The business cycle has more pain in store, even as unemployment grows
Filed under: Columns, Earnings
As my colleague Douglas McIntyre described in "Unemployment problems are worse than meet the eye," unemployment in this recession is different -- what many are calling structural unemployment, meaning a decline in the jobs base, which is not going to bounce back quickly due to deep structural problems in the U.S. economy.Having been unemployed in the last three major recessions -- 1974, 1981 and 1991 -- I have experienced the gamut of wrenching emotions first-hand and know how those running low on money and hope feel.
The deepest downturns since the Great Depression, the 1974-75 and 1981-83 recessions caused widespread unemployment and misery. In the '70s, the problem was stagflation, a combination of tepid growth and rising inflation which eventually required a direct frontal attack on inflation by President Reagan and Federal Reserve Chairman Paul Volker, who jacked up interest rates to 16 percent. This tightening of credit slayed the inflation monster but at the cost of millions of jobs.
That hard-won victory over 10+ percent annual inflation enabled the great 25-year bull market and a massive expansion in employment.
In contrast, the early-'90s recession ended when the PC/Internet boom ignited a major expansion of enterprise and jobs -- what economists call "organic growth" as opposed to a government-funded spurt.
The typical business cycle is one of expansion of business and credit to the point of over-capacity and general giddiness, at which point risks are downplayed and leverage reaches a peak.
Inevitably, risky bets fail, bad debt is written off and business and consumers retrench, saving money which can then be invested in the next expansion.
We all know what happened in 2001: fearing a deep recession, Federal Reserve Chairman Alan Greenspan lowered interest rates and flooded the financial sector with liquidity. That cheap, abundant credit launched a boom in asset prices, most notably housing, which reached bubble proportions around the globe.
In the general giddiness of the boom, American households extracted $5 trillion from home equity and indebted themselves to unprecedented levels.
Now the Federal Reserve, the Treasury and the Federal Government are attempting to reflate the economy with essentially the same formula which appeared to work in 2001: super-low interest rates, stupendous expansion of liquidity ("quantitative easing") and massive Federal stimulus spending -- the Keynesian model of recession-fighting.
On top of this unprecedented "pump-priming," the government has funded or guaranteed financial-sector bailouts to the tune of $11 trillion -- three times the entire cost of World War II. (Adjusted for inflation, the U.S. spent about $4 trillion fighting a two-front global war.)
Unfortunately, the economy is now staggering beneath a debt load which is roughly four times the level of the 1970s and '80s. Total debt (government, corporate and household) now exceeds 375 percent of GDP, compared to a postwar average of about 100 percent.
Households are over-indebted, and are only starting the long process of paying down high debt loads to historic averages. And they are doing so against strong headwinds: their assets have plummeted by about a quarter ($12 trillion) and the equity in their homes has fallen to levels not seen since the 1974 recession.
Millions have lost their jobs and millions more have seen their hours or salaries cut. The numbers are unimaginable. According to the Bureau of labor Statistics' August 2009 Employment Situation Report,
14.9 million people are unemployed, 9.1 million are "working part time for economic reasons," and 2.3 million are "marginally attached to the labor force," that is, they want a job but have not actively sought one in the past four weeks.
That totals 26.3 million people unemployed or under-employed. (For context, civilian employment in 2008 stood at 137 million.)
Even this horrendous number probably understates the loss of household income, as the Bureau's "household survey" counts self-employed people such as real estate agents, free-lance designers and business consultants as employed, even though their incomes may have fallen dramatically or even to zero.
The hope is that the $787 billion in Federal stimulus funds being spread over the land will "prime the pump" of organic growth -- that is, spark a new business cycle of expanding credit, spending, profits and confidence.
But can an organic (non-government funded) expansion take root when debt levels are extraordinarily high in every level of the economy? To say "yes" is to fail to understand that the business cycle must move through renunciation of bad debt and the accumulation of real savings before an organic business expansion can begin.
Can a decade of excessive capacity, leverage, risk-taking and financial fraud be wiped clean in a year? By bailing out financial institutions and pumping stimulus funding around the nation, the government is attempting to bypass the pain delivered by the organic business cycle. But in so doing, it is simply piling up more deadwood for the next financial forest fire.
In my next column, I will look at structural issues within each major category of employment.
Charles Hugh Smith writes the Of Two Minds blog and is the author
of numerous books, most recently "Survival+: Structuring Prosperity for Yourself and the Nation."
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Reader Comments (Page 1 of 4)
9-29-2009 @ 4:00PM
Sandy said...
The employment rate will not go anywhere for years until the wealth distributing business haters are gone! How can this country grow when all you hear from it's leader is how evil businesses is and how much he will make business pay with health care mandates and taxes how he will redistribute businessr profit to those who didn't earn it. Small business could never afford more business taxes and "cap and trade" taxes all of this is an assault on all businesses small and large. So while it seems warm and fuzzy for our leader to talk this way, don't expect employment to rise until he is out of office and he takes all of his business haters in the administration with him.
