Kondratieff Wave

Unemployment has increased steadily throughout the stock market crash and employment market continued to detoriate throughout the stock market rally of 2009-2011. Causes of unemployment are many. But from a macroeconomic perspective, below charts make it clear that unemployment is a function of money supply. As the money supply deflates, unemployment increases.

Why are you unemployed? One could say he is willing to accept lower wages for work. But minimum wage laws do not allow that! Even if you wanted to work for less money, your employer cannot hire you because of the law. Then there are unions that tie the employers’ hands with regard to pay. But there is another reason; a bigger reason that really prevents you, or other debt slaves, from accepting lower wages. There is not enough money in the economy to pay salaries that people HAVE TO demand. How? Banks create money when we borrow. Entire money supply is interest bearing debt. We ran out of borrowers, so new money is not being created as fast anymore and we owe more than the entire money supply. This creates chronic shortage of money where weakest borrowers will go bankrupt. Put in numbers, a gross simplification but makes the point clear: There are N people. Each borrowed X, but promised to pay X+I. So each must earn X+I. Who can pay that much? The combined money in the economy is N*X. How can we find employers who can pay N*(X+I) ? This is what they mean when they say one of the FED’s functions is to fight unemployment. They do that by keeping interest rates low (thereby making more people borrow which in turn increases the money supply), or they simply print money and lend to the US treasury who spends it (inflates the money supply) and creates jobs.

Deflation of money supply is visible in various measures of money supply:

Meredith Whitney explains the sorry state of the economy:

State and local governments are broke and will be cutting about 2 million jobs soon. Consumer is not paying the mortgage but is spending instead. However, double dip in housing is coming.

How does current unemployment numbers compare to past recessions? As seen in the chart below, in most other recessions, employment went up as a V-Shape recovery. However, after heavier job losses, in 2011, we still do not see a V-Shaped recovery in the job market.

Another way to look at unemployment is to have a look at the percentage of the population who have a job:

As seen in above employment chart, number of employed people are decreasing at a fast pace.

Initial claims is steady for the last few months and is applauded by some as a sign that economy is getting better.

Certainly we have seen worse. However, current numbers are still at levels only seen in past recessions:

Albert Edwards of Societe Generale has put together this chart to provide a little context. It shows what the U.S. unemployment number would look like if we were at the peak participation rate of 67%, which occurred around 2000.

At that participation rate, unemployment would be about 4 percentage points higher than the current headline figure of 9%. Edwards says that 4% is the equivalent of 6.7 million more unemployed people.

So if the participation rate increased 3% (from its current 64% to 67%), unemployment would actually be 13%. That gap is partially made up of long-term, structurally unemployed construction workers left behind after the housing bust, and is a significant number.

Conquer the Crash

The deflationary crash was forecast in 2002 “Conquer the Crash” best seller. Conquer the Crash correctly predicted credit deflation, bailout schemes, banking and insurance company troubles, troubles with collateralized securities, derivatives, mortgage-backed securities, woes of Fannie Mae and Freddie Mac, real estate crash. Conquer the Crash foretold the inability of rating rervices to see the coming crash, fate of political leaders in bear markets, desire to print money, short-selling ban, and other psychological changes that accompany bear markets. Plunging confidence and crashing tax receipts were all predicted. Conquer the Crash is a must read to understand the severe economic downturn we are in. Even today, seemingly after the worst of it, the updated second edition is an entertaining read that explains the financial turmoil in a clear and easy to understand way to prepare you for what is about to come next.