Economics and Scrambled Eggs

Admittedly, I am a cynic towards government data.  Government is about power and money. Bureaucrats and politicians retain their ability to keep both by making us believe they can solve any problem. When you are the controlling the data, you make anything appear possible.

On Friday, the government released its statistics on employment for the month of January.  According to the report, the economy created 243,000 jobs and the unemployment rate dropped another couple of notches to 8.3%. The President took a victory lap claiming that his policies have put Americans back to work. Stock market gamblers cheered the news by throwing more money into stocks resulting in hefty gains across all major indices.

Instead of celebrating, some analysts dug deeper into the data behind the joyous headlines. What they discovered as best described by CNBC commentator and free market advocate Rick Santelli was “shrinkage”. The labor participation rate has steadily decreased over the last few months to a January reading of 63%. The unemployment rate is calculated by dividing the number of people actively looking for work by the sum of the people working and those actively looking for employment.  The unemployment rate can be magically lowered by narrowing the definition of actively looking for work. Individuals giving up in the search for a job or returning to school are no longer considered looking for a job. And neither is an individual working part-time due to perhaps a lack of full-time jobs. It does not appear to be logical for the labor participation rate dropping to a historic low point while the employment picture shows improvement.

http://video.cnbc.com/gallery/?video=3000071275

http://www.zerohedge.com/news/record-12-million-people-fall-out-labor-force-one-month-labor-force-participation-rate-tumbles-

Tthe folks at www.zerohedge.com do a good job of investigating the numbers behind the government statistics.  The following summarizes a few treasures buried in the employment data.

·         The labor participation rate implies that 1,200,000 dropped out of the job market in the month of January

·         Tax withholding data prior to Friday’s release indicated an addition of only 40,000 jobs instead of the 243,000

·         The discrepancy could be the result of low paying and part time jobs accounting for a good portion of the 243,000 added to the payrolls

·         The numbers reported by the Bureau of is not raw data. The numbers are massaged for seasonal adjustments and the birth-death ratio. In other words the employment figures are mathematically cleansed

http://www.zerohedge.com/news/explaining-yesterdays-seasonally-adjusted-nonfarm-payroll-beat

I still scratch my head over why people throw money into stocks over employment reports and why they would take at face value anything the government says, especially in an election year. Some will rationalize the correlation between more jobs and the stock market in two ways. First, an improving jobs pictures means the economy is doing better, and therefore, companies are bound to report better earnings. Secondly, an increase in people working results in more disposable, which a portion can be used to invest in stocks.

Such commonly held beliefs fall victim to an error in causality. Stock prices move up or down for only one reason, net money moving in or out. It is a simple exercise in supply and demand. If the demand for a stock during any given time is greater than the shares for sale, then the price must rise or vice-versa when the supply of stock for sale is greater than the demand. Company earnings or any other news does not cause price changes.

Secondly, it is true a job will increase income for a previously unemployed person. But it is quite a leap to say a portion of the new wages will end up in stocks. Money used for the purchase of any investment comes from savings. It cannot be said with any degree of certainty that an individual will save, especially if as the data suggests a portion of the increased employment came from either low paying or part-time jobs. Additionally, many are still highly indebted. Before savings can take place the debt has to be retired.

The pundits will sing Happy Days Are Here Again.  They ignore the fact that the government is the one handing out the song sheets.

Nothing makes me want to scream at the top of my lungs into a trash can more than listening to or reading a debate over the good and evils of capitalism. One side points to everything from the housing collapse to the BP oil spill as evidence to the failure of capitalism, which always requires more government intervention into the production and exchange of goods. The person defending capitalism mutters some babble about individualism and how businesses create jobs. But the system is not perfect, so some government oversight is needed.

This is where I want to scream. The argument is moot. Capitalism does not exist.  The economies of the world range on a scale from light socialism to communism. As it has been said many times before, capitalism or free markets become extinct the moment a central bank is created. The Federal Reserve practices a price manipulation for money (interest rates) that benefits one party while having a negative impact on another. Free markets are based on the premise of mutual benefit.  Price rigging of any good, including money, interferes with the necessary signals between buyers and sellers that allow them to mutually gain.

Secondly, an exchange governed by regulation under the threat of penalty for non-compliance cannot be considered free and voluntary.  It is hard to think of one transaction in this country that does come under a maze of bureaucratic rule. Even the products exchanged at a garage sale or Tupperware party must at some stage be approved regulators. Children selling lemonade on the sidewalk are now under government harassment for not having a business license or health inspection.