GOOD BUSINESSES REALTIONS = MORE EMPLOYMENT we don't have that anymore.
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9-29-2009 @ 4:53PM
Phil said...
LOL I see another Rushbot republican ranting with no clue! Its people like YOU who own anything imported! Imports do not make jobs! Fact! 3 million jobs lost just on WALL STREET alone ! In the past two yrs! Another 6 million in just the US auto industries! As Wall street gambled with peoples 401ks on the sub prime mess they lost ! And so did all the credit in the S&P and the dow! PUFF GONE .
So rant the republican mantra and make America laugh. Republicans will spend trillions for WARs and call that freedom ! But try to spend a few trillion or just half of that a few trillion on Americans and America like old people , children and Americas infrastructure , You same republicans will call that socialism ? LOL COMMUNIST Chinese who fill our Communist China marts of America. You republicans have no problem with them . And the best congress money can buy for the LAST 50 yrs does not help ! Does the Trade deficit mean anything to you ? LOL LOL Nuff said. About America and JOBS ! But then the DOL only counts perople who made apps in the last 90 days ? They do not count people who collect beyond that ? And they do not count people who were denied or EXHAUSTED their benefits LOL LOL A real accurate stat. Lets just leave 2/3rds out so it make America look better for wall street! lol Ya rant on !
9-29-2009 @ 5:03PM
Iridium said...
Phil,
There isn't a store chain in America today that will buy products made in the USA. The required margins aren't there. It has nothing to do with Republicans but everything to do with the liberal controlled investment banks.
In order to bring back American manufacturing and American retail we would have to shut down every single big box retailer. Essentially the entire service industry.
DO YOU WANT TO TRY THAT? You think we have an unemployment problem now, imagine shutting down the entire retail landscape.
People can start small business selling American products but there simply isn't anywhere to buy products outside of a few small trinkets. The fact is that you would need to build thousands of new factories in America and purchase all new equipment. Another fact is that Chinese factories are far more advanced than US factories. Trillions of dollars have been spent in China on infrastructure over the past 15 years. China is far ahead of the United States infrastructure wise.
If you would please find me an American made product that can be sold for every Chinese made product. Do it, I dare you.
9-29-2009 @ 8:32PM
vaughnvdg said...
My lady this is what you call THE BEATDOWN FROM THE TRICKLE DOWN! Please stop that SUPPLY SIDE talk. The people know that it is a FARCE and 99% of America is now PAYING THE PRICE while the top 1% is COUNTING THEIR MONEY IN THE BANK!!!!
9-30-2009 @ 12:12AM
Paul said...
Well said Sandy! The policies this administration are all job killers,.. Cap & Tax is the biggest.
10-04-2009 @ 6:51PM
D BROWN CPA said...
Obviously, you didn't understand one thing that the author wrote. Get educated by taking a course in macro economics, and stop trying to apply micro economics and political jarjon to the realities of macro economics.
9-29-2009 @ 4:12PM
john said...
the stimulus plan isn't spent yet- so spending that in 2009 Q3/Q4 and 2010 Q1/Q2 will increase GDP by a 7% clip in both HALF years... BUT the remaining economy is not healthy and has the same problems as before housing, no job creation, toxic/legacy assets, health care, etc... BUT will then have to deal with THE DEBT of paying for the stimulus, DOUBLED fed budget, etc... true organic growth happens by small business, by innovation, by people taking their shot at capitalism... in this environment, with Gov't hammering small business from all directions, there is NO incentive to doing that... AND THAT is the core problem- fixing social agendas does not pay for social and what does is being demonized. Until that changes, there will not be organic growth and that should terrify the adminsitration, because the election will be painful for whoever doesn't PROVIDE THE ENVIRONEMENT to create jobs- THAT is #1 by far on Main St list of things to do... just think it through- IF the voter doesn't have any shot at getting a job they need to feed their family, then WHY would they tolerate the status quo?
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9-29-2009 @ 4:54PM
MyKisa said...
....the smell of the Weimar is in the air...
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9-29-2009 @ 4:34PM
Rick said...
Look for the nation's U3 unemployment rate to hit 12%-13% by year's end followed by a sharp upward spiral into an unadulterated nightmare.
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9-29-2009 @ 4:43PM
Mike said...
Blah, blah, blah. More obvious drivel. The balance of the jobs lost, are lost forever. This "recovery" is NOT a recovery. Run up the DJIA to 10,000. Hell, make it 12,000! It won't mean a damn thing. Better dig in folks. Think things went bad last year? That will seem like a kiss compared to what's coming.
