Dan’s Blog

The Real Problem

Dan Calandro - Monday, April 04, 2016

So there are two schools of thought. The first believes the economic problem in the world centers around the consumer and their inability to fully recover from the Great Recession. The economists in this camp, camp number one, believe that the low unemployment rate is bogus, the economy is fragile, and that another kind of subprime mortgage crisis is brewing under an unsuspecting global eye. The belief here is that consumers are either skittish to spend or tapped out, which explains why they haven’t propelled the new economy into a legitimate expansionary mode. Demand is the problem – fix it, and production and productivity will adjust, and GDP will improve accordingly.

And then there are the economists in camp number two, who recently concocted a new theory based on an “explosive job machine” that has returned world unemployment rates to pre-recession levels. These economists argue that “unemployment is a better indicator of global economic health than gross domestic product (GDP).”[1] It is their opinion that because unemployment is so “positive” the real problem is not global demand but rather “stunted potential due to aging populations and weak productivity”. Fix productivity, they believe, and wage growth will follow, and GDP will expand accordingly.

First things first. For the life of me I just can’t swallow the premise of camp number two’s theory – that the unemployment rate is a better indicator of economic activity than the economy itself (GDP). That’s just stupid to me. As unemployment benefits expire, people are forced to accept part-time work or lower paying jobs because the good jobs just aren’t there. This dynamic produces the current situation: lower unemployment rates, lower incomes, and thereby less demand, and lackluster GDP results. This has been a staple of this recovery ever since the beginning, when it was billed as a “jobless recovery.”

The unemployment rate is a farce; low labor participation and weak wage growth prove that. To base a theory on it is futile.

Second, productivity – defined as the effectiveness of productive effort, especially in industry, as measured in terms of the rate of output per unit of input – has nothing to do with the economic dilemma currently facing the world.

Take energy, for instance. The price of a barrel of oil is down $103 from it’s all-time high, an astonishing 74% drop in value. Knowing that every product or physical good transports to markets or consumers, and that all transport is driven by energy, economists in camp number two would like us to believe that the problem in energy is that energy companies aren’t productive enough.  

That’s silly. Lower global demand has driven energy prices lower, and productivity had nothing to do with it. Nothing.

But maybe economists in camp number two would argue that energy suppliers don’t need to be productive because there are so many energy producers. In other words, production of energy can be inefficient because there are so many inefficient producers – and even inefficient producers can over-supply markets because of their abundance. Over-supply, of course, brings about lower prices.

But wouldn’t increased productivity in the energy market bring about higher unemployment in that sector of the economy? And if energy suppliers needed fewer workers because productivity increased, wouldn’t that efficiency cause prices to fall even lower, and wouldn’t that dynamic ultimately produce even weaker GDP fundamentals?

The productivity theory to solving the world’s economic woes is as corrupt as the unemployment rate. But let’s put that fact aside for a moment and acquiesce to the idea that an increase in productivity would help the global economy out of its funk. Let’s just agree on that for the sake of argument.

Let me ask, Exactly what incentive do corporations have to increase productivity when demand is so weak?

International Monetary Fund chief, Christine Lagarde, is reportedly preparing to again downgrade global growth projections. Her words about the “fragile” global economy – it needs “urgent action” – and, in a joint statement along with the leaders of the top 20 economies, pledged to employ “all policy tools – monetary, fiscal, and structural” during the next global meltdown.

Why?—Because the world’s $78 Trillion economy isn’t productive enough?

Give me a break.

So what’s motivating the absurdity found in camp number two’s theory of productivity?—Their conclusion: “The message of the job market is that monetary policy is already succeeding.”

Puke.

The last market crash caught the majority of people by surprise because they failed to read the writing on the wall. Sadly, it is happening again.

The writing on the wall is clear. There will be another financial crisis –Take It From Herand the establishment will respond to it in a similar way as they did last time. It is “succeeding”, after all.

There will be more monetary nonsense next time around – more new money and more new sovereign debt to fund more central government planning and social engineering. You can bet on hearing, Well, it worked last time. Why not try it again?—Besides, Wall Street will be begging for it. (No one profits more from new money and debt than they do.)

The central government mantra during the next crisis will, again, be about saving the economy from insolvency and depression. And if the writing on the wall is any indication, their pitch for a new wave of “stimulus” spending will include measures to increase productivity – this to put people back to work earning higher-paying, full-time jobs – something that wasn’t done last time, when productivity was largely neglected. Productivity is the key, I’m sure they will say.

But that kind of central government planning won’t work again next time (see: Stocks, Politics, and Cocaine, for more). Besides, the least productive entity in the entire world is government. The more they do the less everything works.

So we can continue to be distracted with banter as to whether the “real economic problem” is productivity or weak global demand. Or we can talk about the real problem.

The real problem facing We the People, and investors, is the ever-expanding dominance of central governments over individuals and free markets. It is an epidemic. And it is a cancer.

That is the real threat to economic vitality and prosperity.

And until it is thwarted, neither demand nor productivity will correct.

Stay tuned…

 The road to financial independence.



[1] See Wall Street Journal article, Healthy Job Market at Odds with Global Gloom, by Greg Ip


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