Turns out the real unemployment rate in the US is likely higher than expected…way higher.
I mean, this isn’t a huge surprise.
We’ve argued before that unemployment figures don’t show the real picture. It doesn’t account for underemployment, people that want to work more hours, or that settle for a job they are overqualified for to make ends meet.
The pandemic is likely making that figure even more distorted.
Anyway, in a speech at the Economic Club of New York US Fed Chairman said that many Americans had been classified as employed instead of unemployed.
As he said:
‘Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10 percent in January.’
That’s quite a change from the 6.3% the department of labour reported last week.
Meanwhile, property up, stock market up.
If it wasn’t for people wearing masks, sometimes it would be easy to forget that we’re in the middle of a pandemic.
…or that all this movement that we are seeing is coming mostly from government stimulus and not economic growth.
While the pandemic backed us into a corner, this is all ‘fake’ growth, an illusion, pushed by central banks and fake money.
And this is only getting started. We’ll likely feel the effects for years to come.
In a blog post a while back by the International Monetary Fund (IMF), ‘a crisis can definitely leave permanent economic scarring with loss of output and welfare’. That is, once recession hits, output never recovers its pre-recession levels.
As they wrote, the US has seen a constant downward revision in potential output estimates since the 2008 great financial crisis, as you can see in the graph below:
A lower output and revised GDP will definitely have an effect on your wealth…
Their result is consistent with a 2009 study from the International Monetary Fund where they found that recessions leave permanent scars.
As the Financial Times reported in the wake of the 2008 financial crisis:
‘In its recent World Economic Outlook, the International Monetary Fund examined 88 banking crises between 1970 and 2002 and found, on average, that countries do not earn back all the lost ground after the recession slips into people’s memories. In its database, it found that seven years after a crisis, output had fallen by 10 per cent compared with the pre-crisis path. Economic growth generally returned to the pre-crisis rate, but the loss of output seems permanent.’
The loss of output will have an impact on younger generations who are already struggling to get jobs and salaries are low. And what’s even worse, they’ll also be likely left with the debt.
I mean, you can clearly see this in Spain. Things never got back to pre-2008 in regards to employment or wage growth. That’s because the boom wasn’t real either, it was fuelled by cheap debt and a property market bubble.
COVID has meant even higher stimulus and debt.
Make sure you have your own exit plan!
How do you maintain confidence when the solution to the crisis is artificial? As I have written before, confidence in our system is crucial, it’s what it’s based on.
It will probably take increasing amounts of stimulus to keep this up. And it’s coming. Joe Biden has promised a US$1.9 trillion stimulus.
The question in my mind is how do we get out of this mess?
Remember the Fed tried to reverse their 2008 stimulus by increasing interest rates and quantitative tightening. But they had to revert course.
It doesn’t look like they’ll be raising interest rates any time soon.
In my mind, one of the few ways through this mess is for inflation to come back.
In fact, it’s something that Powell touched on in his speech too at the Economic Club of New York.
From The Washington Post:
‘Some economists have questioned whether the $1.9 trillion stimulus, combined with pent-up savings that Americans are expected to unleash once the pandemic ends, could suddenly overheat the economy, triggering a rise in inflation and forcing the Fed to respond by raising interest rates.
‘Powell dismissed those concerns. Inflation has been low or stable for decades, and the Fed is prepared to tolerate a temporary rise in inflation over its 2 percent target, he said.
‘It’s possible, Powell said, that aid from Congress plus a spike in consumer spending could cause “some upward pressure on prices.”
‘But “my expectation is that will be neither large nor sustained,” he said.’
Don’t bet on it.
Make sure you have your own exit plan, because no one else has one for you.
For The Rum Rebellion