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The Warren Buffett EconomyWhy Its Days Are Numbered (Part 4)


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2015 Jun 12, 9:21pm   11,135 views  35 comments

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As documented in Parts 1-3, the Fed has generated a $50 trillion financial bubble since Alan Greenspan took the helm in August 1987. After 27 years, honest price discovery has been destroyed, thereby reducing the nerve centers of capitalism—-the money and capital markets—-to little more than gambling casinos.

Accordingly, speculative rent-seeking in the financial arena has replaced enterprenurial innovation and supply side investment and productivity as the modus operandi of the US economy. This has resulted in a severe diminution of main street growth and a massive redistribution of windfall wealth to the tiny share of households which own most of the financial assets. Warren Buffett’s $73 billion net worth is the poster boy for this untoward state of affairs.

The massive and systematic falsification of asset prices which lies at the heart of this deformation of capitalism is a direct and unavoidable consequence of monetary central planning. That is, the pursuit of Keynesian business cycle management and stimulus through central bank interest rate pegging and massive monetization of existing public debt and other securities—-especially since the latter has no purpose other than to artificially goose the price of bonds and lower their yields; and also via other indirect methods of financial asset levitation such as the Greenspan/Bernanke/Yellen doctrine of wealth effects and the implicit central bank “put” which underpins the economics of buy-the-dip speculators.

As previously indicated, the Keynesian bathtub model of a closed, volumetrically driven economy is a throwback to specious theories about the inherent business cycle instabilities of market capitalism that originated during the Great Depression. These theories were wrong then, but utterly irrelevant in today’s globally open and technologically dynamic post-industrial economy.

As reviewed in Part 3, the very idea that 12 people sitting on the FOMC can adroitly manipulate an economic ether called “aggregate demand” by means of falsifying market interest rates is a bad joke when in it comes to that part of “potential GDP” comprised of goods production capacity. In today’s world of open trade and massive excess industrial capacity, the Fed can do exactly nothing to cause the domestic steel industry’s capacity utilization rate to be 90% or 65%.

It all depends upon the marginal cost of labor, capital and materials in the vastly oversized global steel market. Indeed, the only thing that the denizens of the monetary politburo can do about capacity utilization in any domestic industry is to re-read Keynes’s 1930 essay in favor of homespun goods and weep!

As I detailed in the Great Deformation, the Great Thinker actually came out for stringent protectionism and economic autarky six years before he published the General Theory and for good and logical reasons that his contemporary followers choose to completely ignore. Namely, protectionism and autarky are an absolutely necessary correlate to state management of the business cycle and related efforts to improve upon the unguided results generated by business, labor and investors on the free market. Indeed, Keynes took special care to make sure that his works were always translated into German, and averred that Nazi Germany was the ideal test bed for his economic remedies.

Eighty years on from Keynes’ incomprehensible ode to statist economics and thorough-going protectionism, the idea of state management of the business cycle in one country is even more preposterous. Potential labor supply is a function of the global labor cost curve and now comes in atomized form as hours, gigs, and temp agency contractual bits, not census bureau headcounts.

In fact, the Census Bureau survey takers and the BLS numbers crunchers have not the foggiest idea as to what the real world’s potential labor force computes to, and how much of it is deployed on any given day, month or quarter. Accordingly, printing money and pegging interest rates in pursuit of “full employment”, which is the essence of the Yellen version of monetary central planning, is completely nonsensical.

Likewise, the Fed’s current “soft” target of 5.2% on the U-3 unemployment rate is downright ridiculous. When in the year 2015 you have 93 million adults not in the labor force—-of which only half are retired and receiving social security benefits(OASI)—-and a U-3 computational method that counts as “employed” anyone who works only a few hour per week—-then what you have is noise pure and simple. The U-3 unemployment rate as a proxy for full employment does not even make it as primitive grade school economics.

At the present time, there are 210 million adult Americans between the ages of 16 and 68—to take a plausible measure of the potential work force. That amounts to 420 billion potential labor hours, if we accept the convention that all adults are at least theoretically capable of holding a full-time job (2,000 hours/year) and pulling their share of society’s need for production and work effort.

