Unemployment… (deflation at work)

… or employment… whichever measure you prefer, still not improving.

http://news.yahoo.com/s/ap/20091231/ap_on_bi_go_ec_fi/us_economy

Excerpts, emphasis added:

Thursday’s report illustrates the two different trends: first-time jobless claims are falling as layoffs ease, but the total number of people collecting unemployment checks is still rising. […] But the extensions are set to expire in February. That could mean as many as 1 million people would run out of unemployment aid in March, according to the National Employment Law Project, a nonprofit group. […] Fifteen million Americans are out of work, an increase of 3.8 million since the start of 2009. There are six unemployed people, on average, for each available job. And the so-called underemployment rate, counting part-time workers who want full-time jobs and laid-off workers who have given up their job hunt, stands at 17.2 percent.

The key here is that whichever way you slice it, unemployment/underemployment is still rising. Admittedly employment data is a lagging indicator but the key point here is that unemployment has not yet stabilized. Also, the Federal government has enacted legislation aimed at extending the period of unemployment benefits. Though noble the intent may be, it also masks the true picture of unemployment.

But, here is the kicker. Emergency Unemployment Compensation is a great concept. But extending it over and over again is putting strain on what effectively is already a horrible fiscal situation as brought about by declining tax revenue.

Declining tax revenue and rising unemployment is what deflationary depressions are made of.  If so far you should not have felt what are widely considered the common sense effects of deflation it is because till now the effects have logically been “confined” to the arcane world of finance. Just for kicks, try asking the major banks why they would rather not abide by mark-to-market accounting rules that are mandatory for every other business in the land. But, fear not, I bear good news. The effects of deflation at the street level may begin to show imminently anyway. Here is what I freely admit is still anecdotal evidence:

http://www.cbsnews.com/stories/2009/12/31/business/main6042878.shtml

Excerpt:

Colorado’s minimum wage will drop slightly in the new year – the first decrease in any state’s minimum wage since the federal minimum was adopted in 1938.”

Local, city and state finances are in a mess and in a bind. Cutting social expenditure is the only way to solve the budget crisis all states are facing. A $0.03 drop in the minimum wage does not even begin to address the degree to which wages, pension promises or public expenditure on infrastructure and services will have to be adjusted in order to balance budgets at state or federal level.

However, uncharacteristically for state employees, it appears that some may be seeing the light. Hat tip to Mike Shedlock for this find:

http://www.burlingtonfreepress.com/article/20091231/NEWS03/912310302/Vermont-state-employees-OK-pay-cut

Significant excerpt:

Unionized state employees overwhelmingly agreed to a 3 percent pay cut, voting to ratify a two-year contract that takes effect in July.”

You can read Mike Shedlock’s take here: http://globaleconomicanalysis.blogspot.com/2009/12/vermont-state-employees-union-votes-for.html

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8 Responses to “Unemployment… (deflation at work)”

  1. ducati998 Says:

    guido,

    Democracy, based on the previous definition, categorically excludes all and any form of government. True democracy cannot exist under statism.

    If we are arguing government & inflation, 100% demand deposit reserves, combined with a commodity money, gold, eliminates the inflation dynamic.

    jog on
    duc

    • guidoamm Says:

      Check.
      Come to that, there isn’t even a need for value based money at all. The inflation dynamic could also conceivably be eliminated by a fixed amount of fiat currency.

      Any monetary system be it commodity based or fiat can be gamed. What makes the difference… or what should make the difference, is fiduciary duty.

  2. ducati998 Says:

    guido,

    I actually wrote DEFLATION, not inflation.

    I was interested in how you theorised with regard to democracy. If we take a working definition of democracy as the following:

    There are two principles that any definition of democracy includes, equality and freedom. These principles are reflected by all citizens being equal before the law, and having equal access to power.

    Government, of any type, simply doesn’t fit into this definition. Therefore, government, simply is not, and can never be, democratic.

    Thus, democracy, can quite conceivably, still be correlated and causative of an economic system that is not dependent upon inflation.

    jog on
    duc

    • guidoamm Says:

      Hi,
      right you are. I misread your post. Apologies.

      My contention is that any political system is necessarily inflationist. The difference being that in a “democratic” system the logical conclusion of the inflationary cycle is inevitable. And although an autocratic system could in theory mitigate if not avoid the blow off phase, historically, this has never been the case.

      Like inflation, democracy is a dynamic that develops and evolves over time. Like inflation, at the beginning of the cycle, democracy ensure more freedom and is far more equitable than towards the end of the cycle. Hence as the democratic time line progresses, it gradually evolves towards a much less equitable concept.

