An insight on this question came from an unexpected quarter.

A gentleman by the name of Fernando Aguirre, who posts on Internet forums and his blog as FerFAL, has written voluminously about his experiences as an Argentine citizen during and after the economic cataclysm that wracked his country in 2001. I first found a long forum post, and then a Google search of “FerFAL” revealed a larger web presence, including a recently published book.

Mr. Aguierre shares his thoughts on all sorts of related subjects, from food storage to guns to politics (he appears to really like Rep. Ron Paul). I personally found a great deal of value among what I’ve seen so far.

One brief passage struck me, however, because it related to the mechanism by which middle-class people become poor during an economic meltdown. The mechanism may be obvious, but it is important to see how theory actually worked in the real world.

Mr. Aguierre shares (in “Part IV”) how, while studying architecture following the 2001 crisis, a social studies teacher illustrated Argentina’s middle class’ slide into poverty. Quoting the teacher from memory, Mr. Aguierre writes,

“[Those in the] middle class suddenly discover that they are overqualified for the jobs they can find and have to settle for anything they can obtain, therefore unemployment sky rockets: too much to offer, too little demand. You see they prepare, study for a job they are not going to get. You kids, you are studying Architecture because you simply wish to do so. Only 3 or 4 percent of you will actually find a job related to architecture.”

We all sat there, letting it all sink in. After a few months, it all proved to be true. Even the amount of students that dropped out of college increased to at least 50%. They either [saw] no point in studying something that would not make much of a difference in their future salaries, had no money to keep themselves in college, or simply had to drop college to work and support their families.

This reads like a premonition.

The USA’s middle-class includes lots of people whose careers rest on higher education and specialized certification. While plumbers, electricians, factory employees and truck drivers typically are among the middle-class, most of those populating suburbia are accountants, middle managers, sales people, financial consultants, teachers, nurses, writers, etc. In other words, as manufacturing and now building activity contract, more of the middle class is made up of the college-educated in white-collar careers.

Factor in our current economic pickle and it’s easy to see the most likely path ahead.

With the economic expansion built on mass optimism and debt rolling over, conditions are now fertile for questioning the college degree system as jobs for the college-educated evaporate en masse. The ability of technology to replace white-collar jobs is widespread, and an increasing need to cut costs is finally driving its use, just as changing economic (and regulatory) conditions also drive the replacement of manpower with robotics in the factory.

Across the economy, the need to cut employment costs (not just payroll, but payroll taxes and benefits) is resulting in mass layoffs of sales people and white-collar office staff. When one considers how much work can be replaced now by accounting software, electronic sales presentations, flatter organizational structures, and “news persons” filing reports for free on the Internet via blogs, it is obvious that vast numbers of middle-class Americans teeter on the precipice of unemployability, not just unemployment.

When the “unique” skill sets that commanded $50,000 to $100,000 (or more) annual salaries turn out to be in vast oversupply, the only course left is to compete with those with neither a college degree nor technical education for jobs that can’t support a middle-class lifestyle.

Hands-on service occupations like nursing and medicine are also far from safe. At the end of the day, it is productivity that pays for such work to be done, and when vast numbers of people cannot find economically productive work, economic reality will land on these occupations, too.

When the economic tide goes out, all boats sink into the mud.

Too many people were goaded into illusory occupations by tax subsidies for higher education, government (rather than market) demand, and other distortions like the credit-without-prior-production of the central bank. Political pandering and central planning replaced the natural balance of an economy growing organically through the honest signals of the price system.

As long as there was enough optimism and ignorance to sustain the illusion, the distortions only grew larger.

Though the ignorance largely remains, there’s no more blind denial left to sustain the burden of all that wasted effort. If your job disappears, it may not come back.

This time it really is different. The final stages of that blind denial included fiscal imprudence that bordered on insanity. The mirage economy can’t return until after the pendulum has swung its full travel to the other side of the arc. That path leads through the valley of a crushing economic depression, one that will radically and permanently alter the lives of middle-class Americans who are almost universally unaccustomed to hardship.

Regards,
David Calderwood

October 29, 2009

Economic Collapse Permanently Destroys Middle Class Jobs was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

According to USA Today — I know, not the most hard-hitting rag out there — contestants on shows like America’s Got Talent and Deal or No Deal have undergone a dramatic change in the past year.

Instead of dreaming of building a mansion or retiring early, the poor saps that go on those shows are now just hoping to win some kind of money to keep afloat. On Deal or No Deal, the percentage of unemployed prospective players jumped from just 5% of its total applicants to 20%.