By contrast, during 2014 only 240 billion hours were actually supplied to the US economy, according to the BLS estimates. Technically, therefore, there were 180 billion unemployed labor hours, meaning that the real unemployment rate was 42.9%, not 5.5%!

Yes, we have to allow for non-working wives, students, the disabled, early retirees and coupon clippers. We also have drifters, grifters, welfare cheats, bums and people between jobs, enrolled in training programs, on sabbaticals and much else.

But here’s the thing. There are dozens of reasons for 180 billion unemployed labor hours, but whether the Fed is monetizing $80 billion of public debt per month or not, and whether the money market interest rate is 10 bps or 35 bps doesn’t even make the top 25 reasons for unutilized adult labor. What actually drives our current 43% unemployment rate is global economic forces of cheap labor and new productive capacity throughout the EM and dozens of domestic policy and cultural factors that influence the decision to work or not.

To be sure, for a brief historical interval—-from roughly the New Economics of the Kennedy Administration to the eve of the housing crash and financial crisis in 2007—- the Fed did levitate the GDP and meaningfully impact the labor utilization rate. That was owing to the one-time trick of levering up the household and business sector through the inducements of cheap debt.

But that monetary parlor trick is over and done. Household’s are still de-levering relative to income, and the Fed’s bubble economics have channeled incremental business borrowing almost entirely into the secondary market of financial engineering. That is, borrowings which are applied to stock buybacks, M&A deals and LBOs result in a re-pricing of existing equity claims and more gambling stakes in the casino, but do not add to demand for new plant, equipment and other tangible assets.

So the transmission channels through which monetary central planning could historically impact the labor utilization rate are now broken and done. The Fed’s default business, therefore, is inflating the financial bubble and subsidizing carry trade speculators, pure and simple.

In that context, consider the complete foolishness of school marm Yellen’s campaign to fill up the bathtub of potential GDP by causing labor utilization to reach full employment. And start with the case of non-monetized labor.

Back in the 1970s during one of the periodic debates about full-employment, legendary humorist Art Buchwald proposed a sure fire way to double the GDP and do it instantly. That was in the time that most women had not yet entered the labor force and politically incorrect discussion was still permitted on the august pages of the Washington Post.

Said Buchwald, “Pass a law requiring all men to hire their neighbor’s wife!” That is, monetize all of the cleaning, cooking, washing and scrubbing done every day in American households and get the monetary value computed in the GDP; and, in the process get homemakers in the labor force and their contribution to the economy’s real output in the labor utilization rate.

As a statistical matter—-even though four decades of women entering the labor force have passed since Buchwald’s tongue-in-cheek proposal—- there are still approximately 50 billion un-monetized household labor hours in the US economy. Were they to be counted in both sides of the equation, our 43% unemployment rate would drop to 31% for that reason alone.

Needless to say, whether household labor is monetized or not has no impact whatsoever on the real wealth and living standards of America, even if it does involve important social policy implications. The point is, as an economic matter Janet Yellen can’t do a damn thing about it, even as she dithers about asking Wall Street speculators to pay 35 bps for their overnight borrowings.

And the same thing is true for almost every single factor that drives the true hours based unemployment rate. Front and center is the massive explosion of student debt—now clocking in at $1.3 trillion compared to less than $300 billion only a decade ago. The point is not simply that this debt bomb is going to explode in the years ahead; the larger point is that for better or worse, Washington has made a policy choice to keep upwards of 20 million workers out of the labor force to subsidize them as students.

Whether millions of these debt serfs will get any real earnings enhancing benefits out of this “education” is an open question—–one that leans heavily toward not likely in either this lifetime or the next. But these 40 billion potential labor hours are far greater in relative terms than under the stingy student subsidy programs which existed in 1970 when Janet Yellen was learning bathtub economics from James Tobin at Yale.

Likewise, there are currently about 17 billion annual potential labor hours accounted for by social security disability recipients. Again, that is a much larger relative number than a few decades back, and it is owing to the deliberate liberalization of social policy by Congressional legislators and administrative law judges. The FOMC has nothing to do with this form of unemployment, either.

