Monday, 25 April 2011 11:04

On Employment and Real Estate Recovery

A regular commentator on BoomBustBlog has been attempting to make the case for a housing recovery based upon rising employment metrics. He has, particularly, pointed out rising hourly earnings. I thought I would take this time to point out that average hourly earnings can rise due to the fact that less people are working. The aggregate employment in the US has literally fell off of a cliff. Since you know that I love pictures, let's do this graphically...

Below you have a chart of total hours worked in the US with the average hourly earnings superimposed on top. As you can see, two and a half years and trillions of dollars of stimulus and QE later, we have barely budged. There was no multiplier effect. In essence, what you had was a divisor effect, and the money would have shown up more on a dollar for dollar basis if it was simply given to the populace! Of course, that wouldn't have kicked the inevitably deflation of the banking system down the road, now would it have?

Notice that despite the severe drop in total hours worked, average hourly earnings have increased. This can easily mislead someone who is not paying attention. Read more on this topic here:

and on the real estate issue...

Here are the BoomBustBlog Real Estate Channels:

  1. Residential Real Estate
  2. Commercial Real Estate
Last modified on Thursday, 03 May 2012 10:37

5 comments

  • Comment Link Frank Shoemaker Friday, 29 April 2011 10:44 posted by Frank Shoemaker

    If we were to up the minimum wage far enough to start pushing the price of houses up and to nothing else besides this then you would see a contraction in employment. However and this is a big but, if we give money to everyone at the same time as we up the minimum wage then we will have a spike in consumer spending and with that a spike in employment as well.

    We also need to be engaging in some protectionism. A simple and effective way of reducing and reversing the trade imbalance is with a high savings rate. If we had a national savings plan that is a flat tax that you could get 100% back if you put it into certificates of deposit in credit unions then we could be saving at a rate higher than the domestic demand for debt calls for. The credit unions would then be obliged to buy debt in foreign countries. The people in those countries would then be obliged to buy our products with the debt. Set the savings rate correctly and we get balanced trade.

    We are headed into a new bubble. We are also in a liquidity trap. More debt makes the economy contract not grow. If you want the economy to grow from where we are at now then we need more income and less debt. Writing off a bunch of debt as bad is bad for business. So if we simply inflate wages far enough then the current debt load is far more sustainable. Also if we put more money into circulation without increasing the debt load then we can get a positive multiplier on the money. I think that the new bubble will happen as the economy is stagnant or continues to contract.

    We need to keep new debt from accruing as we get full employment and economic growth. The old-fashioned way of doing this is with higher interest rates. The government can’t afford higher interest rates now. But if, not when, but if the feds QE (Whatever) and 0.25% interest rates gain some traction we will need to raise the interest rates. This will bow the federal budget wide open. We need to raise the interest rates without raising the interest rates. So tax the payment of interest on personal as well as corporate debt, including bank to bank loans. This will up the privet interest rates without raising the public interest rates, also it will increase the tax base for the government and that is desperately needed.

    If you are look backing at the 1970’s and the stagflation that we were having then and comparing it to the macroeconomic picture we have now we are not in that dissimilar a position now. We are set up for stagflation. How long this will last is a function of what public policies are set in place. If we adopted policies that take into account the changes that the economy needs to undergo and will undergo regardless of what policies are put into place then we can shorten the recovery time substantially. We can also go through the economic restructuring that needs to take place at closer to 100% employment than at the current high unemployment rate we have now. (Something like 20% or more forget the numbers that are published) The high unemployment rate is driven by macro deflation, the falling price of houses. Higher fuel costs as well as other things that you need to live are driven by the feds printing press. (Note the US’s economy is structured to run on $800 billion worth of printed money a year as over the last ten years the world’s monetary base went from $3 trillion to $10 trillion with that printed money being used to buy debt in the US. The money was printed by foreign central banks and used to by US debt with.)) We need full employment, a larger tax base, and higher wages to support the high debt load we have, and we need to keep from having a new explosion of debt. What I have been talking about attempts to accomplish all of those things. Any one of those things that I’ve stated taken in isolation will probably make things worse not better.