The following article by James Miller is one of the best I have come across that succinctly describes capitalism.

 http://mises.org/daily/5880/Mr-Rubenstein-Youre-No-Adam-Smith

Every event has an economic lesson. It is true even with the birth of Jesus.

http://www.lewrockwell.com/rockwell/bethlehem.html

I wrote a few weeks ago that our country is doomed because the entire government and financial system has been built on a foundation of lies. Every day the government or some special interest group publishes a set of data points meant to convince the ignorant masses to throw more money for the bank to feed on or show them how the bureaucrats make their lives better.

An industry group that keeps tracks of real estate transactions has just admitted (discovered) the data on home sales has grossly overstated the true housing environment by as much as twenty percent over the last five years. These are the same people that have been pointing toward their data as evidence of a housing recovery. 

http://www.nashuatelegraph.com/news/943311-196/national-home-sales-have-been-overstated-for.html

Why do corrections to economic data always be for the worse?

A story yesterday about the pay of toll booth operators demonstrates what is wrong with our economy. Austrians often talk in terms of malinvstment brought on by easy credit as the source of economic depressions. Because interest rates have been grossly manipulated lower than what would be observed in a true market for money, businesses expand under the belief of increase demand and they take on longer term risks due to the affect the low rates have on the future present value of projects.

The pay received by some toll booth operators shows another type of malinvestment where resources represented by money are diverted toward government wages far greater than what could be earned in the free market. A toll booth operator basically lowers a gate in front of a driver. In order to continue on their way, a driver pays money to the toll booth operator. This description sounds almost identical to a parking lot attendant where a gate is raised after a driver pays a fee to exit.

In any thread of sound reasoning, does anyone believe that a parking lot attendant receives a pay of $100,000 or more. Yet this is exactly what some toll booth operators show as their annual pay. Since they work for the government, the wages for government workers also determine pension payouts. 

http://nation.foxnews.com/new-york/2011/12/14/ny-toll-booth-worker-makes-100000

Any questions why are economy is going down the toilet

As most know, except those schooled in Every Day Math or government accounting or working as a journalist, a ratio can be decreased by either shrinking the numerator or increasing the value of the denominator. For instance, if a family’s annual food bill eats 20% of the yearly income, then two ways exist to lower the percentage food expenditures take from the paychecks. One option is to reduce the dollars spent on groceries by eating less, shopping at discount grocery stores, growing your own food, or kicking someone out of the house.  One or some combination of reduction results in only $15 out of every $100 of income spent on food or a ratio of 15%.

The second option is to find a higher paying job, a second job, or have more family members get a job. For simplistic purposes, let us say that the extra income route increases annual deposits into the checking account from $100 to $200. We still spend our initial $20 on groceries but the ratio of food expenses to income drops to 10%. It seems pretty simple to figure out.

Today the Bureau of Labor Statistics released the monthly national employment report. According to the report, the economy added a net of 120,000 jobs last month. The increase in employment magically dropped the unemployment rate to 8.6% from 9%. The unemployment rate is a ratio calculated by taking the number of people out of work looking for a job divided by the number of individuals estimated to be in the labor pool (employed and unemployed).  A person is considered to be unemployed if they are out of work but actively looking for a job.  The unemployment rate is also sprinkled with some pixie dust in the form of what is called the birth-death ratio.

So how does a relatively small number of net new jobs compared to the size of the labor pool drop the unemployment rate by .4%? Simple, you can either fudge a decline in the numerator or in the denominator. It is a little difficult to show a great increase in the labor pool (denominator) from month to month. But with a straight face the Bureau of Labor Statistics removed 350,000 unemployed people from the numerator because they have simply given up hope of finding work and they are no longer classified as looking for employment. And hocus pocus, the unemployment rate shows a dramatic decline.  On a side note, a good size source of the 120,000 net new jobs came from retailers adding help for the Christmas season.

Here is a thought to leave with, if an addition of 120,000 jobs really lowered the unemployment rate by .4%, then how many new jobs would it take to completely eliminate unemployment in this country?  A good estimation would be 2,640,000. Do you really think that makes

sensehttp://www.bloomberg.com/news/2011-12-02/u-s-jobless-rate-unexpectedly-declines-to-8-6-payrolls-rise-by-120-000.html

** Individuals in the armed forces and government non-worker, workers are considered to be part of the employed portion of the labor pool even though they destroy instead of produce.

People losing their homes, the unemployed, bank closures, rising healthcare costs, and the BP oil spill are all recent examples according to the ignorant masses and statist (one in the same) of free market failings.  Correcting market failure can only be accomplished by a labyrinth of government bureaucracies dictating regulations that cover the minutest details in everyday life.

