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Some Insights on the Economic Crisis July 4, 2009

Posted by Daniel Downs in federal government, Federal Reserve, national debt, news, political economy.
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In his recent financial commentary titled “When Zombies Attack,” Bill Bonner wrote,

“Rise of the Zombies,” is a headline in today’s Financial Times. It tells a familiar and predictable story: the feds have propped up businesses coast-to-coast. Instead of being allowed to fail, they are kept alive by the government…and continue to take resources that could be redirected to more promising competitors.

But don’t bother telling the feds that. They don’t care. The old, worn out zombie businesses still make campaign contributions and employ voters. The businesses of tomorrow don’t. The present votes. The future does not.

After telling us how the feds are ripping the taxpayers off to keep worthless business because of political cronyism, Bonner expands his coverage to include state revenue and a equation of political economy.

The feds and the states are losing income. When businesses lose revenue
they cut back expenses. But governments – at least those that are
modern popular democracies – find that they need to increase spending. They have more people asking for help. And they have programs that become automatically more expensive – such as unemployment benefits – when the economy softens.

Now, the equation of political economy:

Let’s see. Expenses down, income up = happiness.

Expenses up, income down = misery.

See how simple it is?

In another commentary titled “Stay Out of the Water,” Bonner get more patriotic meaning the Londoner mentions July 4th. Leading up to this holiday some news we all could believe in. It casued reveling among economists, investors and politicians. First, the report about Madoff’s sentencing for lying to investors was followed by reports from Bloomberg, General Electric’s CEO, and George Soros’ pronouncement that the “crisis is behind us and that growth will begin again next year.” But, on Thursdays, all of their hopes crashed after hearing the official employment report. Instead of going down as predicted, another 467,000 people joined the Democrats unemployment plan.

Bonner’s not-so-happy commentary continues,

And so…this weekend, investors walk along the beach deep in thought. Is it safe to go back into the water…or not? They should listen carefully. That gurgling sound they hear is not mermaids singing, it is the world economy, drowning.

As we reported in this space, the feds’ bailouts, boondoggles and bankers’ bonus plans aren’t working. At the end of last year, they predicted unemployment over 8% in 2009 – if the stimulus plan were not enacted. But it was enacted. Unemployment is at 9.5% already and it is still rising. It will be over 10% before the end of the year. Global trade is collapsing; exports from Germany and Japan are down about 40% from a year before. Prices are going down too – with a report this Wednesday that the entire Eurozone has slipped into negative inflation. And from Britain came data showing a contraction of 2.4% in the first quarter, bringing the year-to-year decline to nearly 5%. “Economy shrinks at 1930s rates,” said the headline in Wednesday’s Telegraph.

When we look at America’s employment numbers, we feel like a school doctor. We would call the authorities, except that it was the authorities who should be arrested. After the feds got finished with them, the numbers told of a better-than-expected drop in May U.S. payrolls. The key to this uplifting news was not a genuine improvement, but new and improved techniques in torture. Water-boarded with seasonal adjustments and birth/death models, the numbers began to see jobs
everywhere. As for “discouraged workers”, meaning those who gave up
looking because they couldn’t find a job, these unfortunate souls
disappeared from the jobless figures altogether.

John William’s Shadow Government Statistics reports that without these twists, the numbers tell the same story they’ve been telling all year – unemployment is still getting worse, at about the same pace as earlier in the year. “The unadjusted annual decline in May payrolls was the worst since May 1958,” says Williams. And if they were allowed to speak freely – as they did in the ’30s – the figures would show real unemployment at over 20% of the workforce…or about 30 million people. That approaches Great Depression levels…and we’re still only in 1930, not 1932. As for those still working, an additional 1.5 million U.S. workers have been “forced into part time work” according to the Financial Times.

Analysts compare these trends to post-WWII pattern, which result sin a 62 year cycle of credit expansion. That’s a long time of debt-based economic growth. That cycle is coming to an end and a new cycle begins. “It is the beginning of a major credit contraction, with no pent-up demand, no savings, and too much capacity to turn out too much stuff that too many people don’t have the money to buy.”

“With incomes falling and house prices weak, consumers will miss
payments, default, and cut back spending. Business earnings will
decline; bankruptcies will increase. This economic undertow is
treacherous. Investors should stay out of the water,” says Bonner.

For more financial insights of Bill Bonner, visit The Daily Reckoning.

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