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  • Comment Link fedwatcher Monday, 25 April 2011 17:11 posted by fedwatcher

    Reggie,

    Got it. We are still in an extended Bust phase and have not properly entered Contraction and still in Ponzie finance (for sovereign debt).

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  • Comment Link Reggie Middleton Monday, 25 April 2011 16:38 posted by Reggie Middleton

    Sounds good to me, except for the last line. It's not another bust ahead, but the previous bust attempting to complete itself against the efforts of the global central banking cartel.

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  • Comment Link fedwatcher Monday, 25 April 2011 14:56 posted by fedwatcher

    Reggie,

    Is this an accurate exposition/edit of your “Circle of Life”?

    Reggie Middleton's "Economic Circle of Life":

    The Trough Phase is the prime investment opportunity and this phase follows the "Contraction Phase". Here there is almost no competition in a field rife with opportunity. It is nearly impossible to identify this phase. It is in the “Trough” that the first phase of Hyman Minsky’s “Financial Instability Hypothesis” starts or “hedge finance,” where the lender expects both principal and interest to be repaid and has no reliance on asset price inflation.

    The Expansion Phase is the bullish activity in the business cycle. This is where most of the money is made in conventional investing. Although this is a relatively small part of the cycle, marketers push this as the majority of the investment cycle. This short phase follows the "Trough Phase". This Healthy Expansion can be identified and tells you that the "Trough" has past. For this phase to morph into a “Peak”, we need to transition from Minsky’s first phase to his second phase: “speculative finance,” where the lender has a reasonable expectation that interest on the loan will be paid but repayment of the principal is not as certain (asset prices here are not expected to decline).

    The Peak Phase is where overt speculation/excess takes the "Expansion" too far. It is marked by inefficient use of resources and excess leverage. This is where most investors pile in, when it is too late. Here we also see the transition into Minsky’s third phase: “ponzi finance,” where the lender expects neither the principal nor interest to be returned (but relies on asset price inflation).

    The Bust Phase is easy to see coming yet perpetually ignored. Those such as Reggie Middleton who predict them simply observe from afar, and are not possessed of magical powers. The existence of “Ponzi finance” is a “tell” (to use a poker term).

    The Contraction Phase is where "balance" is established before the "Trough". It is the lasting result of speculative excess. This phase may last a matter of months (a recession) or a decade (or two). The Great Depression and Japan's two lost decades are extreme examples. Investors get burned if they think this is a "Trough". In this phase, loses must be recognized and bad debts defaulted. The Inflation of the past can be undone by Deflation and balance restored. Central Banks have long tinkered with this phase to save their owners (which are banks and governments, but mostly banks). After the "Contraction" phase completes, a "Trough" appears. But it is very difficult to see when the "Contraction" has ended. Here banks just do not lend. They are not ready to go into Minsky’s first phase as they are busy foreclosing and often failing.


    Our lenders of last resort (central banks) are flooding the banks with liquidity to cover their loses. The banks are using this liquidity to speculate in the equity and commodities markets and “hedge finance” is still denied to “Main Street”.

    Western governments and the central banks have been "Quantitative Easing" to cover-up the "Bust" and prevent the normal course of "Contraction" which has extended the "Bust" phase. Thus Stagflation and another Bust is ahead.

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  • Comment Link Frank Shoemaker Monday, 25 April 2011 13:46 posted by Frank Shoemaker

    We have had a 2.8% recovery in total hours worked. Yippy. Now we just need 9.24% more and we will be back where we came from.

    I have been a big fan of printing a bunch of money and just giving it to everyone. If you want a $900 billion spike in consumer spending then you should try to give the consumers $900billion for starters. With full employment the banks would be in far better shape.

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