I recently received the following question about unemployment from a gentleman in Tanzania and I thought it was a good question and I would share the answer with you.
What Causes Unemployment?
I have been thinking on that situation of unemployment. Why does the rate of unemployment increase day after day? Does it mean that people have decreased the rate of thinking on creating jobs or there is any other reason? ~ Lioba from Dar-es-Salaam Tanzania.
Here is my Response:
Lioba, That is a very good question. Unemployment is a function of how efficient the marketplace is. In a purely agricultural economy, there is no unemployment, everyone has to work, if they don’t work they don’t eat. So everyone including children work. But as systems become more complex there is more opportunity for “friction” or market inefficiencies. Theoretically, an efficient market would support every person who could produce more than he cost. In other words, if someone could be paid $10 but produced $12 worth of goods, any business would be happy to hire them. On the other hand, if the government sets a minimum wage of $12 the market is no longer efficient and anyone who cannot produce at least $14 worth of goods would not be hired. Therefore after an increase in the minimum wage, those producing $10, $11 and $12 worth of goods would now be uneconomical for the employer so they would be fired.
So the first cause of unemployment is minimum wage laws.
But there are other inefficiencies as well. If the government [click to continue…]
Just the other day I was thinking about language and how it molds our thought processes. In some aboriginal tribes they don’t have words for past, present and future tense. They would just say “I go home” this could mean “I went home”, “I am going home” or “I will go home”. It has been proven that in societies like this the concept of time is very muddled if almost non-existent. How can you plan for your future if you don’t understand the concept of time? Lest we English speakers get all smug about the superiority of our language, ancient Greek was more precise than English in many aspects such as the word Love with at least three different words that we translate as “Love”. And Eskimos are much more precise with a multitude of different words for the English word “Snow”. The author also tells of an aboriginal term that is more precise than ours regarding directions, while some American Indian terms are less precise regarding certain colors.
The point is, the words in our vocabulary enable us to think more clearly, and differentiate between concepts better. Which is a good reason to improve your vocabulary. And as George Orwell showed us in the classic book 1984 by redefining words the government can exert control over the population as in the lies promoted by the “Ministry of Truth” and rewriting history. In today’s article we will look at how our financial time-frame is being distorted and how financial terms can influence our financial future. ~Tim McMahon, editor
Outside the Box: By John Mauldin
My good friend Dylan Grice takes a very interesting tack in the latest issue of his Edelweiss Journal, today’s Outside the Box. Rather than attacking our macroeconomic problems directly with economic tools, he approaches them from the point of view of what he calls a “subtle but significant devaluation of language.” Now, you might think that the words we use to describe and understand the economy are not in themselves very powerful economic determinants, but Dylan lays out a convincing case to the contrary. [click to continue…]
Despite Bernanke’s famous helicopter speech the FED’s powers really are not unlimited. There is only so much they can do to stimulate the economy. After all they can’t force people who are concerned about their future to borrow money. Just like a turtle people naturally recoil and pull back when times are uncertain. And even if they wanted to borrow bankers are reluctant to lend in uncertain times. This results in a phenomenon called Pushing on a String where no matter how hard the FED tries very little force is exerted on the economy. Robert Prechter believes that this is exactly what has been happening over the last few years where the FED has been trying to stimulate the economy but the only effect has been an anemic rebound in the stock market. ~Tim McMahon, editor
Deflationary Forces Stymie the Fed’s Economic Rescue Efforts
See a stunning chart of the Federal Reserve’s assets
By Elliott Wave International
The Federal Reserve’s efforts to rescue the economy have been historically aggressive, starting with the initial round of quantitative easing in 2008 and continuing through 2013.
The central bank’s assets have skyrocketed due to the Fed’s bond purchases, which you can see clearly in this eye-opening report that Robert Prechter presented to the Market Technicians Association and his Elliott Wave Theorist subscribers.
Download the full 8-page report for free here.
The main reason investors are expecting runaway inflation is [click to continue…]
Inflation has a big effect on the future value of our nest egg. As we begin to think about retirement we dream of our “magic number” that amount of money that we will need to retire comfortably. But with the rate of inflation constantly changing in is like trying to take aim at a moving target. To make matters worse it’s not just the value of the money that is changing it is also the amount of interest you can earn on that money. With the FED actively working to keep interest rates low your savings often earn virtually “Nil” in the way of interest and to make matters even worse once inflation and taxes take their bite your nest egg might actually be shrinking. In today’s article Dennis Miller looks at your retirement nest egg and some factors you need to consider. ~Tim McMahon, editor.
