Fed and the Money Supply: Details

A thoughtful consideration of my articles on how the Fed works to expand bank credit, the Fed’s massive expansion of Member Reserve Deposits, and the steady decline in bank loans could easily result in some head scratching. My explanation of expanding bank credit (similar to what you find in Meltdown by Thomas Woods) would lead you to think that bank lending would be going crazy now, with the reserves built up to such a massive amount. There are, however, other factors at work in the process that I did not include in my discussion. I thought that my explanation of the Fed’s basic activities was long, complex, and convoluted enough without adding many other things in as well. I should also say that the degree of complexity is not really apparent until something like the present situation occurs.




What other factors? Well, there are basic banking practices, bank profitability, bank capital and loss reserve needs, and other regulators. This last factor is not minor. The banks have a galaxy of people looking over their shoulders. These regulators insist, and have the power to insist, that the banks follow certain “risk” and accounting standards. It isn’t that everyone of these standards are necessarily bad, but that the application can be arbitrary and outside of context. The standards change constantly, especially in their detail, which sometimes makes what the bank was doing in accordance with the regs yesterday, but today, that practice is wrong and subject to penalty. How this is working out in today’s circumstance is explained in this Forbes article. The author is an administration cheerleader, but he inadvertently gives you a very good idea of what is happening.


Most basic in considering a bank’s standard method of operating is that it is a business, with shareholders, employees, balance sheets, and standard operating practices that have been developed over centuries. Banks are in business to make a profit. Sound banking, to the extent that it can be found amid all of the nonsense required of banks today, also includes of many of the practices that any business needs to follow if it is to be profitable.


In addition, especially within today’s funny-money environment and the uncertainty of future of changes in regulation and government activity, a bank has to protect itself (think of the uncertainty BO’s TARP Tax created). The bank has several different accounts of its own that it maintains for financial protection. It has a capital account, what you could also call equity. The bank’s capital is reduced if it operates at a loss or if other assets are lost. The bank also has a loan-loss reserve, which is an account of cash that the bank keeps to cover bad loans and the failure of other assets, e.g., mortgage backed securities. During the financial crisis, many banks saw significant shrinkage in these two accounts. In order to restore the health of a bank, these two accounts have to be built back up. Banks cannot and will not expand their loans again until they have a healthy capital account (which would be a certain ratio to its obligations) and loss-loan reserve (also a certain ratio to outstanding and new loans). In the normal course of events, these accounts would be increased by either by going to the capital market or by retaining profits. The capital market is not functioning well right now, especially for banks, and profits are hard to come by. Sensible banking is standing in the way of the government’s (read BO and the Fed) demands for increased loans.


One might suggest that a bank could take some of the excess reserves that the Fed has given the bank and put that in either of these important accounts. But it can’t. There is no legitimate accounting method to do so. It is exactly the same problem for someone who wants to take stolen money or drug profits and put into a business. There is no way to account for it.


A bank can take money the Fed has created and placed in a bank’s “reserves”, but there is only one use that it can put that “money” toward: loans. When I wrote that a bank with an increased reserve could then make loans, I was implying a practice that is not the norm. I am not aware of any restriction preventing a bank from just expanding its loan portfolio when its reserves have been expanded, assuming that the capital and loan-loss reserves are sufficient. It may be that the accounting techniques available do not support that approach. For whatever reason, banks tend to take a different approach.


What happens is that the bank will take excess funds out of their Fed account, presumably a percentage that leaves the required deposit in their Fed account. This “money” (in quotes because it is stuff that the Fed created) the bank then loans.