Who Wants to be a Millionaire’s host, Meredith Vieira, claims that her contestants no long play for big prizes. They’re there to collect a few mortgage payments or to help pay off credit cards.

Apparently, the market’s recent fake recovery hasn’t ended this game show contestant trend. Vieira notes, “There’s still a sense of need, as opposed to want.”

This could spell disaster for marketing these shows. No one wants to watch desperate people cashing out early so they don’t have to move.

“Mustn’t Watch TV” aside, you shouldn’t be surprised by the still-pathetic situation out there. After all, one of the favorite buzz phrases on CNBC is “lagging indicator.” Forget that the phrase is an oxymoron for a moment. It’s applied to – more than anything else – unemployment numbers.

We have seen a slow down in job losses, which is to say that we aren’t losing jobs in this country as fast as we were. July even saw a slight increase in employment. I suspect a portion of that tiny bump is due to people giving up. If you aren’t applying for jobs, you no longer count.

We like to think of unemployment as a percentage. But it’s important to put the actual number of would-be-workers into perspective.

We have about 14.5 million unemployed people in the U.S. — at least 14.5 million reported unemployed people. Of those, we have a significant amount that has been in that situation for more than half a year.

As this chart shows, that’s the most people on the dole since the Second World War:

This begs the question: if we do ever recover, where will these new jobs come from?

Where’s Our Next Bubble?

Speculating about which industries will provide future jobs is still damned near impossible. Could Obama’s “green tech” jobs ever come to fruition? Possibly, but it won’t be in the near future. Right now, no one can even afford those kinds of products.

Even with amazing developments in turbine technology over the past few years, it still costs about 67% more for wind power than it does for coal or nuclear power. So for electrical engineers, there might be jobs in the R&D stage of this “green revolution.” For the majority of the 14.5 million unemployed, however, that’s of no help.

It’s doubtful that we’ll see a real recovery in manufacturing jobs. That’s one segment in serious trouble. We didn’t even see it recover during the boom from its 2001 lows.

Technology is one area with some potential. Americans’ need for the latest digital toy hasn’t dissipated in this rough economy. Sure, no one can afford new plasma TVs, but just take a look at AT&T’s iPhone 3G sales this summer. Pretty impressive.

We aren’t going to stash our life savings into Apple, but we are keeping our eyes peeled to see what comes next.

The energy sector, of course, needs a recovering economy to be of importance. It’s certainly not going to lead us out of our recession. Once we do recover, however, drills will once again meet the dirt and create some jobs. But right now, we’re seeing a lot of abandoned wells across our country.

We could always just pile back into the financial services industry and pretend the past two years were a dream. Unfortunately, that’s quite possible knowing how forgetful that crew is.

Wherever new jobs come from – if they come at all – and no matter which industry leads the way, we need to keep a careful watch over every sector. As you can see in one of our favorite charts, if you know which sectors are heading in which direction, you stand to make a lot of money:

There’s no doubt we’ll replace the financial bubble with another one – just like we did with the tech bubble in the 90s. So…where’s our next bubble?

Regards,
Jim Nelson

September 7, 2009

Recovery and Jobs; Where’s the Next Bubble? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Busy airports may or may not be a sign of life in the larger economy.  Even unemployed people can buy a ticket and fly somewhere.  All you need is a credit card, if you can still get credit.  Meanwhile, airline profit margins are tight.  Fuel prices are creeping upwards.  The airlines are still nicking you for things like $15 baggage fees.  And as I flew over the heartland of the nation, I looked down and pondered our collective fate.

Federal Reserve:  “No Net New Jobs”

Recently, the Federal Reserve predicted that the U.S. unemployment rate would surpass 10% in the coming months.

That’s no big surprise.  The true U.S. unemployment rate is at least 15% already when you factor in the long-term unemployed who are not carried on the “official” books.

Then the Fed made a shocking prediction.  It forecasted that the U.S. economy would add NO NET NEW JOBS over the next five years!  Whoa!

No net new jobs?  That ought to scare you.  The Census Bureau predicts that the U.S population will grow over five years.  But the numbers of new jobs will remain static.  That is, for every job gain there will be a loss.

This job-stagnation is a recipe for all sorts of bad things at the local, state and national levels.  Government budgets won’t balance, so I guess we can plan on more “cost saving” measures such as releasing prisoners early and closing schools.  Yep, that’s how to build a great nation… More criminals and fewer well-educated citizens.

