look back at the economic contraction that the talking heads would have you believe is already over. Of course there is no way that it true. The extreme deficit spending we referred to in Federal Funhouse could result in a short euphoria before the creditors pull the plug - just like maxing out your credit cards before declaring bankruptcy. But the real economy is in horrible shape and nowhere is this more apparent than in the labor market.

Today's critical data comes from the Bureau of Labor Statistics (BLS). Their
unemployment data released Friday was loudly trumpeted as good news when all it really said is we're bleeding to death a little slower. Others have commented on and analyzed this data so we'd like to take a longer view of things - examining the size of the pool of blood on the ground as it were.

We're going to use the BLS
monthly data for the last two years. Note that at the end of 2007, the potential labor pool (civilian non-institutional population) was 231.9 million and last month it was 235.9 million - an increase of 4 million potential workers. But the numbers for the labor force have lagged badly behind. At the end of 2007 it stood at 153.1 million and by July 2009, that had only increased to 154.5. Population growth would suggest that number should have been 155.5 million, with two thirds of the added adult population contributing to the labor force. Since the Labor Force is the basis for calculating the unemployment rate, clearly the current numbers are understated. As a mental exercise, let's see what happens if a million workers aren't shuffled off into statistical never-never land. That would be another million unemployed with an unemployment rate of 10.1%. I suspect that a lot of statistical games will go into keeping that number in the single digits as long as possible.

Further, the labor force participation rate (percentage of adult population in the labor force) has been falling since the late 1990s. This indicates that the recovery from the post-tech bubble crash never made it back to the highs of that period and the current further decline indicates that people think the economy is so bad they've quit looking for work. This allows the BLS to conveniently eliminate them from the unemployed category though they are still just as jobless. The bottom line is that the economy has to generate nearly 10 million jobs just to get us back to that lower high of the mid 2000s but it is still destroying jobs even as the population continues to grow.

Sunday, August 2, 2009

Command and Control?

Much is made of the rebound in China's 2nd quarter GDP and the drivers certainly merit a closer look. We are going to focus on just one key metric today - credit. In an effort to reach escape velocity from the global collapse, China has ordered its banks to make lots of loans and the banks have complied. So just how much lending has occurred and what is the scale of the likely impact. Let's look at the numbers, shall we? Various sources have reported the lending numbers and this article from the Globe and Mail is typical:

Chinese banks lent 1.5 trillion yuan ($220-billion U.S.) in June, the central bank reported on its Web site Wednesday. That exceeded forecasts and was up from May's 665 billion yuan ($97-billion) in lending and April's 590 billion yuan ($86-billion).

Keep in mind that the entire Chinese economy was approximately 30 trillion yuan in 2008. Another way to look at things is that China's economic output is roughly 2.5 trillion yuan per month and in June bank lending was equal to 60% of that output. One might safely say that credit expansion on that scale might have some impact on the economy. Keep in mind, this does NOT include bond issuance by corporations, the government in Beijing or the provincial and local governments; but the amount is enormous even without them. For perspective, the Flow of Funds shows total non-financial debt added in the US economy during 2006, the last full year of the UDB was $2.41 trillion in a $13.4 trillion economy - so borrowing was 18% of GDP in an extreme environment. Maybe this was just an aberration of one month? After all April and May were much lower. Well, let's look further down in the article:

The latest figure would push total bank lending for the first half of the year to 7.3 trillion yuan (just under $1.1-trillion).
So monthly loans averaged over 1.2 trillion yuan and June was more typical than the prior months. Interestingly, CNBC reports that Beijing's minimum bank lending target for all of 2009 is 5 trillion yuan and the banks have already exceed that number by 46% in just six months. Having established that the lending spree is enormous, the other key question is how much of a change it represents. For that, we will take words straight from the horse's mouth - a PBOC press release:

At end-June, outstanding RMB loans reached RMB 37.74 trillion, up 34.44% year on year, accelerating by 15.71 percentage points year on year and by 3.83 percentage points month on month. In the first half of the year, RMB loans increased by RMB 7.37 trillion, up RMB 4.92 trillion year on year.

Total debt grew 34.4%, while lending TRIPLED from 2.45 trillion to 7.37 trillion yuan year over year. Are the mental alarms going off yet? Again we will refer to the Flow of Funds for perspective. During the peak of the US housing bubble, mortgage lending took 6 years to triple from the trough in 1995. Yet China has compressed the impact of a historic multi-year bubble into 12 months. There also has to be dramatic deterioration in credit quality. There is no realistic way to triple lending without severely compromising lending standards - as we saw so dramatically with liar loans, nothing down, NINJA lending and option ARMs. Does anyone doubt that something comparable or worse is happening in China now?

The game plan for China should be obvious by now. They are following the path of every other participant in the UDB with a vengeance. Tripling lending until it reaches nearly half of GDP for the first half is the real stimulus in China. By contrast the US Federal government borrowing 14% of GDP looks downright conservative. China is attempting to reinflate their bubble economy but even if they "succeed" the price will be hideous. The price of failure is nearly unthinkable.

The Federal Funhouse

Washington DC has now become the linchpin of lies regarding the US economy. When one looks at the numbers, it is easy to see why this must be so. The Federal budget deficit is now running at somewhere between 14% and 15% of GDP. Because the administration has postponed the budget update past the mandatory deadline, we do not have any official figures so we must estimate based on other data but Americans should be quite used to that by now.

The latest
Monthly Treasury Statement through June 30 gives us a lot of very useful data. Tax receipts are falling rapidly; for the fiscal year to date, taxes are down from $1,934 billion to $1,589 billion - a drop of 17.8%. The trend has been for the monthly numbers to get worse as the FY has gone on but if that applies to the full year then revenues will be $2,073 billion. The current budget estimate is just under $4,000 billion but will likely be higher as unemployment and related expense rise with a tanking economy. This leaves the US government with a $2 trillion deficit in a $14 trillion economy. In other words deficit spending is on pace to equal 14.3% of the economy.

Looked at another way, approximately one-seventh of the economy should not exist, currently exists only due to Washington spending money it doesn't have and will cease to exist as soon as that spending stops. The spending can continue only so long as creditors are foolish enough to supply more capital for the Federal government to destroy. Once the funhouse mirror of massive deficit spending is removed, we will likely see at least a 10% further decline in the economy within 6 months - taking huge chunks of other nations' economies with it.

Wall Street Wacko
We have also now seen the "confidence" return to Wall Street. What this really means it that speculators have put aside their fully justified fears and returned to blind, stupid buying. The "reasoning" behind this is that they managed to rob the taxpayers to cover their last set of enormous losses so their is no longer any such thing as risk. Heads they win, tails the taxpayer loses. As we have pointed out before, the Fed has aligned themselves with the speculators and is feeding such delusions. But these folks obviously haven't been paying any attention to the political climate at all. Congressmen that voted to bail out Wall Street at our expense are facing hostile crowds in their home districts. Many of them are now cancelling public appearances. Politicians now fear for their safety as their victims are beginning to realize what has happened. Even if the bond market allows this foolishness to continue, there is unlikely to be any support for another bailout when the next bubble bursts - which is likely to be either commercial real estate or commodities (again).