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9-29-2009 @ 4:51PM
Rick said...
You can that again! What's coming up is something nobody has bargained for.
9-29-2009 @ 4:59PM
Mike said...
And you know what Rick, the really sad part is, not only does it seem the masses don't see it...I think they DON'T WANT TO SEE IT. That will lead to unnecessary suffering. I mean, we're all going to suffer, but preparations can be made, and I just don't think people are taking this seriously. And the media will be HUGELY responsible. Good luck, my friend.
9-30-2009 @ 9:57AM
Tony said...
The DJIA could up to 20,000 and it won't change a god damn thing!
9-29-2009 @ 4:53PM
Rick said...
You can sure say that again! What's coming up is something nobody has bargained for.
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9-29-2009 @ 8:09PM
Bill said...
You are so right! We are all in for the nightmare of our life. Life as we know it, is about to end.There is no escape. There is nothing that can be done. We are about to loose everything we hold so close to our hearts...
Pray for mercy, that's about it....
http://www.ebiblefellowship.com/may21/index.html
9-29-2009 @ 8:08PM
Will said...
Curious statement, "not what they bargained for". It is similar to "unintended consequeces". Here are the facts, once the majority of Aemricans sided with the anti busienss, anti profit , anti wealth and income liberals, they literally chose the unemployment which is the natural result. Businesses know now that USA is no longer a place to grow in so jobs will shrink as they seek higher productivity with the people they have. Of course, they have to get rid of business hating employees or see their busienesses fail. That is why they are moving their assets and base for future growth out of America and mostly to Asia. I do not accept that anti busieness people are so stupid they did not know buisnesses would move their jobs to greener pastures, they arn't that stupid.
9-29-2009 @ 5:14PM
mike rubinoff said...
why on gods green earth is al gore, building a green sports car factory in finland, with our tax money under the umeployment circumstances that we face here in the usa today, and a cost per car of approx. $90,000.
the entire democratic world in this country has gone completely mad.
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9-29-2009 @ 5:08PM
John said...
This is your trickle down economics at work. Even George Bush Sr. said it was "voodo economics". To bad he enlighten his son who took us down the same road. When you have a president who takes the time to visit China, India and Vietnam to push for trade packs to take American jobs plus lets in 20 million illegal Mexicans for cheap labor what do you expect. If our government does not start to protect the American labor force like other industrial countries are doing we will suffer from the results. Go to Mexico or China and try and open a business and see what their government tells you and the restrictions you have to deal with. This open and free trade mentality is only good for the corporations to fatten their bottom line not for the American worker. We have tried it for the last eight years, how is it working for the country and you?
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9-29-2009 @ 5:17PM
Phil said...
The Communist Chinese have advanced factories? LOL Is that why they shut down about 90% of them during the Olimpics? To clean the AIR? LOL Most chinese factories dump their pollution in the ditch in the back ! Oh im sorry what you said will bring factories and jobs into America ? It just goes to show how republicans think? Backwards that is ! The object is to bring JOBS to The USA ! Daaa.
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9-29-2009 @ 5:35PM
Iridium said...
Where did Intel open their new advanced microprocessor foundry? Not in America, they opened it in China.
Where are the majority of electronic deices made, China.
Ever been to China? I have. Advanced factories doesn't mean CLEAN FACTORIES. Factories are advanced by the technological level of the machines and the overall output of said factory.
Pollution is a net result of industry. YOU CAN NOT HAVE INDUSTRY WITHOUT POLLUTION. If you think there is some magic fairy land where you can manufacture steel and injection mold plastic without any type of industrial fallout you are a lunatic.
HOW ARE YOU GOING TO CREATE AMERICAN JOBS IF THERE ARE NO FACTORIES TO BUILD PRODUCTS TO GIVE PEOPLE JOBS???
I love how you think jobs will appear out of thin air if people start buying American. THE PRODUCTS DON'T EXIST AND THERE IS NO INFRASTRUCTURE TO MAKE THEM.
One way could have been instead of giving $14 trillion to banks so they could re-invest in the failed socialist stock market, they could have given to small business that wanted to expand. The US Government could have used that money to build those factories that are needed.
The problem with that is that you will increase pollution. Which is something you would never let happen.
Go try to buy an American made t-shirt at any mass retailer. Try it. There used to be over 1000 independent cut and sew operations in the USA producing cotton shirts. Now there are 2. There are only three sock mills left. It is still possible to buy American made socks but you must pay around $9 a pair for a simple crew sock.
The only reason why the sock mills are still here is because they produce low volume high end running socks that still have a production to wholesale margin high enough to make it worth while to produce. They will never sell to Walmart but they can sell a few hundred thousand pairs to mid level accounts. Enough to keep around 50 people employed.
How do get to the levels where a few million can be employed?