The process probably goes like this. The Fed has selected a target interest rate below market for the Federal Funds/discount rate. To maintain that low rate, the Fed will be buying Federal bonds from institutions. When the bank presents the check for the purchase of the bonds to the Fed, the Fed puts the funds into the “reserve” account of that bank at the Fed. The bank now has more funds in their “reserve” account than they need for the demand deposits held by the bank. If a “qualified” loan applicant is available (qualified in quotes because low interest rates distorts, undercuts the real criteria needed to make loans, i.e., a market interest rate), the bank takes the “money” out of the reserve account, leaving at least sufficient funds to cover its reserve requirement, and loans the “money” to the applicant. And thus the money in circulation has been expanded. The funds loaned are used to pay bills related to the purpose of the loan, which means that the “money” shows up in other banks’ demand deposits, which those banks use as they use any money. They adjust their Fed reserve account to reflect the increase in demand deposits, and loan out a portion in new loans. After this process continues through its natural course of movement from bank account to bank account, the ultimate increase in the money supply comes close to equaling the reserve ratio. Today, large city banks are required to have 10% of their demand deposits in their Fed accounts (currently, they can count cash in their own vault as part of the “reserve”). Thus, an increase in the “reserves” of $1B can see an increase in the money supply of $10B.


As much as the Fed and, today, BO, would like to see an automatic process whereby the Fed can force up the money supply, just by increasing the Member’s deposits, as we see above, there are some countervailing forces. How long those forces will remain in effect is the current question.


It is also the case that as much as the Fed wants banks to begin lending again, it doesn’t want them to be lending as much as the current massively, over-funded Member’s accounts would allow. Currently, there is over $1T in excess reserves. That is more than any historical period by a factor of close to 100,000! Even the Fed, which normally ignores the actual pumping of money, is concerned about the amount of reserves currently sitting there.


But what is the Fed to do? Bank loans are actually still declining. Interest rates, according to mainstream economics, have to remain low to stimulate the economy. As soon as the Fed starts withdrawing the excess reserves, interest rates will start up, especially long-term rates, and all kinds of unwanted consequences will result, including increased interest expenses in an already bloated federal budget. BO will start yelling at the Fed and the Congress will start “investigating”! Also, the stock market will dive, (the dollar might actually strengthen, who knows?) housing purchases will decline as mortgage rates go up, and the economy will tend to slow. If it weren’t that we are all living in the middle of this circus, it would be fun to watch.


As of yesterday, the Fed again reassured everyone that interest rates will remain low. Aren’t they nice?

My Return; Four Comments

Storms, cat sitting (my good friend, George), being sick – for way too long, and stuff have put me way behind. I haven’t touched this for weeks. I hope to get back to my efforts.



For today, let me hit a news story or two, err…four.


HEALTH CARE

Recent announcements from people who keep track of it put government spending on health care at almost 50% of the total this year and more than 50% next year. After that, especially with Medicare and then whatever BO gets into the system, government spending will soar!


What does this mean? You know already. More of the same annual inflation of the cost of health care, plus probable rationing, attempts at price controls (MA is approaching that now), and a lowering of the quality and quantity of health care in America. Because of the recession, the loss of our high health care standards will happen earlier than we might have expected. It is all interrelated, the economy and our quality of life.



RECESSION

Speaking of the economy, the recession is lingering. Yes, some have proclaimed the recession over. Maybe in some respects it is, but even then, it is a very marginal thing. I see no immediate reason to declare that our standard of living is recovering. In fact, it is just the opposite.


Now there are stories in the press that the economy will suffer a decline again very soon. You might say that it is good that the press is recognizing the failure of the approach accepted by both Dems and Republicans alike (does “Repub” sound like a nice fit with “Dems”?). You would be wrong. These “economists” who are forecasting renewed recession are doing so because the government hasn’t interfered sufficiently or in quite the right way for their taste. They want more government activity, in areas they think are important. How bizarre. The disconnect with reality is so severe for today’s “economists” that no level of failure will cause them to reevaluate their position.


As the decline in January of the housing market indicated, the stimulus programs that BO put in place are failing to get the economy going. In stead, the economy is still pretty much not going anywhere. Job losses have flattened, bank lending is still falling, and businesses are trying to do the best they can.