A Million Dollars Isn’t What It Used to Be
By Dennis Miller
We all share a common goal: to grow our nest eggs and make sure they last over the long haul. Our generation was taught to live off the interest and never touch the principal, but interest rates for CDs and Treasuries no longer allow for that. Frankly, they don’t even keep up with inflation, so we have to invest our money elsewhere if we want it to last.
It is a challenge to keep up with inflation and earn enough income to supplement our Social Security. Also, when our respective parents died, my wife and I each inherited a bit of money to add to our retirement fund, and we hope to do the same for our children. Many of you likely have a similar goal.
In 2007, an investor with $1 million could earn $60,000 annually on a certificate of deposit. Today, that same CD would earn $12,000, which makes things a lot more difficult. We will use $1 million in our examples simply because it’s an easy number to follow and do math with in our heads. However, the principles we’ll discuss apply no matter what size your retirement portfolio happens to be.
The Old Rule of Thumb
Back in the good old days, there were four estimates that worked well for [click to continue…]
Under certain circumstances such as high national indebtedness, fear of bad economic times or when interest rates approach zero, monetary policy becomes ineffective in enticing consumers into spending more money. Economists refer to this as “Pushing on a String” because if the basic demand doesn’t exist to induce people to spend money, it can’t be forced through monetary policy. Prime examples of this are during the Great Depression in the United States and in Japan since the 1990s. And as Lacy Hunt explains we are once again facing this problem in the United States since 2008. ~Tim McMahon, editor
Federal Reserve Policy Failures Are Mounting
The Fed’s capabilities to engineer changes in economic growth and inflation are asymmetric. It has been historically documented that central bank tools are well suited to fight excess demand and rampant inflation; the Fed showed great resolve in containing the fast price increases in the aftermath of World Wars I and II and the Korean War. In the late 1970s and early 1980s, rampant inflation was again brought under control by a determined and persistent Federal Reserve.
However, when an economy is excessively over-indebted and disinflationary factors force central banks to cut overnight interest rates to as close to zero as possible, central bank policy is powerless to further move inflation or growth metrics. The periods between 1927 and 1939 in the U.S. (and elsewhere), and from 1989 to the present in Japan, are clear examples of the impotence of central bank policy actions during periods of over-indebtedness.
Four considerations suggest the Fed will continue to be unsuccessful in engineering increasing growth and higher inflation with their continuation of the current program of Large Scale Asset Purchases (LSAP): [click to continue…]
The government shutdown is over and the U.S. Bureau of Labor Statistics is recovering from their unscheduled vacation. The United States federal government shutdown of 2013, lasted from October 1 to 17, 2013. Unemployment data for the month of September was due to be released on October 4th i.e. four working days into the shutdown.
So the employment data is now scheduled for release on October 22nd. And the Consumer Price Index which is used to calculate the September inflation rate, which was scheduled for release on October 16th is now scheduled for release on October 30th. Although the shutdown inconvenienced vacationers wanting to see National Monuments and the National Zoo, did it really save any money? If past shutdowns are any indicator… probably not. Government employees will probably… Read More
What is the Consumer Price Index?
The Consumer Price Index is simply a basket of goods that is used by the Bureau of Labor Statistics to gauge how much price inflation the economy is experiencing. It is “weighted” based on how much of each good the average family uses. Therefore if 41% of your expenses are related to the housing category and 3.6% of your expenses are related to the apparel category and Apparel goes down by 1% and housing goes up by 1% your overall expenses will still be going up. In other words, if you spend $820 on rent a month and $72 on clothes a 1% increase in your rent would add $8.20 to your monthly rent expenses while a -1% would only save you $0.72 on clothes.
In today’s article Doug Short, editor of Advisor Perspectives looks at the makeup of the U.S. Consumer Price Index (CPI) and how much each category has increased since 2000. He also looks at Education costs and Energy and addresses the common misconception that the CPI doesn’t include Food and Energy (which it does). Food and beverages make up 15.3% of the CPI plus Energy is a major component in both the housing and transportation sections. Doug also addresses “Core Inflation” which doesn’t include Food and Energy and what it is used for. Doug also includes an interesting little tidbit about beverages that are included in core inflation that you wouldn’t expect. ~Tim McMahon, editor.
What Inflation Means to You: Inside the Consumer Price Index
By Doug Short
September 17, 2013
What does an increase in inflation mean specifically to your household?
Let’s do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I’ll refer to hereafter as the CPI.