The Fed announcement is basically an admission of monetary and policy malpractice at the highest levels of the U.S. political class.  I witnessed it first-hand a couple weeks ago when I was in Washington, DC.  I met with some Congressional staffers who were just clueless.  But they sure were full of themselves.  They had all the answers, too.

The Good Old Days of the Great Depression

As my Delta flight flew over eastern Washington the other day, I looked down and saw a familiar sight.  It was a long, narrow body of water, with a stark, linear feature at the end of it.  It was Lake Roosevelt, impounded by the GRAND COULEE DAM, OF WHICH I WROTE LAST YEAR.

From 36,000 feet, Grand Coulee Dam sure looked small.  But it’s the largest manmade structure in North America.  It’s three times the height of Niagara Falls.  It’s larger than the Great Pyramid of Cheops, times a factor of three.  It has enough steel in it (9 million tons) to build about 225 World War II-era battleships, at 40,000 tons each.  Today it’s rated at about 6.8 gigawatts of electrical power, or the equivalent of about seven large nuclear power plants.

Grand Coulee was built in the 1930s as a government “stimulus” project.  This was back in the good old days when the government knew how to “do stimulus.”  Y’know, build big dams.  Kick-start the steel and cement industry.  Employ tens of thousands of skilled workers.  Do some heroic engineering and create an energy project that will benefit the nation for decades into the future.

No, Grand Coulee by itself didn’t solve the issues of the Great Depression.  But it sure did come in handy when it started spinning power in 1942, just as the U.S. entered into fighting World War II.  One lesson is that if you dream big dreams, you never know what will come out on the other side.

And today?  Congress’s idea of “stimulus” is to pass a $787 billion pork-bill.  But most of the money won’t get spent until 2010 and 2011.  Oh well, we’re going to have to borrow it all anyhow.

Yard Sale Nation – People Are Dropping

I drove across part of southeast Washington and northwest Oregon during my journey to Vancouver.  I haven’t been up in these parts in many years, so this was my chance.

As I motored around the two and three lane back roads, I sure saw a lot of stuff for sale.  It seemed that many households wanted to sell one item or another, often parked prominently along the highway.

I saw cars for sale – old, not-so-old, and nearly new.  There were vans, SUVs, trucks, campers and trailers.  There was farm and construction equipment.  There were boats and ATVs.  Then there were dozens of homes and lots with “for sale” signs.  Plus many yard sales, with all sorts of household, workplace and institutional goods waiting for buyers.

It was entirely clear that many people are trying to raise cash.  So everything’s for sale.

Remember that old expression, “Shop ‘Till You Drop?”  Well, people are dropping.  Where’s that Grand Coulee Dam project when you need it, right?

Following the Trail of Lewis and Clark

I drove along the Columbia River for quite a ways, following the trail of Lewis and Clark, from their expedition in 1805-1806.  Today the Columbia is a well-regulated, controlled body of water crossed with dams and dredged as necessary.  Large ocean-going ships float serenely in the water next to downtown Portland.

In their journals, Lewis and Clark described a wild Columbia River of raging rapids, filled with gigantic log snags.  Some of the logs floating down the Columbia of old were up to 7-feet in diameter and 200-feet long.  Big trees, huh?  It was a different world back then.

The Old Portland Customs House

Speaking of a different world, I was impressed by the old U.S. Customs House in Portland. Now THAT building also represents a different world, one where the federal government raised its revenues from duties and imposts.

In the olden days a ship captain would dock at Portland, or another locale on the Columbia.  Then he’d walk over to the U.S. Customs office to declare the cargo and pay the taxes due.  This was how the federal government funded its operations.  And when the funds were spent, the government had to observe its own fiscal limits.

In other words, the original U.S. government had to take an interest in growing and maintaining the economy.  Today, with the fiat dollar, the feds think that they can do anything.  Until, of course, the nation spends itself into national penury.

Until we meet again,
Byron King

July 29, 2009

The Good Old Days of Depression and Stimulus was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The recent jobs report is letting us know that the “Great Receding” is continuing.  The winds of change are a-blowin’.  The question remains, however, “What kind of ‘repairs’ will be made, and how will the market respond?”

We are now approaching 2 million jobs lost in the US.  The most in over 25 years.  The number came in at -533K, meaning 25% of all jobs lost were in the last month alone.  An interesting thing about receding tides and receding economies – as long as the winds keep blowing – they keep receding.  But even after the winds stop, things don’t return to normal right away.