      As government makes the deliberate choice to push inflation faster than economic growth, it makes the deliberate choice of goosing GDP. When you do that systematically, aggressively, pervasively and persistently over decades, inflation will eventually overwhelm the GDP number. So, at some point in the inflationary time line, any let up in inflation spells doom for GDP.

      This is the reason that as the inflationary time line progresses, government has a vested interest in closing an eye on practices that, at least initially, may be considered borderline legal. But as the “beneficial” effects of inflation wane (GDP growth), government gradually has an interest in closing both eyes till, eventually, it has a vested interest to collude in practices that contradict the letter of the law. Hence the reason that as the inflationary dynamic progresses government must necessarily become a progressively larger actor in the economy. Being the largest actor in the economy is inversely proportional to the degree of democracy government can extend to society.

      Finally, by accepting the US$ as reserve currency, sovereign countries must contend with an inflationary dynamic that is now 97 years old.

      Here is a post with data for the past 30 years which is the period that most directly concerns us.

      https://guidoromero.wordpress.com/2009/11/07/the-utility-of-a-fiat-monetary-system/

      What thinks you? Input appreciated.

  3. ducati998 Says:

    guido,

    While I think I know what you are actually saying, viz. deflation is a consequence of increased capital formation which leads to higher productivity and supply, which, in the face of lower consumer demand, lowers prices –

    I’m going to play devils advocate here and challenge you to argue how democracy promotes [I’m guessing you imply] inflation.

    jog on
    duc

    • guidoamm Says:

      I am not sure I follow you when you say that capital formation induces inflation. Unless of course, by “capital formation” you mean the manipulation of interest rates to induce expansion in the credit market.

      As to why democracy can only lead to inflation, that is because inflation is purely a monetary phenomenon.

      Government imposes a monetary system unilaterally and arbitrarily AND, more importantly, retains the power to set interest rates (so much for democracy and/or free markets). From that point onwards, wittingly or not, inflation is guaranteed. It cannot be otherwise. Particularly in a democratic environment. The reason that inflation is inevitable in a “democractic” environment is because the political process cannot make do with less money than previous administrations. There is no way on God’s green earth that a politician can ever hope to be elected to office campaigning on a platform of austerity. No way. If any politician were foolish enough to try, he/she would immediately be contrasted by rival politicians claiming to be able to bring about change without cutting previously enacted programs. Thus “democracy” is bound to outspend itself because the democratic process aims to promise satisfaction to the many regardless of practical economic considerations.

      There is no doubt that at the beginning of the cycle, inflation does serve a productive purpose in as far as productive capital is required to kick start an economy for example. However, persistent, pervasive and aggressive inflation pumping over decades that far outpaces the growth of economic intrinsic value must necessarily end up in excess industrial and commercial capacity. This is fine for as long as credit markets can be expanded. But credit markets can only be expanded for as long as interest payments can be serviced. The moment that underlying nominal economic activity does not allow you to service debt, then underlying assets must be sold off till equilibrium is reached again.

      However, after decades of inflation pumping, selling off assets to bring the debt burden back into balance necessarily results in a lowering of all asset values across the board. This means that all the assets that were used to guarantee the expansion of the credit markets no longer command their original values thus triggering margin calls thus requiring the sale of even more assets to make up for the loss in value. Rinse repeat. This is what deflation does.

      Since fiat money is essentially a form of debt based money, the whole construct is predicated on expanding credit markets. The point at which actors in the economy can no longer increase their debt burden, then the expansion of the monetary base is compromised. Thus inflation is compromised as is, by extension, GDP growth.

  4. ducati998 Says:

    guido,

    “Declining tax revenue and rising unemployment is what deflationary depressions are made of. If so far you should not have felt what are widely considered the common sense effects of deflation it is because till now the effects have logically been “confined” to the arcane world of finance.”

    I would take issue with your definition of deflation. Unemployment can be a statistic in either a deflation, 1930’s or an inflation, 1970’s – 1980’s

    Deflation is a good thing for the consumer, who wouldn’t want, in real terms, increasing purchasing power?

    jog on
    duc

    • guidoamm Says:

      Deflation is actually the normal state of the world or it would be if it weren’t for an unchecked fiat monetary system and democracy. As I have outlined in several previous posts, deflation is not the demon here. We should embrace deflation because it does lead to a much better style of life. The problem is that deflation is great if you are not in debt; but it is deadly if you are. Today, nobody is deeper in debt than our governments. Hence the reason that a deflationary recession will lead us straight into a world war.

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