PRICE INFLATION

If BO does get some more of his programs in place I think that we will begin to see some more significant price inflation. He will be pumping massive amounts of money, new, made-up money (by way of selling bonds overseas or through the Fed), directly into the economy (as opposed to the method used when new money is created by the Fed via bank credit expansion), which will chase after the stuff already available, and prices will rise. We won’t be seeing the asset or commodity bubbles because bank lending is still declining. Price rises will confound everyone, including the Fed, and we may revisit price controls. We certainly will not see spending reductions from the Federal government for the next three years, even if the Dems lose a lot of seats in the coming election.



GLOBAL WARMING

I don’t write much about this because it is well covered by others and I don’t have anything new to contribute. I did see this on facebook, so I thought that I might mention it.


This was referenced by some conservatives as a good reply to the global warming croud. I’m not sure why. It may be a put up job. It certainly is a denunciation if you regard religion as wrong, but it is offered by the conservatives (?). It does take the science out of the global warming movement, which is a good thing. It doesn’t give any importance to the political aspect of the global warming people, which is their main objective.



GRAB FOR RETIREMENT ACCOUNTS

This subject should make you very concerned, if you have any significant amount of money in what are called qualified retirement accounts, i.e., IRAs (Roth or traditional), 401(k)s, Simple Plans, Money Purchase Plans, etc. The government, under the assertion that most investors are mismanaging their retirement assets, are suggesting that the funds be turned into annuities. Annuities give you a stream of income that lasts as long as you are alive.


The intention of the government is to move that money into government securities, i.e., bonds. Thus, it won’t matter what China or other overseas bond buyers do in the future, the government will have trillions of dollars to use from the retirement accounts.


There are many downsides to this plan for you, financially speaking. The biggest is that an annuity offers absolutely no protection form inflation. You are on a fixed income. But that, of course is a secondary point. Most important is their plan to forcibly separate you from your assets. Watch this carefully. If they get close to bringing their plan to fruition, you will want to pay the taxes and move whatever money you can to a non-qualified account. In the meantime, you will need to talk to your representation to stop it.


Like the attempt to subvert your health care, this attack on your retirement assets has personal repercussions on you. If you talk to make comments to the Treasury, I think that it is important to point out the principled and practical consequences on you, both moral and financial. You don’t want to lose this battle because the authorities did not realize that you feared for your financial health as well as your freedom. If they don’t care about your freedom, they still might be concerned about the other. We don’t know. Don’t leave out either issue.

Social Security, Medicare Update: Problems Start Now

I have referred to the dire warning sent out by John Lewis a few months ago about Social Security, Medicare, and Federal Spending. Dr. Lewis used a report written by a former government budget official, which was based upon current information at that time. Well, surprise, the recession has had an impact.



According to a report (here) Social Security is experiencing a shortfall in its revenue this year, many years before the last Social Security report expected. It will need to draw on the “Trust Fund” this year. The SSA won’t need much to meet its needs, but the real problem is that SSA revenue was expected to exceed it needs and add to money to the Federal Budget. So the deficit will be larger than they expected.


Further, as long as the number of workers contributing to Social Security remains less than needed to meets its needs, we will see Social Security dipping into income tax revenue and the deficit will become larger.


I am sure that there is consternation in the Treasury Dept. I am sure that BO and most of his gang aren’t paying any attention.


It doesn’t mean that the problems that John Lewis warned us about will happen that much sooner, because that mess is more dependent upon the age of the population.


What we will see is larger deficits, larger Treasury Bond auctions, more resources removed from real economic activity, slower growth, slow job growth, more recession, more made-up money being created, and probably higher price inflation.

The Question of Obama

When I look at the next few years, one of the big questions that I have is the real nature of Obama. Every time he presents another of his ideas it seems more extreme than I could have expected, more cut off from the real world, more bazaar, more like we are living in Venezuela. I am serious, Obama is envious of Chavez, just as FDR was envious of Mussolini. Therefore, I want to ask a question:



Does Obama have any sense of restraint? Can he restrain himself?


I ask because I have seen no restraint in any of his actions so far. In each of his major proposals and attempts to push forward his program, he seems to go for the full effect at once.


His health care plan was nearly full socialism. And in spite of growing resistance to his health care plan, he still seeks a way, any way, to pass the thing.