Then there is the billions of potential labor hours in the un-monetized “underground” economy. While the work of drug runners and street level dealers is debatable as a social policy matter, it is self-evident that state policy—–in the form of the anti-drug laws and the DEA and law enforcement dragnet—–account for this portion of unutilized labor, not the central bank.

The same is true of all the other state interventions that keep potential labor hours out of the monetized economy and the BLS surveys—-most especially the minimum wage laws, petty listening of trades like beauticians, barbers, electricians and taxi-drivers, among countless others.

Finally, there is the giant question of the price of labor as opposed to the quantity. And here it needs be noted that “off-shoring” is not just about shoe factories and sheet and towel mills that went to China because American labor was too expensive. Owing to the rapid progress of communications technology, an increasing share of what used to be considered service work, such as call centers and financial back office activities, have already been off-shored on account of price. And that process of wage suppression has ricocheted into adjacent activities owing to the displacement of off-shored workers willing to work for lower wages in purely domestic sectors when push comes too shove.

Indeed, the cascade of the China “labor price” through the warp and woof of the entire economy is so pervasive and subtle that it cannot possibly be measured by the crude instruments deployed by the Census Bureau and BLS.

In short, Janet Yellen doesn’t have a clue as to whether we are at 30% or 20% unemployment of the potential adult labor hours in the US economy. But three things are quite certain.

First, the real unemployment rate is not 5.5%—–the U-3 number is an absolute and utterly obsolete joke.

Secondly, the actual deployment rate of America’s 420 billion potential labor hours is overwhelmingly a function of domestic social policy and global labor markets, not the rate of money market interest.

And finally, the Fed is powerless to do anything about the real labor utilization rate, anyway. The only tub its lunatic money printing policies are filling is that of the Wall Street speculators.

And that’s what Warren Buffett economy is actually all about.

In Part 5, the possibility that the free market in finance could function just fine without activist monetary policy intervention and bubble finance fortunes like Warren Buffett’s $73 billion will be further explored.

http://davidstockmanscontracorner.com/the-warren-buffett-economy-why-its-days-are-numbered-part-4/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Friday

#housing

Comments 1 - 35 of 35        Search these comments

1   indigenous   2015 Jun 12, 9:25pm  

Interesting graph

2   indigenous   2015 Jun 13, 8:19am  

This article further dispels Keynesian myths. You can tell because the mutts are speechless.

3   control point   2015 Jun 13, 10:55am  

indigenous says

When in the year 2015 you have 93 million adults not in the labor force—-

Here is one lie which is central to this entire argument:

220.5M population 16 and over:
https://research.stlouisfed.org/fred2/series/LNU00074593
plus those with a disability, 30MM:
https://research.stlouisfed.org/fred2/series/LNU00074597
minus 157.5M in labor force
https://research.stlouisfed.org/fred2/series/CLF16OV/
minus 43.3M receiving Social Security (65 and over)
http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/
minus 20.4M in post-secondary education
http://nces.ed.gov/fastfacts/display.asp?id=98

220.5 + 30 - 157.5 - 43.3 - 20.4 = 29.3M disabled, homemakers, discouraged (former) workers, and high school juniors & seniors not working, etc. A little bit from 93M.

By the way,
SSA link above shows 14.2M disabled on Social Security. Lets assume half of these are not working at all. 7.1M
The population/working ratio of those aged 16 to 19 years is 28.8%. IF we assume half of the 16-19 years old population of 16.6M is 16-17 (and still in high school), then we can assume 71.2% of these are not working, 5.9MM.

So we have 29.3M - 7.1 - 5.9 = 16.3M americans, aged 16 and over, who are not in high school or college, not disabled, not retired, and not in the labor force. Roughly 1 for every 10 in the labor force. Basically stay at home mothers. Hardly something to worrry about.

4   bob2356   2015 Jun 13, 7:41pm  

control point says

So we have 29.3M - 7.1 - 5.9 = 16.3M americans, aged 16 and over, who are not in high school or college, not disabled, not retired, and not in the labor force. Roughly 1 for every 10 in the labor force. Basically stay at home mothers. Hardly something to worrry about.

It's very much something to worry about when your entire ideology revolves around 93 million not in the labor force.

5   MisdemeanorRebel   2015 Jun 13, 9:14pm  

bob2356 says

It's very much something to worry about when your entire ideology revolves around 93 million not in the labor force.

And the solution, of course, is to eliminate the minimum wage.

6   indigenous   2015 Jun 14, 8:05am  

control point says

Here is one lie which is central to this entire argument:

You want to dig into the minutiae. That is not the point. BTW the BLS says 148795 jobs

http://data.bls.gov/timeseries/LNS12000000

A way to cut through the statistical manipulation is simply to do it like Stockman did. There are 210 million working age individuals (or 220 according to your number, which would make it 441 billion potential work hours) less the actual 240 billion hours worked according to the BLS.

In this context :

Notice the graph is topping out for the last 15 yr but the population is not:

This correlates with bread winner jobs:

Stockman's overarching point is valid

The financial bubble has tried to make the economy look healthy when there are clearly systemic catastrophes on the horizon.

7   tatupu70   2015 Jun 14, 9:07am  

indigenous says

So you agree it has been destroyed at least. The cause is NOT from outsourcing nor mechanization otherwise we would have had huge unemployment ever since the majority of farmers went off of the farms due to the tractor and other farming automation.

The difference is that back then the gains made from automation were put back into the US economy. Now they aren't.

8   indigenous   2015 Jun 14, 9:31am  

tatupu70 says

The difference is that back then the gains made from automation were put back into the US economy. Now they aren't.

That is what Stockman is saying as well.

9   mell   2015 Jun 14, 10:07am  

indigenous says

The overarching problem is that the US has made it unattractive for investment other than as speculation especially in the last 6 years. And the main reason for that is that the Fed has perverted the business cycle by bailing out the banks. I look at the newspaper business or the music business and them having to reinvent themselves the same would apply to banking and healthcare if the Govt would have stayed out of it.

Yep, indeed. Automation is insignificant btw. as it has replaced some low paying jobs while creating (albeit fewer) high paying jobs (and there's noting wrong with a single breadwinner if it weren't for inflation), however the service sector has been growing rapidly with this "recovery", so mostly low-paying jobs have come back. These claims never hold up.

10   tatupu70   2015 Jun 14, 10:12am  

indigenous says

The overarching problem is that the US has made it unattractive for investment other than as speculation especially in the last 6 years. And the main reason for that is that the Fed has perverted the business cycle by bailing out the banks. I look at the newspaper business or the music business and them having to reinvent themselves the same would apply to banking and healthcare if the Govt would have stayed out of it.

OK, let's examine that theory. How exactly did the Fed bailing out the banks make the US unattractive for investment?

The newspaper business is dying. They didn't reinvent themselves into anything profitable.

11   tatupu70   2015 Jun 14, 10:14am  

mell says

Yep, indeed. Automation is insignificant btw. as it has replaced some low paying jobs while creating (albeit fewer) high paying jobs (and there's noting wrong with a single breadwinner if it weren't for inflation, however the service sector has been growing rapidly with this "recovery", so mostly low-paying jobs have come back. These claims never hold up.

Can you honestly write that with a straight face? Inflation is a distraction. There is no evidence real wages perform better under a low inflation environment than a high inflation environment. And any evidence that's there, indicates moderate inflation is best.

Your nonsense about inflation is what doesn't hold up.

12   mell   2015 Jun 14, 10:23am  

tatupu70 says

mell says

Yep, indeed. Automation is insignificant btw. as it has replaced some low paying jobs while creating (albeit fewer) high paying jobs (and there's noting wrong with a single breadwinner if it weren't for inflation, however the service sector has been growing rapidly with this "recovery", so mostly low-paying jobs have come back. These claims never hold up.

Can you honestly write that with a straight face? Inflation is a distraction. There is no evidence real wages perform better under a low inflation environment than a high inflation environment. And any evidence that's there, indicates moderate inflation is best.

Your nonsense about inflation is what doesn't hold up.

Math doesn't lie. Even a "moderate" (aka brutal) 2% inflation p.a. will make it necessary for the lowest paying jobs to get pay raises that are utterly unrealistic, esp. for these kind of jobs.

13   indigenous   2015 Jun 14, 10:23am  

tatupu70 says

OK, let's examine that theory. How exactly did the Fed bailing out the banks make the US unattractive for investment?

The money that would have been invested in nascent business, has instead propped up banks that should have gone away.

tatupu70 says

The newspaper business is dying. They didn't reinvent themselves into anything profitable.

The newspaper business was made profitable by want ads which was taken away by Craig's list. Since the habit of reading the newspaper has gone away and also the idea of paying a subscription fee, it is tough. I suspect that people will tire of low quality free stuff and news providers will start charging for their services. As well as advertising.

14   tatupu70   2015 Jun 14, 10:39am  

indigenous says

The money that would have been invested in nascent business, has instead propped up banks that should have gone away.

No it hasn't The money that propped up banks came from the Fed. None of that money would have EVER been earmarked for nascent businesses. Further, interest rates are at historic lows right now. There is no shortage of available money out there now. No sane person can argue that the economy is struggling due to lack of available money.

indigenous says

The newspaper business was made profitable by want ads which was taken away by Craig's list. Since the habit of reading the newspaper has gone away and also the idea of paying a subscription fee, it is tough. I suspect that people will tire of low quality free stuff and news providers will start charging for their services. As well as advertising.

Newspapers were profitable because people read them--subscriptions and newsstands. So now "you suspect"? I thought they already reinvented themselves?

15   indigenous   2015 Jun 14, 10:49am  

tatupu70 says

No it hasn't The money that propped up banks came from the Fed. None of that money would have EVER been earmarked for nascent businesses. Further, interest rates are at historic lows right now. There is no shortage of available money out there now. No sane person can argue that the economy is struggling due to lack of available money.

No money is earmarked, capital goes where it is treated best. Right now that is in speculation. Investing in business i.e. small caps is risky, much better to do buy backs, guaranteed money for excess reserves, buy real estate, etc

There is a dearth of small business opportunities because the business cycle was not allowed to run it's course.

16   tatupu70   2015 Jun 14, 10:53am  

indigenous says

No money is earmarked, capital goes where it is treated best. Right now that is in speculation. Investing in business i.e. small caps is risky, much better to do buy backs, guaranteed money for excess reserves, buy real estate, etc

There is a dearth of small business opportunities because the business cycle was not allowed to run it's course.

Actually, that's not true. The bank bailouts did not steal money that would have ever gone to small businesses.

Regardless, like I said, interest rates are near historic lows. That means there is an oversupply of money looking for an investment opportunity.

There is a dearth of opportunities because of inequality. The majority of US consumers have no money, so there is no excess demand waiting to be met.

17   indigenous   2015 Jun 14, 10:57am  

tatupu70 says

Actually, that's not true. The bank bailouts did not steal money that would have ever gone to small businesses.

Regardless, like I said, interest rates are near historic lows. That means there is an oversupply of money looking for an investment opportunity.

There is a dearth of opportunities because of inequality. The majority of US consumers have no money, so there is no excess demand waiting to be met.

19   tatupu70   2015 Jun 14, 11:02am  

indigenous says

And the reason why this charts looks like this is, again, because of inequality. More and more credit is needed as money continues to accumulate at the top.

We can tax the 1% or borrow from them, and unfortunately, we have chosen to borrow.

20   indigenous   2015 Jun 14, 11:04am  

tatupu70 says

And the reason why this charts looks like this is, again, because of inequality. More and more credit is needed as money continues to accumulate at the top.

And why is that???

21   tatupu70   2015 Jun 14, 11:04am  

indigenous says

I guess this means you are giving up this discussion and are going to change the subject now. Typical--you and CIC like to run away when you realize you are wrong.

22   tatupu70   2015 Jun 14, 11:05am  

indigenous says

And why is that???

Because of 30+ years of conservative policies. Low taxes, deregulation, free trade, union busting. Shall I continue?

23   indigenous   2015 Jun 14, 11:10am  

tatupu70 says

Because of 30+ years of conservative policies. Low taxes, deregulation, free trade, union busting. Shall I continue?

No, but guess again.