It appears now that we are in for yet a deeper and longer recession than previously thought.  Each week that passes, more and more people say that exact phrase.  But let’s stop for a minute and review what we have at hand.

-A negative GDP

-A 50% cut in the Equity Market

-A new weekly high in the dollar

-2nd Highest Monthly Job loss in History

-Moving toward Highest Annual Job Loss in History

-A President-Elect who responds by saying that this catastrophe points out the need for more stimulus, job creation, and provides an opportunity to “transform the economy”. (translated, “God save us all…”)

The government has done such a good job with everything else they’ve touched, we just can’t wait to see what happens when they get their socialist mitts around the throat of a gasping economy.

While I hate to see such things as a “government transformed economy”, my first concern here is what will the market’s reaction be?  As long as the FX remains unfettered, we have the opportunity to be free marketeers.
When we look at the equity indexes we see that they have not hit a new low since around the 3rd week of November.  They are up 7 of the last 9 sessions, 6 of which are at or near their session highs.  A market bottom in place?  Or forming?  Let’s hold our horses.  If we compare this to a few elements of the Great Depression, some stark contrasts stand out.  Now I was not alive during that dour period of American History, so like you, I am dependant on the written accounts to guide me.  Unemployment was accounted as high as 25%.  Currently, it is 6.7%.  With a present loss of 1.9 million jobs, that would equal a total loss of nearly 6 million jobs if we were to reach a 25% unemployment rate.  So interims of sheer unemployment, we have only gone 1/3 of the way.

The next question is this. How about other fundamentals?  Are they likely to drive us further into higher unemployment?  Here’s one consideration.  As many seem to think it was WWII that got us from the Great Depression, we have to realize that the US government had at its disposal a much larger arsenal of economic weapons than it does now.  Essentially, as the gold standard was “relaxed”, government inflation could now assume a pedal to the metal position.  Government jobs were created at breakneck speed during the depression to get people back to work, with success based on this simple equation: More workers = more revenue.  The plan of course, was that what the workers produced would more than offset the cost of job creation and maintenance.  Wow! And the government could actually make a profit by employing this plan.  Holy Moses!  The government produce a profit?  What a wonderful idea!

Ok, enough of the sarcasm.  The point is, it didn’t work.  Were it not for massive inflation over the last nearly 80 years since then, we would not have the current illusion of wealth.  And this brings us to the next problem:  The illusion of wealth.  For most people wealth itself is “relative”.  Men always measure their wealth by what other men have.  We may never reach the levels of a Bill Gates or Warren Buffet…but most of us are not troubled by that.  We just want to know, that we have enough to care for ourselves by whatever standards we deem as being wealthy.  We also want to have more than our neighbors and co-workers.  Very few of us have a life goal of being the richest person in the world.  So our view of wealth is relative.  In the end, it isn’t really the money we want, or the house or boats or whatever.  We want the joy that such things bring us.  We want the “peace” that they offer us, that everything is going to be OK.  In the end, what we want from our wealth is the ability to enjoy our lives.  Philosophers and theologians have searched for millenia for the meaning of life.  King Solomon puts it this way.  “There is nothing better for a man, than that he should eat and drink and that he should make his soul enjoy good in his labor.  This I saw also was from the hand of God”.

I say all that to say this.  In America, the poorest among us are richer than 99% of all those who have ever lived in the history of mankind.  Yet we are still inclined to call them poor.  In contrast, we consider ourselves rich.  Not by just what we own, but because we have knowledge to increase our wealth.  We have our health.  We have a long life expectancy.  And up until recently, we had a better expectation for our children than we had for ourselves.  Because wealth is not only relational, it is generational.  We want to leave something to our children.  Something better than what we had.  It is becoming more and more apparent that this will not happen.

As the Fixer-Uppers of our time continue to manipulate and convolute the economies of the world, they cannot make it better unless they simply leave it alone.  But as that is not going to happen, we may have a lot of unfolding yet to do in this unwinding of mistakes.  Because the truth of the matter is, the markets are just like a bungee cord.  You can only stretch it so far before it shoots you in the opposite direction and there is nothing you can do. The markets will correct their inefficiencies, and all the manipulation in the world can’t stop it.  Just like the fool who petitioned congress to repeal the Law of Supply and Demand, only to find out that it is a law established by God, so will the modern tinkerers find that their “solutions” are ridiculous.

For us, we will continue to trade our trend.  Next week will bring us more opportunities.  So enjoy the weekend.

Until next time,
Bill Jenkins

December 10, 2008

Government Tries to Outrun Recession… Again was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.