The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the [click to continue…]
It all seems a bit silly. On Monday the National Park Service declared that the open-air Veterans Memorial would be closed during the shutdown. After all they have to prove there is some “pain” involved in shutting down the government. But a bunch of 80-90 year old veterans would have none of it and they tore down the blockades.
So the park service made a 180-degree turn and declared their visits now constitute protected “First Amendment activity” .
Basically they had no choice, what were they going to do? Shoot the old war heroes? Put them all in jail? It’s like a bit of a joke. No their backs are against the wall, somehow they must impress on us common rabble how important the Government is… after all without the government the Bureau of Labor Statistics website isn’t being updated and the Washington Zoo is closed. Somebody must do something quick… after all without the BLS we have no Inflation Data to publish… worry, worry, worry oh my what will we do?
Perhaps we will have to go to other free market sources like Gallup and MIT… hmmm, maybe the data will even be more reliable. The government better hurry up and reopen before everyone figures out they are better off with it closed. ~Tim McMahon, editor
The Default Nobody Wants – Except Us!
by Bill Bonner
All the commentators are talking about is the looming clash in Washington over the debt ceiling.
We didn’t read about it in any detail; it seems trivial. But if Congress doesn’t get off its collective butt and pass another law the government will have to shut down. That’s because a previous law requires the feds to stop borrowing when they reach a certain limit. [click to continue…]
By Ben Hunt, Ph.D.
Previously, we discussed the Bureaucratic Capture of the FED and the institutionalizing of QE.
QE is adrenaline delivered via IV drip … a therapeutic, constant effort to maintain a certain quality of economic life. This may or may not be a positive development for Wall Street, depending on where you sit. I would argue that it’s a negative development for most individual and institutional investors. But it is music to the ears of every institutional political interest in Washington, regardless of party, and that’s what ultimately grants QE bureaucratic immortality.
It is impossible to overestimate the political inertia that exists within and around these massive Federal insurance programs, just as it is impossible to overestimate the electoral popularity (or market popularity, in the case of QE) of these programs. In the absence of a self-imposed wind-down plan – and that’s exactly what Bernanke laid out in June and exactly what he took back on Wednesday – there is no chance of any other governmental entity unwinding QE, even if they wanted to.
The long-term consequences of this structural change in the Fed are immense and deserve many future Epsilon Theory notes. But in the short to medium-term it’s the procedural shifts that have been signaled this week that will impact markets. What does it mean for market behavior that Bernanke intentionally delivered an informational shock by forcing uncertainty into market expectations?
First, it’s important to note that this is not really an issue of credibility. The problem is not that people don’t believe that Bernanke means what he said on Wednesday, or that they won’t believe him if he says something different in October. The problem is that the Fed is entirely believable, but that the message is not one of “constructive ambiguity” as the academic papers written by Fed advisors intend, but one of vacillation and weakness of will.
From a game theory perspective, [click to continue…]
By Ben Hunt, Ph.D.
Two things happened this week with the FOMC announcement and subsequent press conferences by Bernanke, Bullard, etc. – one procedural and one structural. The procedural event was the intentional injection of ambiguity into Fed communications. As I’ll describe below, this is an even greater policy mistake than the initial June FOMC meeting when “tapering” first entered our collective vocabulary. The structural event … which is far more important, far more long-lasting, and just plain sad … is the culmination of the bureaucratic capture of the Federal Reserve, not by the banking industry which it regulates, but by academic economists and acolytes of government paternalism. These are true-believers in too-clever-by-half academic theories such as management of forward expectations and in the soft authoritarianism of Mandarin rule. They are certain that they have both a duty and an ability to regulate the global economy in the best interests of the rest of us poor benighted souls. Anyone else remember “The Committee to Save the World” (Feb. 1999)? The hubris levels of current Fed and Treasury leaders make Rubin, Greenspan, and Summers seem almost humble in comparison, as hard as that may be to believe. The difference is that the guys on the left operated in the real world, where usually you were right but sometimes you were wrong in a clearly demonstrable fashion. A professional academic like Bernanke or Yellen has never been wrong. Published papers and books are not held accountable because nothing is riding on them, and this internal assumption of intellectual infallibility follows wherever they go. As a former cleric in this Church, I know wherefore I speak.
There’s frequent hand-wringing among the chattering class about whether or not the Fed has been “politicized.” Please. That horse left the barn decades ago. In fact, with the possible exception of Paul Volcker (and even he is an accomplished political animal) I am hard pressed to identify any Fed Chairman who has not incorporated into monetary policy the political preferences of whatever Administration happened to be in power at the time.
Bureaucratic capture is not politicization. It is the subversion of [click to continue…]