Distortions in the Global Economy

We have argued in several places that a high unemployment level in the US is structural. In today’s “Outside the Box” titled Sorting Out the Decade, John Mauldin presents two articles by Bill Gross and Charles Gave that have bearing on themes we have written on.

In the first, Bill Gross confirms our argument that high unemployment level in the US is structural (see the emphasized segment below):

Recently, Erik Brynjolfsson and Andrew McAfee at MIT have affirmed that workers are losing the race against the machine. Accountants, machinists, medical technicians, even software writers that write the software for “machines” are being displaced without upscaled replacement jobs. Retrain, rehire into higher paying and value-added jobs? That may be the political myth of the modern era. There aren’t enough of those jobs. A structurally higher unemployment rate of 7% or more is the feared “whisper” number in Fed circles. Technology may be leading to slower, not faster economic growth despite its productive benefits.

The seriousness of this issue is seen when the Fed’s December FOMC highlights are reviewed (Flash Point: Fed Math) and we note that the exit condition for QE is a 6.5% or lower unemployment rate. If such is unattainable, we will have QE until either the Fed throws in the towel and admits that they are ineffectual (highly unlikely) or the whole system blows up in some manner (just a matter of time we think).

The second point Gross makes is based on the work by Carmen Reinhart and Ken Rogoff in a critically important paper titled, “Growth in a Time of Debt.”  He sums up their observations:

They conclude that for the past 200 years, once a country exceeded a 90% debt/GDP ratio [for the US, the ratio is now at 100%], economic growth slowed by nearly 2% for both developed and developing nations for an average duration of nearly a decade.

He sees that a 2% or lower real growth forecast holds for most of the developed world over the foreseeable future and this observation coincides with what we have predicted in several places.

In the second article, The Control Engineers and the Notion of Risk, Charles Gave identifies an issue that really grabbed our attention. As he notes (emphasis his):

… plain, boring and well-meaning economists working in the entrails of the world central banks. My intent is not to show why these economists will fail (bigger and brighter minds such as Hayek, Mises, Friedman, etc. have already done this) – but rather to review the impact that the misguided manipulation of the price of money (exchange and interest rates) is having on the notion of risk.

In short, the massive intervention of central banks in world financial markets has artificially distorted the valuation of risk and price for a number of asset classes. In particular, risk has become dissociated from sovereign debt valuation. When risk is improperly evaluated, prices of assets become artificial. The longer the suppression of proper risk discovery continues, the greater the price distortion and the wilder the correction will have to be to restore risk and price to proper levels, probably around long-term means.

Powered by WordPress | Designed by: photography charlottesville va | Thanks to ppc software, penny auction and larry goins