The Jobs/Inflation Conundrum
Jun 7, 2010
Posted by Jody Eisenman | Filed under Uncategorized
When Fridays’ unemployment numbers showed scant month to month improvement, the stock market reacted swiftly. When the dust settled, the DJIA had fallen over 300 points. What added fuel to the fire was a surprising announcement that Hungary could be facing bankruptcy. While Hungary is a relatively small country, this announcement, coming the heels of the Greek bailout and the Spain credit downgrade, has led many to believe that the European debt crisis is spreading. The market is now clearly nervous, which is almost a 180 degree turn from where we were a month ago, when the market seemingly shrugged off every bit of negative news with a wave of fresh buying. While I do think that the situation will probably get sorted out over time, there is a slight chance in my opinion of this crisis becoming so large as to completely overwhelm the stock and bond markets. I prefer not to dwell on this nightmare scenario at the present.
The main issue, of course, is debt. It is rather outrageous that almost every industrialized nation has spent more than they take in. If a sovereign country were a corporation, they would realize that you cannot continually spend three dollars for every two dollars in revenue. Sooner or later, you are to have to turn a “profit”. In the case of most European countries, they haven’t turned that profit in years. Their solution has been to borrow ever increasing sums in order to finance their yearly shortages, as well as buying the interest on their debt. This is true in the United States as well. OK, then why did the market react so negatively to a seemingly benign jobs number on Friday?
In order to stimulate the economy, the US government has been spending huge amounts of money (via treasury bond sales).Interest rates are already around zero. They have already bailed out the banks and the auto industry. Now, all this might have been worth it if the economy was truly improving. However, based on the latest unemployment numbers (which are currently 9.7% nationally),it is apparent that it is not. Most of the new hires have come from the government incentives, and not from private industry. How long can the US continue to spend without bringing the Euro crisis here? I don’t know, but one thing I learned in business school was that if you borrow money, you have to repay it sooner or later. Unfortunately, the US, like most countries, really have no idea how they are going to repay this. You want to know what their plan is?
1. Leave it to the next guy
2. Hope that investors will continue to buy bonds forever
3.Pray
There is only one real way to address this, and that is to balance the budget. One would accomplish by either cutting expenses (meaning unemployment, bailouts, subsidies, etc.) or by increasing revenues (meaning taxes). Needless to say, neither path is politically popular. The one thing every elected official understands is that you remain popular in order to get reelected. As such, there are very few people who will be willing to sacrifice their political career for the sake of balancing the budget. Until this happens, we will constantly be behind the eight ball.
