Brane Space: Deflation, The Real Unemployment Rate - And Why A Depression May Be Nigh If McConnell & Repukes Don't Act With Covid Aid Pkg.

Why isn't the actual unemployment rate of 12 % (denoted U-6 by economists) - with 9.8 million Americans out of work - used instead of the much lower U-3 value of 6.7%? The latter, of course, is the one circulated in the corporate media and one seldom sees the real rate cited unless one does some extracurricular research. But the bottom line is that some time after the "Reagan revolution" in the 80s, both political parties agreed to use the U-3 form, and casting all who had not worked for 6 months as "discouraged" instead of unemployed. This left the stat much more acceptable to the politicos and the corporate sector. Hence, because there will almost always be more people who are unemployed after 6 months - especially in the wake of a financial cataclysm- the unemployment rate U-3 can always be kept artificially low. (Best the U.S. not look like a Banana republic, or third world country!)

Many readers may also not realize - especially if they were born before 1970 or so - that at one time the cost of keeping people employed was a hot topic for the Federal Reserve. In those "olden days" the Fed used a stat called the "Employment Cost Index" to try to keep track of the relationship between inflation and employment. The (per capita) Employment Cost Index here basically calculated how much cost was attached to keeping each unit worker in a job. That cost included: wages-salaries, benefits as well as overtime pay. Generally, the greater the number of employed Americans, the higher the cost index. The more unemployed citizens the lower the cost index. The Fed - whether under Paul Volcker or Alan Greenspan - tended to worry if the cost index was too high because it meant inflation was near.

After a time, Greenspan and Wall Street investment firms came up with a general formula that every 1.3 million Americans out of work cut inflation by 1 percent. Hence, too low an unemployment rate raised hackles and fear in Fed chairmen. Here is a comment from a Baltimore Sun column (p. 1E Jan. 27, 1997, 'Employment Cost Is a Hot Number') worth noting now:

"Inflation fears are especially acute ..because unemployment is too low. When available workers become scarce, employers must often bid more for their services and then raise consumer prices to make up for higher costs."

Why now? Well, because recent data on yields - especially for TIPS (Treasury-Inflation Protected Securities) and inflation suggest the relationship may be broken. I refer to the WSJ Business & Investment column by James Mackintosh appearing on p. B1, Nov. 30, where one reads:

"The issue concerns the Federal Reserve and inflation, or rather the lack of it. After a decade when faster growth, low unemployment and zero interest rates did nothing to spark inflation, many no longer expect even extraordinary Fed action to push up prices faster."

Then quoting John Roe, head of multi-asset funds at Legal & General Investment Management: "Even at very low levels of unemployment the Fed struggled to generate any wage inflation, and now there is quite a lot of slack in the labor market."

By that "slack" he meant the 9.8 million Americans currently ouot of work and many facing the extinction of their benefits by the end of the month, as well as possible evictions.

Let's be clear here that inflation is not zero or even less than 1 percent. The same WSJ piece cites an "implied inflation rate calculated by comparing yields on standard Treasurys and TIPS" with an increase from 1.81% (at the end of October) to 1.83 % now.

To be sure, these are not exactly low numbers. Further, an ongoing beef with the Fed's inflation rate is that it is lowballed, like the BLS unemployment rate. The giveaway came sometime back in 2012, when the Fed chair Ben Bernanke - pressed on why prices seemed high (e.g. at supermarkets) while the stated inflation rate was low, responded: "Those are shelter costs, just made-up numbers." He was referencing food, housing (rent) and meds as well as health costs, none of which are entered into the Fed-computed inflation rate. (I seem to recall my blog post comment at the time, 'Well hey, then maybe we can pay for them in made up money!')

The takeaway here is that the inflation which the economic geeks claim is so hard to find would suddenly appear if the real "shelter costs"- based inflation was used. But in some finance quarters, like the editorial board at The Financial Times, the U.S. inflation rate is real and the expectations are for it to increase. From that FT editorial (December 8):

"Expectations for inflation are on the rise: the implied predictions in the price of inflation-linked US government bonds hit their highest level for 18 months this week. With central banks still flooding the financial system with liquidity, and now the prospect of economies reopening following the rollout of vaccination programmes, investors are right to think there is more potential for an acceleration in price growth next year."

