The New Normal: Stagnation-Unemployment-Inflation-Deficits
By George Noga
More Liberty, Less Government
For quite awhile I have been in a blue funk about the future of our country. Only in recent months have I grasped the future already is here; this is the new normal! In the Book of Revelation four horsemen appear to the apostle John, each riding a different color horse and symbolizing a different catastrophe. Today’s horsemen are stagnation, unemployment, inflation and deficits.
“The future already is here; this is the new normal!”
First Comes a White Horse: It Symbolizes Stagnation
Stagnation began in 1999 with the stock market which is only 5% higher today than 11-12 years ago and down over 20% from 2007 – and that is without adjusting for inflation. The economy has stagnated since 2006. Despite unprecedented hyper-stimulative fiscal and monetary policy, economic growth is anemic and tenuous. Last week JP Morgan lowered its 2011 estimate for GDP growth to 1.4% and Macroeconomic Advisers lowered to 1.7% from 4% at the beginning of the year. As shown by the Rahn and Noga curves, the expansion of government acts as a permanent constraint on growth. The era of robust GDP growth is not likely to return; we have become more like Europe.
February 2011 sales of new homes hit a 50-year low and the median sales price of a new home has reverted to the level of 2003 – 8 years ago. Even low prices and low interest rates cannot shake housing from its torpor. Attitudes toward home ownership are changing with more folks no longer harboring the American dream. Stocks are where they were 11-12 years ago; housing 8 years ago and the economy 5 years ago. Welcome to the new normal.
Second Comes a Red Horse: It Symbolizes Unemployment
As noted in my April 1, 2011 email, the official government unemployment number likely has been massaged; even if it hasn’t, it is dangerously misleading. In June 1999 there were 108.6 million private sector jobs; the comparable number in February 2011 was 108.3 million. There are fewer private jobs than in 1999 despite 4 million more on SSDI (disability) and many added millions taking early social security. And this happened despite a population increase since 1999 of 31 million Americans. Ponder those metrics for a moment longer: 31 million more Americans – fewer jobs.
The Labor Force Participation Rate (“LFPR”) is at the lowest point in 25 years and declining. If the LFPR were the same as 2006, today’s unemployment rate would be 11.5%. Adjusting for all the new folks on SSDI and early social security, the unemployment rate would be 15%. It gets uglier. The Census Bureau reports the USA’s 89,526 state and local governments employed 16.6 million and the federal government (including military and USPS) another 15.1 million for a total of 31.7 million public sector workers. Further adjusting for the increase in government workers since 2006, the 2011 unemployment rate would approach 20%.
“Today’s unemployment is worse than the Great Depression when the shares of public sector workers are equalized.”
Going even further, I labored mightily to obtain data to compare today’s unemployment rate to the Great Depression – assuming the comparable percentage of public sector workers in 2011 was the same as in the 1930s. Based on the best data I can corral, today’s unemployment rate would be well above 25% and approaching 30%; this is comparable to or worse than at the height of the Great Depression. Hello – new normal!
Third Comes a Black Horse: It Symbolizes Inflation
The Producer Price Index rose 1.6% in February, an annual rate of 20%; it has been up at an annual pace of 10% the past 5-6 months. Food alone increased 4% in February, the largest one month increase in 36 years. The Consumer Price Index (“CPI”) increased at an annual 6% rate in the past two months. The only thing holding down the CPI is housing which constitutes nearly 40% of the CPI. Gold is near a record high and the dollar near a record low; commodity prices are soaring and oil is above $100. These are harbingers of imminent inflation.
We are in a no-win situation. To head off inflation, the Fed should be increasing interest rates. If the Fed continues to follow loose money policies, inflation will spike along with the cost to the government of servicing the national debt. Inflation will spiral out of control and we will have a Jimmy Carter economy on steroids. However, if the Feb applies the brakes, there will be another severe recession. The more the Fed dithers, the longer and deeper the recession. Warren Buffet again warned publicly about the risks of inflation and advised against holding long-term, fixed-dollar investments. Buffet understands the new normal.
Fourth Comes a Pale Horse: It Symbolizes Deficits
The crisis of spending, debt and deficits already has metastasized to an advanced stage from which escape is nigh impossible. The USA will reach a point, likely between 2013 and 2015, when the government no longer can borrow on acceptable terms. The Treasury simply will print money (issue new bonds) and the Fed will buy it; we will become like Zimbabwe. The USA may experience an existential crisis and we will be lucky to maintain civil order and the rule of law. Of course, the crisis immediately will go global. Meanwhile in Europe the dominoes continue to fall: Greece, Ireland, Portugal, Greece again and Spain at the brink.
I am not smart enough to know what form(s) the ensuing crisis will take. I am reminded how little we know and how fragile our vaunted financial systems really are. I do not know if the end game will be more like a sudden heart attack or a chronic cancer or both. I do not even know if we will recognize the end game when it comes. What I do know for sure is that if something cannot go on forever, it won’t. The spending, debt and deficits cannot go on for much longer; therefore, they won’t.
TAKEAWAY: DO NOT ASSUME WE ARE IN A TRANSIENT CRISIS AND THINGS WILL GET BETTER. SERIOUSLY CONSIDER THIS IS THE NEW NORMAL. THE FOUR HORSEMEN OF THE APOCYLPSE MAY BE WITH US FOR SOME TIME.