There are two primary reasons why the U.S. is producing yet another "jobless recovery" and is now suffering under a condition of structurally-based high unemployment. Those reasons are: a pervasively irresponsible monetary policy, which has led to the continued attenuation of our manufacturing base, and an over-leveraged consumer who must now reconcile his balance sheet. In reality, those two conditions go hand and hand. They are the result of a government that seeks to micromanage the cost of money and the rate of economic growth.
When the Fed prints money and monetizes debt in order to set interest rates too low, they encourage excess consumption. The boom in lending and money creation results in rising prices, which misallocates what little savings and investment there actually is. Since inflation is never evenly distributed throughout an economy, it usually gets concentrated into a particular asset bubble (think NASDAQ stocks and real estate).
If interest rates and money supply are left to market forces (i.e. interest rates are a function of savings vs. the demand for money and money supply is restricted by the mine supply of precious metals), then resources tend to be allocated in the most efficient manner. However, when the Fed distorts these forces employment gains are most prevalent in the building and servicing of the asset bubbles they help create. This means labor capital is not deployed evenly throughout the economy. It is also not used to expand productivity or to strengthen the economy's manufacturing base; it is instead concentrated on flipping stocks or houses for example. But by definition these bubbles are unsustainable. Once they are popped the economy must first go through a period of deleveraging before labor can be reallocated in a viable and sustainable fashion.
To further illustrate this point, according to the BLS, from January 2000 through today, the U.S. has lost more than 6.6 million goods-producing jobs! But it's not just the number of jobs that has been lost. Those who use the productivity excuse will still have to deal with the fact that as a percentage of GDP manufacturing has declined from 14.2% in 2000 to just 11% of total output today. While the U.S was busy eroding the manufacturing sector of the economy, jobs in the Housing and Service sector were doing much better in comparison. From January 2000 through June of 2006 the economy added 261,000 jobs in the real estate sector. And from 2000 through today, the service sector of the economy added 5,083,000 jobs.
Some will claim that the prescription for boosting manufacturing output and employment is to destroy the dollar at an even greater pace. But the answer can't be found by simply forcing the Chinese to appreciate their currency or by devaluing the U.S. dollar further. History clearly shows any such currency manipulation strategy to be a complete failure. The most important factors in balancing trade are the wages, taxes and regulations within a given country. A current account deficit cannot be balanced by lowering the value of a currency.
But another consequence of government's desire to manage interest rates and the economy is the accumulation of debt. Household debt in the year 2000 totaled $6.9 trillion, which represented 66% of GDP. If that wasn't bad enough, government then slammed on the monetary and fiscal accelerator in order to paper over the collapse of the equity market. Consumer debt skyrocketed as a consequence. Today, household debt stands at $13.5 trillion and is over 93% of GDP.
The truth is that job growth will be weak because the consumer must pay down this debt and will not be taking the risks associated with employment creation. Demand will also be weak because consumers are doing the correct thing and repairing their balance sheet instead of taking out loans to expand or start up new businesses. Additionally, government debt accumulation is crowding out private investment that would be used for capital creation. Instead of making loans to the private sector, commercial banks have loaded up on $1.57 trillion in Treasury and Agency debt.
The bottom line is that it takes time for those erstwhile service sector employees and those whose employment was associated with the previous bubble to become gainfully employed in the rebuilding of our country's manufacturing base. It will also take many years for the private sector to deleverage and be able to once again expand their balance sheet.
Unfortunately, our government is not currently headed down the correct path to a sustainable recovery. They are trying to re-inflate another bubble instead of allowing the free market to create jobs that can help reconcile our trade imbalance. And they are piling on an intractable amount of public sector debt, which taxpayers in the future will be forced to service in vain. The result is an economy marred by slow growth and underemployment. The sooner our government stops piling on debt and destroying our dollar, the quicker we can start to heal.
Michael Pento is the Senior Economist for Euro Pacific Capital
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