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There
are three primary reasons why the US is suffering from structurally high
unemployment: a pervasively irresponsible monetary policy, the continued
attenuation of our manufacturing base, and an overleveraged consumer who must
now reconcile his balance sheet. In reality, the latter two conditions are a
direct result of the first. They are the result of a government that seeks to
micromanage the cost of money and the rate of economic growth.
When the Fed prints money and monetizes debt in order to drag interest rates
down, it necessarily encourages excess consumption. The boom in lending and
spending results in rising prices, which misallocate what little genuine
savings and investment remain. Since inflation is never evenly distributed
throughout an economy, it usually gets concentrated into a particular asset
bubble (whether NASDAQ stocks, real estate, or tulips).
If interest rates and the money supply are left to market forces (i.e.
interest rates are a function of savings vs. the demand for money and money
supply is restricted by the mine supply of precious metals), then resources
tend to be allocated in the most efficient manner. However, when the Fed
distorts these forces, employment gains are most prevalent in the building
and servicing of the asset bubbles they help create. This means labor capital
is not deployed evenly throughout the economy. It is concentrated on flipping
stocks or houses, instead of expanding productivity or strengthening the
economy's manufacturing base. But these behaviors are unsustainable. Once the
bubble is popped, the economy must go through a period of deleveraging before
labor can be reallocated in a way that makes economic sense.
As an illustration of this point, from January 2000 thru today, the US has
lost over 6.6 million goods-producing jobs! Some make the excuse that higher
productivity means less workers are needed to produce the same amount of
goods. If that were true, then manufacturing would not have declined from
14.2% to 11% of GDP over the same period. Meanwhile, jobs in the housing and
service sectors were doing much better. From January 2000 through June 2006,
the economy added 261,000 jobs in real estate alone. And from 2000 through
today, the service sector as a whole added over 5 million jobs.
Some will claim that the prescription for boosting manufacturing output and
employment is to destroy the dollar at an even greater pace. But the answer
can't be found by simply forcing the Chinese to float their currency or by
devaluing the US dollar further. History clearly shows the currency
manipulation strategy to be a complete failure. The most important factors in
balancing trade are wages, taxes, and regulations within a country. A current
account deficit cannot be balanced by lowering the value of a currency.
Another consequence of government's desire to manage interest rates and the
economy is the accumulation of debt. Household debt in the year 2000 totaled
$6.9 trillion, which represented 66% of GDP. Then government slammed on the
monetary and fiscal accelerator in order to paper over the collapse of the
equity market. Consumer debt skyrocketed as a consequence. Today, household
debt stands at $13.5 trillion - over 93% of GDP. Job growth will be weak
because the consumer must pay down this debt and will thus not be taking the
risks associated with employment creation. Demand will also be weak because
consumers are (responsibly) repairing their balance sheets instead of taking
out loans to expand or start new businesses.
The bottom line is that it will take time for those erstwhile service-sector
employees and others whose employment was associated with the previous bubble
to become gainfully employed in the rebuilding of our country's manufacturing
base. It will also take many years for the private sector to deleverage and
be able to once again expand its balance sheet.
Unfortunately, our government is not currently headed down the path to a
sustainable recovery. They are trying to re-inflate the bubble instead of
allowing the market to self-correct. Because of these efforts, they are
piling on an intractable amount of public-sector debt - which future
taxpayers will be forced to service in vain. The near-term result will be an
economy marred by slow growth and underemployment. As for the long-term, the
sooner our government stops piling on debt and devaluing its dollar, the
quicker we can start to heal.
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Please note: Opinions
expressed are those of the writer.
Michael Pento
Senior Market Strategist
Delta Global
Advisors, Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone: 800-485-1220
Fax: 800-485-1225
A
15-year industry veteran whose career began as a trader on the floor of the
New York Stock Exchange, Michael Pento recently served as a Vice President of
Investments for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk Securities, where he
focused on options management and advanced yield-enhancing strategies to
increase portfolio returns. He is also a published economic theorist in
the Austrian school of economic theory.
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