February 02, 2010
The US Treasury Department says that bailouts add risk to the financial system.
WASHINGTON - The government's response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.And guess what? He is not the only one saying that.
From a November 2009 report we get the word that more stimulus creates more unemployment.
"Stimulus" is in the process of turning a nasty recession into a genuine depression. The evidence is in the "Employment Situation" report released by the Bureau of Labor Statistics (BLS) on November 6th. The "headline" unemployment rate shot up to 10.2%, the highest in more than 26 years. But the report was much worse than most people realize.I have to admit that recently the rate of job loss appears to have slowed. But that may only be a temporary respite. And why is our recovery from problems so off track?
The massive sales of U.S. Treasury bonds to finance "stimulus", bailouts, and other government spending is sucking capital out of the private sector and destroying jobs.And there are still problems with other sectors of the economy.
The smaller banks are carrying the burden of the commercial real estate problems and consumer debt and mortgages still present these banks with problems because these loans represented "Main Street" and were not all packaged and sold to investors in Finland. Remember there are 552 banks, all small- and medium-sized banks that are on the FDICs list of problem banks and this is expected to grow this year before declining, generally do to actual failures.Illinois where I live is in bad shape. Very bad shape.
And, there are the dislocations being created by the federal government. Budget deficits for the next ten years have been placed in the range of $15 trillion. The United States is fighting three wars throughout the world. The government is passing health care legislation that has been justified fiscally by postponing start dates of programs from three to five years. There is climate control efforts being considered along with regulations, like anti-pollution controls, that will just exacerbate the economic and fiscal problems of the country. Then there are other changes in the rules and regulations that apply to industry that will further change the playing field and create greater uncertainty about what management's should do.And the funny thing is that we did not lose those jobs to foreign competition. We lost them to computers and robots.
...the news about the manufacturing sector gets a little better. According to the Federal Reserve, the dollar value of U.S. manufacturing output in November was $2.72 trillion (in 2000 dollars), which translates to $234,220 of manufacturing output for each of that sector's 11.6 million workers, setting an all-time record high for U.S. manufacturing output per worker (see chart below). Workers today produce twice as much manufacturing output as their counterparts did in the early 1990s, and three times as much as in the early 1980s, thanks to innovation and advances in technology that have made today's workers the most productive in history. So at the same time that manufacturing employment has been declining to record low levels, manufacturing output keeps increasing over time, and the amount of output that each manufacturing worker produces keeps rising almost every month to new record high levels.So despite Stupid Government Policies the economy is getting rationalized. The reason it is so painful this time is that we have 50 years of accumulated dead weight to shed.
Which brings me to a book. This Time is Different: Eight Centuries of Financial Folly and a book review.
Unemployment rose by several hundred thousand jobs in the fourth quarter, and if you look at some surveys, it approached 500,000. That is hardly consistent with a 5.7% growth rate. Further, sales taxes and income-tax receipts are still falling. As I said last year that it would be, this is a Statistical Recovery. When unemployment is rising, it is hard to talk of real recovery. Without the stimulus in the latter half of the year, growth would be much slower.The thesis of the book is that this time it is the same as it ever was.
Let's lead off with a few quotes from This Time is Different, and then I'll add some comments. Today I'll focus on the theme of confidence, which runs throughout the entire book.And it not just the US. It is a problem world wide.
One point I found fascinating, and we'll explore it in later weeks. First, when it comes to the various types of crises with the authors identify, there is very little difference between developed and emerging-market countries, especially as to the fallout. It seems that the developed world has no corner on special wisdom that would allow crises to be avoided, or allow them to be recovered from more quickly. In fact, because of their overconfidence - because they actually feel they have superior systems - developed countries can dig deeper holes for themselves than emerging markets.We hear of trouble in in Greece taking Europe down. Maybe down so hard that it will collapse the Euro market. And then there is China which I have been writing about for the last few days. They have yet to undergo the first stage of the world wide fall. And every one knows China will fall. No one knows just when. It could start this week. Or it could start two years from now. If I was a betting man I'd bet on sooner than later.
So what should the US Government do? Other than keep people off the streets - nothing. And by off the streets I don't mean in homes that are unaffordable. A roof - we have plenty of them - and a minimal diet. Then let the wisdom of 300 million people take over.
At the core of our problem is a secular decline. The easy gains from microprocessors (I have the equivalent of four or ten Cray 1s on my desk - not so micro any more. Except for size.) have been realized. So what is the next big thing? It could be a real breakthrough in fusion not one of those mega projects with big promises and small results. It might be in carbon nanotubes. Or it might be a breakthrough in materials that allows us to substitute cheap materials for much more expensive ones. Or it could be something in biotech. Or a new way to do business. Or probably something hardly any one knows about. Some unrealized potential.
The deal is, that what ever it is, Washington with its macro policies is more likely to hurt than help. So what could Washington do? Pour money (it need not be a lot) into micro policies. More fundamental research. And a big push into research is not expensive. A few tens of billions a year could reap us big dividends. If we are truly in a knowledge economy (we are) then what we need is more knowledge not more bail outs of dying sectors of the economy. What is unseen is more important than what is seen.
Cross Posted at Power and Control
posted by Simon on 02.02.10 at 09:26 AM
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