Adding:

"Central banks, however, should be more circumspect and guard against any premature withdrawal of support to still-battered economies. For much of the past year, deflation has been the greater risk for the world. Without sufficient fiscal and monetary policy support, the collapse in consumer and investment spending caused by the pandemic risked pushing the world into a deflationary trap. A drop in economic output below its potential would mean mass unemployment and stockpiles of unsold goods that would weigh on workers’ wages and business revenues. The first job of central bankers should be to resist the disastrous deflation that accompanied the Great Depression in the 1930s."

The preceding is more or less a warning to Mitch McConnell and his Repubs to get their act together and pass some kind of Covid relief package and soon. After all, 9.8 million out of work with no money coming out and nothing to spend is not a good sign. It is indeed, the basis for a deflationary trap - the same form which hurled the world into a Great Depression in the 1930s. Does Mitch not see this, or is it he just doesn't care? Or is he so despicable he wants to leave Biden in a total economic mess, to grab more power himself?

Even if a stimulus deal is passed in the next 7 days, the slowdown in the U.S. labor market highlights the challenge facing Biden. He has called for large-scale government spending to bolster the recovery. But in a divided Congress it is far from clear that he will succeed. On Tuesday, Mitch McConnell basically said he's willing to let any package wait until after the holidays, letting Senators return home. Meanwhile 10 million may face evictions and have to line up at food banks to survive. Again, the other aspect is zero consumption and amplified by lockdowns on account off the Covid surge.

James McDonald, the head of Hercules Investments, quoted in The Financial Times, said a double-dip recession in the U.S. depended on “the severity of the shutdowns . . . and the size of potential stimulus from Congress and the Federal Reserve”. Minus any action then, serious deflation and a depression - not just double dip recession - may be on the horizon. This view is reinforced in the earlier cited WSJ article noting Republicans will likely control the Senate and hence little if any fiscal stimulus (e.g. extended unemployment benefits) but only more monetary stimulus (e.g. more Fed buying of long-dated bonds). Trouble is, monetary stimulus doesn't help Joe and Jane Smith who need help to settle their debts, money to get food and keep a roof over their heads.

Are there any upsides or positives to take away? According to the WSJ piece, inflation-free growth is a plus because "it allows interest rates to remain low even as the economy accelerates." The FT, meanwhile, sees little carryover risk of deflation given "the prices that have seen the greatest falls are in categories where consumers have been forced to cut back, i.e. cheap airline tickets and holiday package deals." Also noting that "many categories of goods have been withdrawn altogether."

Maybe. But the grocery stores, remaining restaurants - even if only doing takeout - still depend on revenue from consumers to survive, not to mention all the landlords that have been waiting x' months now to be paid back rent. That aggregate lack of demand translates into massive deflationary pressures whether the economists see it or not. This may be why the FT editorial also warns:

"Central banks should not, therefore, be overeager in their fight against inflation. The U.S. Federal Reserve and the ECB consistently overestimated the risks of rising prices in the aftermath of the 2008 financial crisis. With a heavily indebted global economy, the costs of deflation are much higher than inflation. Falling prices would mean lower income for businesses while debt burdens and interest rate costs would increase in real terms."

As noted by Sen. Bernie Sanders on ALL In last night, Treasury Secretary Mnuchin made a proposal for a $600 direct payment to individuals ($1200 for couples) as part of the latest iteration, but if accepted wanted the unemployment benefit nixed. As Chris Hayes put it: "They want to give with one hand and take with the other!" This as Americans are in need of both, unemployment benefits AND direct payments. But as usual the cheapskate Reeps dislike direct payments (even a chintzy one time $600) because they "are too costly and give too much money to people who don't need it".

Well, Reepo Rats, tell that to those recently evicted from their homes and apartments and living on the outskirts of Denver, Aurora and Colorado Springs, in tents and in their cars. It continues to boggle the minds of sane citizens how this political party - and its "president" - could get so much devotion from millions who are also in dire straits. It makes no sense at all. The only explanation, as Janice puts it, is "they are programmed to be part of a cult".

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