As noted many times before, the argument for government intervention in the free market is of course based on a fallacy. You cannot logically blame something that does not exist in the first place. Free markets do not include a central bank manipulating the cost of money. Free markets do not include bureaucrats telling a producer the minimum amount to pay their employees or what benefits they must offer. The free market does not have government reaching into the pockets of people and extracting a chunk of their wealth. The free market does not have government subsidizing housing, medicine, education, agriculture, energy, and hundreds of other industries. Backstops against failure are not part of the free market playbook. For at least the past hundred years, the government at all levels has increasingly molded private transactions into a form that looks nothing like a society based on voluntary exchange.

The governments of Europe and their central banking partners are rapidly crumbling. The extent of the damage is so great that trillions of dollars are needed to just keep the boat floating for a few more months. Across the United States the roll of municipalities declaring bankruptcy grows daily. The accumulated debt of numerous states like Illinois and California makes Greece look frugal. The total liability of the federal government that includes Medicare and Social Security dwarfs the world’s wealth. Individuals around the globe are in danger of being swept out into a sea of financial ruin by the massive government debt wave circling the earth.

What is to blame for all of this? Not the free market, it does not exist. When the Federal Reserve set out on a course of bailing out Europe yesterday in a clandestine operation, Ron Paul summed it up best. According to Paul, the action by the Federal Reserve essentially bailed out socialism.   

Last week Germany received a warning from the bond markets to consider what country it ties its economy to.  The common link to the Euro and the Eurozone has made the debt problems of Portugal, Italy, Ireland, Greece, and Spain (known in lingo as the PIIGS or Club Med) a financial crisis for Germany.  Bond investors turned their backs on new debt offerings from Deutschland a week ago due in part to the company it keeps.

Germany now faces a dilemma. One course of action is to copy the insanity of the United States by giving the European Central Bank the authority to buy the sovereign debt of European Union members that banks and investors shy away from.   The central bank purchases the bonds by printing new money. In essence the central bank institutes price controls on debt yield. Do you really think the free market interest rate on 5 year US Treasuries is less than 1%?

Printing money in order keep a lid on debt yields may work for a brief time. As the Germans learned firsthand after WWI when investors shied from purchasing German bonds, the country’s central bank resorted to  money printing that eventually exploded into hyperinflation. Prices rise so rapidly that the value of money totally disintegrates. In such an environment the middle class is wiped out as their savings evaporate into thin air. Store shelves lay bare as distribution cannot keep pace with individuals seeking goods in exchange for a currency becoming more worthless with each passing moment. Rapid increases in prices all but make it impossible for producers to make the necessary revenue and cost calculations. Productions of goods come to a standstill. Knowing the history of money printing to buy debt, Germany has rightfully balked at any agreement to allow the European Bank to engage in monetizing the debt.  

The only alternative for Germany to regain the confidence of bond investors is to sever ties with the Eurozone. Without the common thread of the European Union and a singular currency, Germany’s financial structure can be viewed with a microscope instead of a telescope scanning the entire continent.

When the Titanic made its icy plunge toward the ocean floor, passengers in lifeboats had to row far enough to keep from getting sucked down in the vortex of the sinking ship. Germany needs to paddle hard away from the Euro.

The question for people in this country is why anyone should be shackled to another person’s debt. Many, including myself, have handled our personal finances responsibly carrying little or no liabilities. If a neighbor takes on a debt load that will in the future wipe out his assets, then why must I be forced to surrender a portion of my wealth and financial security to keep the neighbor afloat? The same can be said for bad decisions made politicians. Because I am tied to the currency of the federal government and they by law dictate that I must use their money for transactions in this country, their irresponsible behavior directly affects my wealth. The only option left to the public is either let the Federal Reserve continue buying Treasuries by printing money or let the politicians tax every dime we possess. Either choice results in a destroyed economic system.

The only chance to be saved from such catastrophe is no different than choices facing Germany. We must sever ties from the source of the problem.

I have heard several times today the manipulation of interest rates by the Federal Reserve described as ‘nationalizing yields”.

http://www.lewrockwell.com/blog/lewrw/archives/99167.html

In order to create the illusion of money in the bank, individuals of less than moral character will write a check from the account of one bank and deposited it into the account of another. In the days when check clearing took several days to process, a person could play a merry-go -round of money. Of course this only delayed the inevitable realization that little money existed in the first place.

The situation in the world between banks, central banks, and sovereign debt looks to me very much like old fashion check-kiting.  The BBC put out a chart showing who owes what to whom in the global debt markets.

In the end, just like the individual floating checks from one bank account to another, we will soon realize that the wealth of the world does not exist.

http://www.creditwritedowns.com/2011/11/european-debt-web.html