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.

Shrinkage
1.2 Million Gone

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

Employment Report Buried Treasures

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.

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The Christmas Story

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http://mises.org/journals/scholar/bratland7.pdf

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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 sense?

Fuzzy Math

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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.

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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.

.

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Nationalizing Yields

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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.

Debt Merry-Go-Round

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Princeton Economics

I feel Anderson could go farther and say that most of the academic culture in this country not only needs to be occupied, but thrown out with the garbage. In a recent email exchange with a known economics professor and historical writer, I posed the question about an individual with years of business experience and some time spent teaching college having a chance to teach economics full time at a college or university without a Ph.D. He relayed a story at a prior university where the faculty threw a fit over the hiring of a renowned and respected individual simply because the person did not hold a doctorate. A few colleges still exist that place experience and teaching ability over phony credentials. And thus ignorant students are bombarded from people like Bernanke and Krugman with law defying theories and misrepresented history.

The real problem starts well before college. As we have seen here in Hudson and any other community in the country, theoretical educational bullshit has completely engulfed K-12 government sponsored education. The century old methods of teaching reading, writing, arithmetic, history, and science were tossed out like an old toy. Catchy phrase education with names like outcome based education, space for learning, project 2025, and every politically correct curriculum took the place of a methodology focused on nurturing critical thinking.

Administrators glowed about how children with a calculator could bang out an answer in seconds. The students that once banged on calculators for an answer are now banging on drums in the streets wondering why they are buried under a pile of debt with little chance of seeing daylight. For all their button pushing, they could not calculate the simple math of indebtedness. They could not figure out that after deducting various taxes, groceries, rent or mortgage, fuel, utilities, and an auto loan from their paycheck plus a student loan payment the result is nothing leftover. Everyday math could not add up everyday expenses.

Some form of socialism has been tried through the ages, And no matter how benevolent it started the result was always a society economically divided between the poor masses and the wealthy government officials. Students today learn from government school teachers that government is good and free markets are bad. History is painted with a shade of red.

If the people want to march in the streets toward something, then they should start with their local government school districts and demand true educational freedom. The citizens of Hudson can begin by telling the school board and administrators to shove the dog track up their pompous asses.

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You Ignorant Austrians

In the recent past, he has thumbed his nose at the Austrians calling for an audit of the Federal Reserve. Cain calls such people ignorant. By his own admission he never saw the current financial calamity coming. As the economy imploded, Cain became a shill for the Bush administration talking up the strength of the economy. Furthermore, he supported the bailout and cheered taxpayer funds siphoned toward Wall Street.

What Depression

Herman Cain also believes that Alan Greenspan as the best leader of the Federal Reserve over the last forty years. Greenspan is the type of person that Cain says he will appoint Chairman of the Federal Reserve if elected president.

Greenspan the Great

As Austrians long ago realized and even our earlier Presidents, central banking is the root cause of the boom-bust cycle. How can you support a candidate that not only was part of the beast, but believes it does not need to be watched over through audits? How can you support a candidate that at heart is an economic interventionist? How can you support a candidate that believes the federal government needs more money?

The bottom line is that Herman Cain is another George Bush who does not believe in free markets. In other words he is no friend of liberty.

Enough said.

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S&P Upgrade

Considering the recent SEC investigations into S&P’s downgrade of US debt and possible insider trading, I have to cynically wonder if the government is putting the muscle on the company to bolster the stock price of General Motors, which the government presently holds one-third of the outstanding stock. In order to fully recoup the $49.5 billion in bailout funds, the government must sell its holding of General Motors at a share price of $133.78 or about $113 higher than where the stock is currently trading.

Wall Street Journal Report

Ever since the government sold a portion of its General Motors stock almost a year ago in the mid-thirties the price has declined by almost 40%. Along with the government, the UAW and I would speculate some state pension plans also hold large amounts of stock. In other words, a lot of Obama’s political allies are suffering extensive losses with the decline of GM share prices and something needs to be done to halt the freefall.

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The other morning while driving to work I listened to a segment of the Davis-Emmer show on Twin Cities Talk Radio. Bob Davis cut his co-host off in mid-sentence when Tom Emmer was trying to make the case for the economy being in a serious downturn. Davis claimed the objective definition of a recession as created by the National Bureau of Economic research has not been met ( two negative quarters in a row for GDP). What is objective about a group developing a subjective measurement. Furthermore, the calculation for GDP (C+I+G+X) includes government spending. When the “G” spends at light speed, then it is hard for GDP not to grow. With real unemployment hovering in the mid-teens along with stagnating wealth and production, does not one of the media parrots consider the possibility that the “objective yardstick” is out of calibration.

In 2008, I warned about the historical characteristics of financial bubbles and depressions. After the initial crash, an economic aberration makes it appear like the full blown calamity has been averted when the house of cards is reshuffled. But the debt that caused the calamity has not disappeared; it has only switched hands. Debt cannot be resolved with more debt. Central banks and Treasury Departments can only delay the economic inevitable.

At this point in time, one can only hope for a recession, which is a vast improvement from where we are headed.

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