Friday, August 14, 2009

The way it really is and what we can do about it.

All this bull malarky about "green shoots" and economic recovery "just around the corner" is nothing but media hot air.
Pink Slip Nation
by Gary North
August 12, 2009

... The economy is not in recovery mode. The best news that the media can present is that the rate of contraction is slowing.

There is no good news on the unemployment front. The rate keeps climbing. The statisticians have this hope: the job market will get so bad that workers presently looking for jobs will drop out. If they stop looking for jobs, they are removed from the unemployment statistics. Unemployment refers to people out of work who are looking for jobs. So, when someone drops out of the job market, he lowers the rate of unemployment. If enough people quit looking, the statistic looks better....

... This puts downward pressure on wage rates. Full-time workers know that there are part-timers in the company who would be happy to return to full-time work. There is great fear of being fired today.

The economy will recover at some point. But then we face the problem of the secondary recession. As the Alt-A mortgages come due next year and through 2011, the number of foreclosures will rise. It is now estimated that half of Americans who have mortgages will be underwater in 2011...

... Banks are not lending. They are keeping money with the FED as excess reserves. The bankers know that the next wave of residential real estate loan re-sets will hit next year. Commercial real estate is also going to fall. Vacancy rates are up. No one expects a near-term reversal.

This raises doubts about bank solvency. There are over 300 banks on the FDIC's problem list. This is probably a low-ball estimate by the FDIC. The bankers do not want to lend to high-risk borrowers. They keep their money at the FED because they see no borrowers. This includes the U.S. Treasury. They could buy safe 2-year T-bonds and lock in 1.2%. This is ten times what they are paid by the FED. They refuse.

Will they lend to mortgage holders who are facing the re-set problem? Of course not. The price of real estate is unlikely to rise. The underwater mortgages are rising. The borrowers will want to borrow the money they paid for their homes. They want a rollover. But their homes are worth 20% less or more, depending on where they live. In the re-set states of California, Nevada, Florida, and Arizona, homes are down 40% or more.

The bankers will not roll over these loans at face value. Then what?

...How can the people facing a re-set crisis get the money they need to roll over their loans? They will need to come up with cash to make up the difference between the loans' face value and the houses' resale value. These people do not have cash to do this.

... The manufacturing sector in July was still in negative territory, according to the Institute for Supply Management: 49. But this was up 4 percentage points since June: a substantial one-month increase. This is good news, even though anything under 50 is contracting.

The non-manufacturing sector got worse. It was at 46.4, down six-tenths of a percentage point from June. The non-manufacturing sector is far larger than manufacturing in terms of its impact on the labor market. It employs almost 90% of the work force. Manufacturing employs 11% of the labor force, down from 20% in 1979 (2006 figures).

The economy is still contracting. The hope is that it will reverse later this year. Bernanke has said it will. Geithner has said it will. But both have said it will be a weak recovery. Geithner has said that unemployment will peak in 2010. He did not say when in the year. This indicates that he understands the lag factor...

...The workers above 35, with families and mortgages, are taking heavy hits. Their career plans have been upended by the severity and duration of this recession. The one bright spot was their homes. They were appreciating. Now these families are underwater...

...The Reagan recession had been preceded by a decade of inflation...When rates fell, there was a boom. Now rates are lower than ever before, and prices are stable. Banks are not lending. Real estate is depressed. A bubble market does not recover rapidly. It takes years.

... Where will recovery come from? What will be the boost comparable to falling interest rates after 1981? There will be none.

Then where will the jobs come from that will roll back unemployment at 9.5% today and heading higher? Where will people find a career at age 35 that will not suffer from the wage pressures from younger workers who finally settle down in career paths?

Oldsters will retire if they hate their jobs and if their homes are paid off. But that hope is fading...

... Bankers see what is coming: more defaults, more real estate declines, more foreclosures, and more write-downs. They remain in paralysis mode.

The economy has been hollowed out by monetary inflation, followed by a sharp decline in output. Demand is low. Caution is at the forefront.

Businesses are not going to hire new workers when things turn up. They are going to add hours to the workers who are still on the payroll.

The effect on the work force is going to be the Keynesian's nightmare: a recovery without increased spending. They will demand more Federal deficits. They will demand another stimulus. The government will absorb more investment dollars. The government will crowd out the private sector.

Recovery without new capital? It's not possible.

We now live in pink slip nation. We will live in it for a long time.

So, class, what do we do? We have to stop relying on outside banks and outside sources for jobs - we need to relocalize and, yes, to reinstate the "social contract" our immigrant forebears knew so well. We need to get rid of the illegal aliens working in our stores and hire our fellow Jews at reasonable wages. We need to set up barter systems and local currencies for various services (hair stylists, nurses, small appliance repair, etc. - jobs that required special training, in other words). Especially we need to stop paying money for things that should never have been part of the paid economy in the first place: child care, elder care, and educating our children - which can all be done using organized cooperatives instead of paid services.

We need to make an effort to become more self-sufficient in food, by helping each and every family with a yard, balcony or porch or flat roof learn to grow and can and dry produce from fruit trees and bushes, garden vegetables and herbs. We even need a few chickens in the back yard - and neighborhood farmer's markets where everyone can trade or sell their goods.

We need to get all the young people, girls and boys, learning arts and crafts and trades so that money and/or barter credits can be made with home and garage businesses making the household goods everyone needs.

We need to make it unnecessary for anyone to buy a car, by having everything we need within a walkable or bike-able distance. The neighborhoods need to band together to buy small electric buses for the elderly and disabled and provide free passes for them.

Etc., etc., etc. Our neighborhoods need to be more like kibbutzim (except, of course, many people will not lose their current jobs, even though their hours may be cut back). Some will cry "socialism," of course - and the answer is, "so?" You shall not stand by while your brother's blood is shed - by the Robber Baron CEOs of the banks and corporations. Is that really so hard?

No comments: