Slow jobs growth continued in December

Current news:

The Boston Globe – Saturday, January 8, 2011

Title: “Slow jobs growth continued in Dec.,” Christopher S. Rugaber, Associated Press

The U.S. economy is slowly adding jobs, barely enough to keep up with the growth of the workforce. Over the past three months, the economy added an average of 128,000 jobs per month. Employers added 1.1 million jobs in 2010, or about 94,000 per month. The nation still has 7.2 million fewer jobs than in did in December 2007, when the recession began.

Some economists predict the nation will create twice as many jobs this year as it did last year. Even if hiring picks up, the damage from the recession will take years to undo. Federal Reserve chairman Ben Bernanke told a Senate panel it could take five more years for the unemployment rare to return to a normal level of 6 percent.

Neo-functionalism

This is a difficult term. What does it mean? Neo-functionalism is defined as a growth of technical economic institutions that have required the growth of political institutions as a result. Whew – still don’t have a clue what this means.

This need to compensate economic markets with governance is known as the “spill-over” effect between government institutions and economic growth. This is the first significant difference between the Great Depression and Great Recession. The Social Security Act of 1935 not only created the retirement vehicle we know today, it also created an unemployment insurance program. The Employment Act of 1946 requires the president do everything in his power to prevent another depression.

Public policy conventions recognize that the critical different between deflation and its accompanying large unemployment rates and inflation is that a nation and individual workers can never recover the lost days and years of idle factories and workers. Unemployment insurance has been a vital asset during times of economic woes as it allows the unemployed to remain part of the consumer economy. In 2008, a special extended benefits program was created.

The national unemployment rate for the end of 2010 is 9.3% after its height of 10.4% in February 2010. These figures do not include those who stopped looking and the under-employed. As mentioned earlier, consumer spending represents 70% of the U.S. economy.  If consumers don’t spend, the economy worsens. The federal extension has been a lifesaver for so many families and individuals in the U.S. Most people blame President Obama for the debt increase related to the Federal Unemployment Benefits Extension; what would our economy and country look like without it?

http://www.google.com/publicdata?ds=usunemployment&ctype=l&strail=false&nselm=h&met_y=unemployment_rate&scale_y=lin&ind_y=false&rdim=state&tdim=true&tstart=631152000000&tunit=M&tlen=250&hl=en&dl=en

The Ink Tank: Editorial cartoon roundup

 

US near default, Geithner warns

Current news:

The Boston Globe – Friday, January 7, 2011

Title: “US near default, Geithner warns,” Jackie Calmes, New York Times

The government would reach its legal borrowing limit as early as the end of March and no later than May 16. A failure to increase the limit in time would force the Treasury to default on legal obligations and payments to bondholders “causing catastrophic damage to the economy,” Geithner said, threatening the dollar and stopping payment for a range of federal benefits, including military salaries, Social Security, and Medicare.

Geithner stated in a letter to congressional leaders that the outstanding gross national debt stood at $13.95 trillion.

Great Depression

Ten comparisons about these two significant financial crises

Deficit Spending and Monetary Policy

The understanding of fiscal policy prior to the Great Depression was simple – the federal government should be run on a balanced budget. That is not the case today. The first similarity of the Great Recession to the Great Depression is the amount of deficit spending as part of the federal monetary policy. As America spends to get out of the recession, the deficit increases exponentially. The federal government now plays a role in Medicare, Medicaid, Social Security and military spending. Based on the insufficient tax rates we desire, this position is unsustainable over the long-term.

During an economic crisis, private spending evaporates. Consumer spending represents 70% of the U.S. economy.  If nothing fills the consumer gap, deflation is inevitable and recovery becomes more difficult. The U. S. is flirting with deflation today as home prices continue to decline.

What does this mean for the future? As of January 3, 2011, the federal deficit was $14 trillion. It is anticipated to rise to $19.6 trillion by 2015. The government has to pay interest on its debt. If you have a deficit every month, you keep borrowing and your debt grows. Soon the interest payment on your loan is bigger than any other item in your budget. Eventually, all you can do is pay the interest payment, and you don't have any money left over for anything else. The risk is bankruptcy.

Each year since 1969, Congress has spent more money than its income. The Treasury Department has to borrow money to meet Congress's appropriations. We pay interest on that huge debt. The debt is being held by China and other world powers, hence another long-term risk for the American Dream.

Comparing the Great Depression vs. the Great Recession

The Great Depression happened in 1929 and it took over ten years to cure. Massive layoffs occurred, resulting in U.S. unemployment rates of over 25% with 13 million people becoming unemployed. During 1929-1932 industrial production fell by nearly 45%. Home-building dropped by 80% between 1929-1932 and nearly 5,000 banks went out of business as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse.

The Great Depression consisted of two major economic dips – August 1929–March 1933 and May 1937–June 1938, also called “Roosevelt’s Recession.” By 1939 the massive rearmament policies and war spending doubled the GNP, essentially ending the Depression. Productivity soared and business hired new workers to replace the 11 million working-age men serving in the military.

(Courtesy of Wealthvest.com/blog/wade-dokken)

The Crash of 2008-2009

On September 16, 2008, failures of large financial institutions in the United States rapidly devolved into a global crisis resulting in a number of bank failures in Europe and sharp reductions in the value of equities (stock) and commodities worldwide. In the United States, 15 banks failed in 2008, while several others were rescued through government intervention or acquisitions by other banks. On October 11, 2008, the head of the International Monetary Fund (IMF) warned that the world financial system was teetering on the "brink of systemic meltdown." The economic crisis caused countries to temporarily close their markets. The Times of London reported that the meltdown was being called the Crash of 2008.

The Black Week: beginning October 6, 2008 and lasting all week the DJIA closed lower for all five sessions. Volume levels were also record breaking. The DJIA fell over 1,874 points, or 18%, in its worst weekly decline ever on both a point and percentage basis. The S&P 500 fell more than 20%. On October 24, many of the world's stock exchanges experienced the worst declines in their history, with drops of around 10% in most indices.

By March 6th, 2009 the DJIA had dropped 54% to 6,469 from its peak of 14,164 on October 9th, 2007, a span of 17 months.

The Great Depression

In the Roaring Twenties, the economy grew robustly. It was a technological golden age as innovations such as radio; automobiles; aviation; and telephone were deployed. Companies that had pioneered these advances saw their stocks soar. By the summer of 1929, the economy was contracting and the stock market went through a series of unsettling price declines. These declines fed investor anxiety and events soon came to a head on October 24 (known as Black Thursday) and October 29 (known as Black Tuesday).

On Black Tuesday, the Dow Jones Industrial Average (DJIA) fell 38 points to 260, a drop of 12.8%. The deluge of selling overwhelmed the ticker tape system. Black Tuesday was a day of chaos. Forced to liquidate their stocks because of margin calls, overextended investors flooded the exchange with sell orders. The glamour stocks of the age saw their values plummet. Across the two days, the DJIA fell 23%.
By the end of the week of November 11, the index had a cumulative drop of 40 percent from the September high. The markets rallied but it was a false recovery that led unsuspecting investors into the worst economic crisis of modern times. The DJIA lost 89% of its value before bottoming out in July 1932.

What is the definition of a stock market crash?

A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors.

Stock market crashes are social phenomena where external economic events combine with crowd behavior and psychology in a positive feedback loop where selling by some market participants drives more market participants to sell. Generally speaking, crashes usually occur under the following conditions: a prolonged period of rising stock prices; excessive economic optimism; a market where Price/Earnings ratios exceed long-term averages; and extensive use of margin debt and leverage by market participants.