Page 2 of 4 Either way, it could be an
unkind cut By Henry C K Liu
abnormally high returns that
landed the US economy in its current sorry state
in the first place. A case can be made that what
is needed under current conditions is not more
cheap money from the Fed, but full employment with
rising wages by government fiscal stimulants to
boost consumer demand.
The US government
should make use of the money that the banks cannot
find worthy borrowers to lend to, with
money-cautious investors seeking to lend to the
government, creating
jobs
for infrastructure rehabilitation and upgrading
education to get the economy moving again off the
destructive track of privatized systemic financial
manipulation.
Credit-market seizure
causes more unemployment The scurry by banks
to shore up their deteriorating balance sheets as
the commercial-paper market dries up as a source
of funding for many of their highly leveraged
borrowers could slow down bank funding for
consumer credit further, to cause a downward
spiral of more layoffs in the already anemic US
economy. Also, as recently completed
private-equity deals structured with cheap money
turn distressed with a credit squeeze, massive
layoffs in the target companies will follow,
adding to a further sharp rise in unemployment.
More ominous, the wide anticipation for a
rate cut by the Fed at its September 18 FOMC
meeting has already pressured the exchange rate of
the US dollar, pushing up gold prices. By
September 12, the GLD exchange-traded fund (ETF)
for gold set a 52-week high of $70, with gold
prices rising above $700 per ounce from $610 in
January. Oil has risen above $80 per barrel. Food
prices are rising. A further weakening of the
dollar combined with faster-growing economies in
emerging markets means foreign investors would
invest in non-dollar zones or in US companies that
have non-dollar revenue, further weakening the US
domestic market.
All 10 major sectors in
the S&P fell lower on September 7, and for the
week, the US consumer discretionary sector fell
3.2% amid fears over lower consumer spending.
Home-builders lost 6.8% for the week, taking their
fall for the year to 50%. Financials declined 2.6%
for the week, while the S&P Investment Bank
Index fell 0.8% on the day of the discouraging
jobs report, taking its loss for the year to
16.5%.
Investors are still waiting
nervously to see whether the market can clear a
backlog of $300 billion in unsold debt paper and
bonds associated with this year's record
private-equity buyout deals. In the midst of all
the negative news, it is sometime forgotten that
the Dow Jones Industrial Average is still above
13,000, a level substantially higher than economic
fundamentals would justify. Left alone, a truly
free market would adjust downward by as much as
40% before all the liquidity fluff is removed. The
pleasure of excess in the market is never
restrained by the excess of pleasure, which
unfortunately must be paid for at some point by
pain in the economy.
Still, structural
disparity in job opportunities persists in the
faltering US economy. In August, white
unemployment was at 4.2%, below the overall rate
of 4.6%; black unemployment at 8.0%; Hispanic at
5.9%; and Asian at 3%. The last two categories did
not include illegal immigrants, which could alter
data on underemployment substantially. Teenage
(16-19) unemployment was at 15.2%, while black
teen unemployment was 26.5%. The pain of NAIRU has
not been equitably shared even in the liquidity
boom. The rising tide failed to lift all boats.
Hidden US unemployment was 16.2 million or
10.3% of the labor force. They included 4.3
million who had part-time jobs because they could
not find full-time employment and 4.8 million who
wanted jobs but were not counted in official
statistics because they were not looking, of whom
about 1.4 million searched for work during the
prior 12 months and were available for work during
the reference week.
In addition, millions
more were working full-time, year-around, yet
earned less than the official poverty level for a
family of four. In 2005, the latest year for which
data were available, that number was 17.0 million,
16.2% of full-time workers. In June 2007, the
latest month available, the number of job openings
was only 4.3 million, nearly four job-seekers for
each job opening, while corporate earnings
continued to rise from job outsourcing and
financial manipulation such as share buybacks made
possible by a liquidity boom.
Phantom
'strong economic fundamentals' With the
liquidity boom abruptly halted, residual robust
employment and corporate earnings were
misidentified as the alleged remaining "strong"
economic fundamentals to which high US government
officials and Wall Street cheerleaders
misleadingly referred, in defiance of facts even
weeks after the subprime-mortgage crisis broke
out. Even honest fools would know that a collapse
of credit markets would lead quickly to rising
unemployment and falling corporate profits, and
high government officials and high-paid analysts
are surely not fools. The issue then must be one
of honesty.
Non-farm US payroll employment
dropped by 4,000 in August to 138 million, and the
unemployment rate remained at 4.6% or 7.1 million
workers, more than the total population of any US
city except New York. Still, 4.6% is uncomfortably
on the low end of NAIRU (4-6%), and that means an
interest-rate cut now would risk inflation down
the road in a faltering economy, ie, stagflation,
as in the 1977-81 period under Fed chairman Paul
Volcker and president Jimmy Carter. This is the
dilemma faced by the Fed: a cut in short-term
rates may do more harm than good by not helping to
sustain a liquidity boom yet fueling accelerated
inflation, not to mention leading to a loss of
confidence of the part of the market in the Fed's
ability to manage a monetary and financial crisis.
As with their flawed attitude toward risk,
the authorities in charge of regulating financial
markets and the US economy apparently think that
inflation-fighting structural unemployment spread
over the whole economic system is not damaging to
the economy as long as the resultant profit is
privatized and concentrated on a preferred
selection of financial institutions, even if the
privatized profit is achieved by externalizing the
cost of risk to the entire financial system
through structured finance. Free-market
capitalists obviously think that socializing risk
or unemployment is not dreaded evil socialism,
only socializing profit is.
Over the third
quarter of 2007, total US payroll employment
changes have averaged 44,000 new jobs per month,
well below the monthly average of 147,000 new jobs
between January and May. In August, employment in
manufacturing, construction, and local government
education declined, while job growth continued in
health care and food services. The civilian labor
force edged down to 152.9 million, and the
labor-force participation rate decreased to 65.8%.
The declines were largely due to a drop in
labor-force participation among teenagers; their
participation rate fell to 39.7%. Total employment
in August was 145.8 million.
Part-time
and temporary workers The number of
Americans working part-time for economic reasons,
at 4.5 million in August, was 359,000 higher than
a year earlier. This category includes people who
indicated that they would like to work full-time
but were working part-time because
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