In the face of an economy that is showing no real start of a recovery, he has presented a budget that will spend outrageous amounts. Actually, I don’t have an adjective that fully expresses the audacity of the “thinking” that is behind this budget.

With no sign that his previous “stimulus” packages have provided any benefit, he is demanding a big new one.

With the Supreme Court sitting immediately in front of him, he criticizes their pro-free speech ruling.

He barges into the Republican retreat and plays gangster, and then pleads with to give him all the power he wants to do things his way.

He criticizes people for wanting to have fun and offends another Dem.

He verbally attacks anyone who he thinks the public will allow him to bludgeon, like banks or major corporations.


Practically in the same day he demonizes the banks for taking on too much risk and then for not taking risks when he wants them to do so.

I am sure that the list can go on a lot longer, but you’re saying, “yes, we know”.


What is he going to do when he becomes really frustrated? What is he going to do later in the year or next year when it is clear that the economy is not going anywhere? What is he going to do when low tax revenues are making the Treasury borrow sums of money that is causing the market to choke and long-term interest rates go soaring. And then criticism becomes more severe. Is BO going to retreat? Or is he going to become more aggressive, call on his still loyal, younger supporters and demand change. Is he going to instruct his loyal people in the administration to nationalize the businesses that are not bending to his will? Is he going to …?



What is he going to do?


I don’t know. In the past we have been confident in the willingness of politicians to follow the legal procedures of office. But we have seen actions in the last two years that completely ignore property rights and there has been no real protest within the Washington establishment. It began with Bush, and BO is quite willing to follow in Bushes footsteps and beyond. I wonder if BO has any restraint. I wonder if BO is willing to accept any significant opposition to his desires.


Do you have a feel for the man? Will he accept frustration? If, as I suspect now, that in the next election he will lose the majority he has in at least one House of Congress, will accept defeat?


What do you think he will do?

Bernanke's Confirmation: No! Err... Well....Okay

Ben S. Bernanke, the Chairman of the Federal Reserve Board, is facing some opposition in winning a confirmation for his second term as Chair. As a man who is nearly universally proclaimed as the savior of the American economy from a deep depression, it seems amazing. The mainstream press has been a cheerleader and books have been written extolling his heroics. What is happening?



My own view of the man is spread throughout this blog, especially in my comments on his speech on January 2nd. He practices a science that is tailor made to not learn of causal relationships. He gives the impression of being non-political. He appears to be the ultimate academic bureaucrat.


Bernanke always appears poised and rock solid in his pronouncements and prognostications. This is his view of how a Fed Chair should be. Unfortunately, he appears rock solid regardless of the veracity or wisdom of his statements. Here are some examples: He appeared poised and rock solid when he said that there was no problem with the rise in housing prices a couple years ago. He appeared the same when he said that the problems with foreclosures would have no impact on the economy. He appeared the same when he said that Fannie Mae and Freddy Mac were in excellent financial health. He appeared the same when he and the Treasury nationalized the failing Fannie Mae and Freddy Mac a few days later. He appeared the same when he began nationalizing banks and put a couple trillion dollars into the economy. He appeared the same when he said that events that coincided with injections of money were coincidences. He appeared the same when he said that the probable cause of the foreclosure problem was the use of risky mortgages offered to substandard credit borrowers, even though he knew that the Fed had pushed with the rest of the Federal government for lowering credit standards for mortgages for years. The guy has an appearance that does not connect to the real world.


I also think that any man who accepts the chair of the Fed has to be regarded as having a questionable psychology. This is one of the most powerful, political positions in the world. Anyone willing to accept that much power over his fellow man has problems.


At this point, there is very little suggestion in the mainstream press that the Fed is responsible for the house price bubble. As I mentioned, there is nearly universal acclaim for his leadership in keeping the U.S. economy from depression. Why then is his confirmation being opposed by several Democrats?


The good news is that several democrats are criticizing Bernanke for the bailouts. The bad news is that they are criticizing the bailouts primarily because these politicians think the companies bailed out are unpopular. It is a play of the class warfare card.