24   tatupu70   2015 Jun 14, 11:18am  

indigenous says

No, but guess again.

lol--it is true, and it wasn't a guess. But thanks for playing.

25   tatupu70   2015 Jun 14, 11:31am  

indigenous says

tatupu70 says

lol--it is true, and it wasn't a guess. But thanks for playing.

So are you right or Woggy?

I think we're in agreement, actually.

26   indigenous   2015 Jun 14, 11:33am  

tatupu70 says

we're in agreement

Are not

27   tatupu70   2015 Jun 14, 11:35am  

indigenous says

Are not

You sound like a two year old. Where do we disagree?

28   indigenous   2015 Jun 14, 11:36am  

Woggy says from fractional reserve banking, you say from bad fiscal policy

29   indigenous   2015 Jun 14, 11:40am  

splain me

30   control point   2015 Jun 14, 4:13pm  

indigenous says

You want to dig into the minutiae. That is not the point. BTW the BLS says 148795 job

Its central to his entire argument.

"employed" does not equal "not in the labor force."

2000 hours is suspect. Most companies have between 10-15 paid holidays. People also have at least typically 2 weeks vacation. Most companies use 1800 hours when budgeting for capacity for a FTE, FWIW.

I've established the true number of non-retired, not working and in high school or college, and not working and collecting disability potential workers age 16 and over. Basically the labor force plus 16.3M.

So 157.5M plus 16.3M = 173.8M. Times 1800 hours is 313 billion hours. 240 billion hours worked, so 73 billion unused capacity. (unemployed, discouraged, stay at home mothers, shadow economy, part timers...)

FWIW 1800 * 149M jobs = 268200 hours. At 240 billion hours for 149M jobs, average per week (50 weeks w/ holidays) is about 32 hours per week per employed person. If we assume 2 weeks vacation as well, the average increases to about nearly 33.5 hours per week. 3.5M of those workers are teachers, who work probably 30 weeks. So lets assume 1200 hours average for them, making the math equation 3.5M(1200) + 145.5Mx = 240B. That will put the average for all non-teacher workers at about 34 hours per week. Basically 9-5 with a lunch break, plus another hour somewhere during the week.

Again, hardly a problem.

Stockman is a blatant liar, has been for years.

31   indigenous   2015 Jun 14, 4:45pm  

control point says

Again, hardly a problem

Sure it is.

The numbers have a lot of wiggle room in them. Which is why I posted this graph, assuming they calculate the numbers the same way, yes we have a problem:

control point says

Stockman is a blatant liar, has been for years.

Link?

32   control point   2015 Jun 14, 8:49pm  

indigenous says

The numbers have a lot of wiggle room in them. Which is why I posted this graph, assuming they calculate the numbers the same way, yes we have a problem

You know that graph ends at the end of 2012, right? You know, when there were somewhere around 7M less people working?
https://research.stlouisfed.org/fred2/series/B4701C0A222NBEA

Here, try this, more recent:
http://www.bls.gov/news.release/empsit.t18.htm

Looks like I was off by a half hour per week...actual average is 34.5 which means your 240B hours is a little low now that we know the average and the number of workers. Try about 254B today with the 7M extra workers.

33   indigenous   2015 Jun 14, 9:25pm  

control point says

Looks like I was off by a half hour per week...actual average is 34.5 which means your 240B hours is a little low now that we know the average and the number of workers. Try about 254B today with the 7M extra workers.

You're missing the point.

The stats have been flat for about 15 years or better. That is a big fucking problem.

34   control point   2015 Jun 14, 9:52pm  

indigenous says

You're missing the point.

The stats have been flat for about 15 years or better. That is a big fucking problem

If you have a graph that is up-to-date and reflected the current number of 254B hours, it wouldn't look flat. We have about 20B more hours than 15 years ago, which is over 10 million more jobs.

I agree slow job growth but that is because of low tax rates. If we had better job growth we'd have more inflation and you'd be bitching about that like in the 70s.

35   indigenous   2015 Jun 14, 9:59pm  

NO, we are talking about 15 yr of no job growth, that is a big fucking deal.

Even Obamafuck states that small business creates jobs, the problem is what I have stated it is ad nauseum.

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