Yesterday was another exciting day on Wall Street. The Dow rose 131 points…and gold shot up $25 to a new record, $1043.
Investors must be pondering the future.
What will the future look like? No one knows. But investors thought they saw things they liked.
For one thing, there was the Federal Reserve governor from New York, who told the world that there was no risk of a rate hike anytime soon. Bill Dudley knows which way the wind is blowing. He said the Fed would hold money policy loose “indefinitely.”
Indefinitely is otherwise known as “as long as it takes.”
But as long as it takes for what? Ah…as long as it takes until the economy appears strong again.
How long will that be? Ah…maybe longer than anyone realizes.
Yesterday, we were calculating how long it would take to get the jobless number back down to ’90s levels…that is, around 5%. There are now about 131 million jobs in the United States…and about 15 million people who would like a job but can’t find one. Meanwhile, population growth adds about 1.5 million new workers every year. That means the economy has to grow at 1% (in real terms) just to stay even with population growth. Currently, the economy is going in the wrong direction – backwards. It’s losing jobs…maybe 3 million this year…and maybe another 2 million or so before it finally stabilizes (who knows?)…for a total of 20 million jobs down (about 13% unemployment) by the time unemployment bottoms out.
Let’s suppose, by some miracle, the economy turns around…and begins growing at 3% per year. That should be about 3 million new jobs per year. Half of those, remember, are just to keep up with population growth. So the other half – 1.5 million – gradually reduce unemployment. Now, let’s get out the calculator…20 million divided by 1.5 million equals a little more than 13. By these numbers you can expect full employment again in 2022!
But what if the economy doesn’t grow at 3% per year? Ooooh…that’s the problem, isn’t it? All the feds – and practically all other economists too – are projecting a return to normal. They expect a ‘recovery.’ But what if there never is a recovery?
Heck, yesterday, the central bank of Australia said it was so sure that everything was going well it raised its key lending rate by 25 basis points.
“Canberra says risk of serious retraction over,” The Financial Times reports.
But they get a lot of sunshine down under. Possibly, the heads of the Reserve Bank of Australia got a little too much of it yesterday. Australia is also a supplier of natural resources to China; possibly, the sun burnt bankers failed to notice that China is a bubble.
Or maybe they failed to notice that China’s biggest customer is broke.
Right under The Financial Times’ article about Australia is the following headline:
“No sign of credit revival for US households.”
“The latest data from the Federal Reserve show consumer credit declined at an annual rate of 10.4% in July – the fastest rate since the crisis began two years ago.”
Yes, dear reader, Americans are shedding debt. They are cutting back. They are saving.
Another headline in The Financial Times tells us, “Holiday sales [are] set to fall.”
Hold on. Who makes all that junk that Americans buy for Christmas? And how can China buy more raw materials from Australia when it is selling fewer finished products to Americans?
Perhaps China is focusing more sales on the domestic market; we don’t doubt it. But you don’t refocus the world’s second or third largest economy in 12 months. It takes years. And you don’t get this kind of rebirth without some kind of suffering. The big, old oak tree has to fall down before the sapling can take its place. And when the oak falls – it makes one helluva mess.
for The Daily Reckoning Australia