It is okay, they think for the Fed to have pumped a trillion or two into the economy. It is okay for him to have wielded the power he has, along with the Treasury.


One set of criticisms of Bernanke is that he gave too much money to AIG and did not add conditions. These criticisms aren’t that Bernanke bailed out AIG, but that he didn’t do it in a certain fashion. Somehow, in his headlong dash to dole out all the money he could create, Bernanke was suppose to make sure that the money wasn’t suppose to be used for AIG’s actual business, which, in this case, was to insure certain investments tied to mortgage backed securities. If AIG failed to meet its contractual obligations, those companies would suffer sever difficulties and many would fail. What was AIG suppose to do with the money? These congressional critics are all for the use of government money as a means of manipulating the economy, confiscate assets, and generally extend the government’s reach, but they are outraged that the money was used for contracted, normal business activities. It is just another example of the attitude of the political climate that the importance of contract is ignored and denied. The worthiness of attacking a person because their actions inadvertently helped a company that can be attacked for political gain.


One criticism that I have heard only a little is that he has lied at several stages of the bail-out. He lied to BoA on the financial health of Merrill Lynch, and then when they found out the depth of the problem he threatened the Bank’s leadership and implied that he would put someone in their place who would do what he, Bernanke, wanted. The man feels as though he may do as he pleases with his power. He lied about the AIG deal and his representatives at the New York Fed told AIG to keep quite (for which the AIG officials are blamed with the suggestion that AIG instigated the deceit, when it was obviously the Fed). He has lied about the role of the Fed in the lowering of credit standards for sub-prime mortgages, implying that it was the nefarious and evil mortgage brokers, who had only their jobs and businesses to loose. The man apparently feels that any statement he makes is acceptable because he is “saving” the country from depression. He must “do all it takes”, which means forcing people to do what is not in their best interest. At best, Bernanke believes in sacrificing others for the sake of “the greater good”. Not to psychologize, but it is just as possible that he just likes the power.


I have seen that many people are happy that Bernanke may be rejected. They are joining the chorus, albeit a small one at the moment, in calling for his confirmation to fail. Bernanke should be fired, at the very least. He should not continue in a post that he doesn’t understand and mishandled so badly. I cannot deny that I too would feel good about the Senate sending him home. But. But! BUT! There is a small, okay, a big problem.


If Bernanke, the lying, self-deluded, power craving, freedom destroying, bureaucrat loses his job on Sunday. What happens? Obama gets to appoint a new Fed Chairman. Obama. Obama gets to appoint the person who is quite possibly the most powerful person in the world economy. Obama.


I am afraid. The prospect of Obama placing a person in the Fed Chair frightens me more than Bernanke does.


I have not kept track of Obama’s appointments. But from what I can tell, his people are radical, anti-freedom socialists and fascists. I am not aware of a single competent person. The guy at the Treasury is the one who forced through much of the current economic plan as head of the New York Fed. He came to the government from Goldman Sacks, and he turns out to be a pragmatist of the first order, willing to use government power to control and manipulate. He is not a capitalist. If there are people in Obama’s administration who do not want to actively expand government power, they haven’t made an impact.


So, what can we expect from an Obama appointment that could get through the Senate confirmation process? Anyone who has paid their taxes, including their nannies taxes, who will use the Fed as the means to further corrupt, undermine, and destroy what little remains of our freedom and capitalistic system. Is that better than Bernanke? Bernanke’s one little bitty redeeming piece of character is that he is an academic, as corrupt and pragmatic as that is. He is not overtly political. He is certainly not a supporter of capitalism, and he has shown no willingness to oppose any of Obama’s drive to fascism. Nor will his policies help stabilize and strengthen the economy. But, he is not going to act as Obama’s pawn or tool in the manner that Obama’s own selection would. It is a small difference, but sufficient that I am willing to argue for Bernanke’s return for another term.


If you want to argue that putting Obama’s person into the Fed will make our current situation much worse and that people will rebel against Obama and the destruction of our freedom I am willing to listen. But, I think that it is too early for us to do that. People don’t know any more about freedom and capitalism than they did three years ago. It is still too soon. I think that we can use more time in a slowly deteriorating situation to further our efforts to save our freedom and the United States of America. I want more time.

Social Security and Medicare: "Trust Funds"

A few months ago John Lewis published a “dire warning” about the future of the economy. [http://theobjectivestandard.com/blog/2009/08/dire-message-of-mr-david-walker.asp] This article concerns the near future proportional increase in retirees, the Baby Boomers, and their impact on the costs of Medicare and Social Security. To say the least, it will make all of today’s arguments regarding the budget superfluous. All of the facts and figures are in the material that Dr. Lewis references. I will not include them here. This post is meant to talk through the things that are going to happen, especially the impact of the “Trust Funds” of Social Security and Medicare.



You will hear some politicians argue quite loudly that, even if there may be a problem down the road, it is not now because both programs have trust funds that will provide money for several years. The date that the government has to begin adding funding to both programs is, thus, some time in the future and they don’t worry about it now.


Well, yes, both programs have “Trust Funds”. That is, both programs have had more money paid into them over the years by taxpayers than the programs have paid out. This “surplus” has been put into a trust fund. Each trust fund has securities in it that may be exchanged for cash as needed, and the cash is then paid out in benefits. So, these politicians are correct, right?


The recent annual report of the Medicare Trust Fund revealed that this program is already spending more than the Medicare Tax is bringing in. The short fall began in 2008. Medicare has begun redeeming “Trust Fund Assets”. Because of the recent short fall, they now expect the “Trust Fund” to be exhausted in 2017.


The Social Security Trust Fund is still taking in more money than it is spending, but the recent troubles in the economy have, no doubt, changed the “projected” dates as well.


When the Medicare Administration projects that they will fall short of Medicare claims they will not cover 19% of the annual cost of the program. As these claims are “entitlements”, the shortfall would have to be made up by general Federal Government revenue, or taxes and the proceeds of bond sales. So, according to our politicians, we have 8 years to solve this problem, right? We have even more years to solve the Social Security problem.


Ahhh. Let’s take a look at those “Trust Funds”. That money is invested in securities, right? Well, depends upon your definition. What the administrators were allowed by law to buy with their “surplus” is a special class of Treasury Bonds. These bonds pay interest, which are probably close to market, so they are accumulating assets, right? Okay, we are at the crux of the issue now. The Treasury of the United States sells these special bonds to the “Trust Funds”, and guess what the Treasury did with the money? They put the money into the General Fund, and spent it as they did with all the other tax money and the proceeds from bond sales. And the accounting, you ask? The money from the “Trust Funds” reduced the annual deficit of the Federal Government. The Treasury had to sell fewer bonds.


Administration after administration has been spending the Social Security and Medicare surpluses and pretending that it was general revenue, not some future debt. In many cases the administration crowed about the way it was decreasing the Federal Deficit.


In this case, however, it isn’t like the standard Treasury Bond that no politician expects to ever pay back. These special “Trust Fund” bonds have to be paid back as the two entitlement programs fall short of meeting their required payments from the FICA taxes. In practice, it means that the Treasury will have to sell more standard bonds. Did anyone say Ponzi?


I ask you, what is the difference between taking money from taxes and the proceeds of bond sales and redeeming special bonds for covering Medicare expenditures, and giving the money directly to Medicare after the “Trust Fund” Bonds are depleted? The Trust Funds are a standard government fiction, which allows some (many, most?) politicians to duck the issue.


Social Security is “projected” to need to dip into its “Trust Fund” in the middle of the next decade. Like any government projections, the government planners have foretold of wonderful years of tax collection because the economy will be booming and employment will be below 5%. Even if you count all of the non-employed as tax payers, there are far more than 5% unemployed, and current prognoses, even from the most optimistic government hack is that the employment part of the recovery will be slow. The number of retirees is growing, maybe even faster than expected (for Social Security), thus the outflow is growing at least as fast as expected, but the income is less, probably a lot less. That means that Social Security will begin drawing on its “Trust Fund” sooner, and more Treasury Bonds will need to be sold, more money will be taken from the economy, which means either less capital for investment and slower growth (if any) or more made-up money, i.e., inflation.


All of this will be on top of whatever programs our beloved leader can manage to get passed.


Some of you are eager for the end of the year when the Democratic strangle hold on our government will hopefully be reduced. I tend to think that a mix of Dems and Republicans is a nice safe government. But it won’t help this situation, because it will require a direct look at reality and the willingness and ability to tell the American citizen, especially the older American citizen, that the cupboard is pretty skimpy. The Republicans, who are after all, working to “conserve” the New Deal, have shown just as much willingness to ignore reality as the Dems.




In the meantime we can watch the drama being played out in Japan. Their problems with the same issue are more immediate and proportionally larger than ours. More than half of their population is dependent upon the government pension. Their elderly tends to depend upon their children, but that percentage is declining. The aging of the Japanese population is more rapid than other industrial countries. At the same time the population is shrinking.


The government has been steadily pushing up the retirement age and the age that government pensions begin. Japanese use to retire at age 50, now it is 60. The government pension begins at age 65, up from age 55. So a Japanese has a 5-year period that has to be filled in somehow.


But, get this, the taxes to support the retirees is a combined 30%, down from 40%. Part is paid by the employee and part by the employer. In the U.S. the combined tax is 15.3%.


Where are they going to get the income to support their elderly? The same place we will? We may be seeing real tragedies both at home and abroad. The European countries are heading for the same problem at various speeds, most of them will begin to see major problems before we do.



When we get done with the health insurance thing, whichever way it goes, we need to begin beating upon these people about this coming storm.

Notes on the Jobs Data

Someone noticed that the employment figure released recently by the Federal government was actually slightly less than the number they released ten years ago. I have looked for this comparison on the web, with no luck. I heard this report on PJTV, in the weekly discussion with Yaron Brook.


It is disturbing that employment is nearly the same as ten years ago. We are not talking about percentages here. It is the actual number of people employed. It means that the steady inflation that is suppose to make us prosperous didn’t work. Bernanke’s solution to all our problems hasn’t been a solution.


But two things come to mind, mine, anyway. One thought moderates the news, the other makes it worse.


The first thing that needs to be noticed is that an exactly ten-year comparison doesn’t really give you an honest read on what the figures mean. Given that we have been forced to live through two business cycles during that time, it would be a better comparison to go from peak to peak, or trough to trough. In this case the lowest employment during the earlier period of time as a basis of comparison to today. It might not look as bad. Of course, you might still argue that the growth in the population over the same period would tend to mean that the number of people employed today should still be higher today, even if this is a trough and the earlier number was mid-lower cycle. Okay, that’s true. (Note that this is the employment number, not the unemployment number, which has other problems.)


On the other hand, today’s number is bogus, and make the comparison to the earlier, ten-year old number, much worse. This is especially true if the government included in today’s figure any of the Obama, make-work “jobs”, that just soak up money.  There are more government "jobs".  There are also a lot of jobs in private enterprise that consist of doing stuff the government requires but don’t actually produce anything. These “jobs” don’t actually add anything to the economy either. All of these new jobs combined, new government jobs, Obama make-work jobs, and jobs created outside of government just to take care of government required reporting or compliance, mean that the actual number of productive jobs today are much fewer than ten years ago!


So, if you want to look at the level of prosperity-producing employment of today vs. 10 years ago, given the misleading, arbitrary choice of dates, you would have to conclude that the economy has lost a lot of jobs and that we are experiencing as prolonged decline in our living standards.


The resource that is most scarce in any economy is people. The more people you have, the more productive you can be (another point lost on the anti-immigration folks). We actually have lots of people but our government insists on forcing us to employ them in ways that tend to be less and less productive, or not employ them at all.  When will they notice that their whole thing is not working?  Do they care?  No, they don't.