Salaries are bound to go down - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 9 July 2010
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Paris, France

Being an economist must be the most amusing job in the world. It's a laugh a minute. So many foolish pretensions, so many claptrap theories, so much pomposity and vanity...

We used to enjoy reading Thomas L. Friedman in the New York Times. Whenever he wrote about anything even remotely connected to economics we were assured a good chuckle. But he's moved on to geo-politics. Israel this... Palestine that... It's probably just as funny, but it's not our field. The only thing we know about the subject is that it shouldn't exist.

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Now, if we want entertainment we turn to Paul Krugman. He's not as funny as Friedman, frankly. And he's right about things often enough to make him unreliable. But it's still fun to watch a popular economist strut his stuff.

Krugman was really annoyed that the Senate refused to extend unemployment benefits, for example. He called them "heartless...clueless...and confused" as if that was some sort of revelation. We don't know about 'heartless,' but clueless and confused could apply to just about every US Senate since the beginning.

And as for failing to extend unemployment benefits, was that really a bad thing?

"Where you stand depends on where you sit," goes the expression. If you're sitting in an unemployment office, you're likely to be in favor of more benefits. If you're paying taxes, struggling to make ends meet, you might resent having to pay more for others who don't work.

Krugman points out that it's not their fault. Unemployment compensation doesn't really reduce people's desire to find work - not when there are 5 applicants for every job. Still, adjustments need to be made...and not having any money coming in the door is bound to be a motivator to make them. (More on Krugman below...)

The real reason people are unemployed is that the price of labor is too high. We're in a period of price and debt destruction. Output prices are going down. So, labor prices should be going down too.

But labor prices are 'sticky' ....they don't go down easily. Especially when there is unemployment compensation to keep them stuck. Unemployment compensation just interferes with the correction, delaying the necessary adaptations.

You are getting tired of hearing us say this. But we are in a period of debt destruction. The world has too much debt...particularly the 'rich' part of the world...particularly the people who speak English...and particularly the US and Britain.

Instead of spending money they don't have, people are beginning to save even the money they do have. This plays hell with the economy. Not only does it eliminate the sales it should not have had in the first place...it also reduces the sales it should have had - those that come from honest, current earnings. For now they must be foregone to make up for those that had gone before. Does that make sense?

Yes, it does. Sales that are paid for with credit are really a call on future earnings. They consume today what will be earned tomorrow.

That's why sales that come from credit are the best kind - from an economy's point of view. Usually, business pays its employees, who then buy its products. But when the employees spend credit - they're spending money that hasn't been earned yet. The employer gets extra current sales without any offsetting current expense. Profits go up.

There is some unwritten law in nature that everything must balance out somehow. So, if profits go up in a credit expansion, they're bound to go down in a credit contraction. So are prices. And labor rates too.

Yesterday, the Dow managed an additional advance, a nice follow-up from Wednesday's big move to the upside. Up another 120 or so points. Is this the start of a new bull phase? We don't know. But we wouldn't bet on it.

Not as long as the credit contraction continues. Bloomberg:

July 8 (Bloomberg) -- Consumer borrowing in the U.S. dropped in May more than forecast, a sign Americans are less willing to take on debt without an improvement in the labor market.

Borrowing that's increased twice since the end of 2008 shows consumer spending, which accounts for about 70 percent of the economy, will be restrained as Americans pay down debt. Banks also continue to restrict lending following the collapse of the housing market, Fed officials said after their policy meeting last month.

"The trend in consumer de-leveraging is clear as credit has declined 11 of the last 13 months," Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said in a note to clients. "Credit card debt continues to be paid down at a heady pace."


*** "I just am not sure what I want to do..."

Jules, 22, has been out of school for a year. He has a remarkable talent for music.

"You like music. Why not just go for it? I'll help you..." said his father.

"I don't know. I don't know if I can do it. I don't know if I have enough talent. And there are a lot of other people trying to do it...and a lot of them are a lot more talented than I am...

"And I don't know if I should do it either. When I write songs I have to reach so deep into myself that I'm almost afraid of what I find. It's too painful emotionally...it makes me think too much.

"Sometimes I think I'd be better off at a career that didn't involve so much creative imagination. Something that I could do without becoming too emotionally engaged. A normal career. Like working for a big business. Or something completely different. When I was working with you fixing the barn roof, for example, I was completely at ease. I enjoyed it. But then when I went back to work on my music, I got in a gloomy mood again."

Father is supposed to know best. But there are some things he thinks he knows and some things he knows he hasn't a clue about.

He replied:

"Well, you can stop worrying about the 'talent' issue. In the first place, I've seen what you can do. There's no lack of talent.

"Besides, when I was your age I thought talent was so important. Raw talent is very important when you're just starting out in life. Because it's all you've got. The guy who is very smart, for example, is the guy who gets good grades without hardly trying and gets into good schools and seems like he's going to set the world on fire.

"But there are different kinds of talent. There's a talent for being able to remember things. There are guys who have perfect pitch. And there are guys who are able to get to work on time and keep at it. As you grow older, raw talent becomes less and less important. Because you have more and more accumulated experience, wisdom, skill, instinct and so forth. The guy who was naturally talented gradually loses ground to the guy who gets to work early and stays late.

"You want to be a success? It's very simple. Get to work at 8AM. Stay on the job until 8PM. Repeat that. Keep at it for 10 years. I guarantee you'll be a success at whatever you're trying to do.

"As for the question about whether it would be better to avoid a career in the arts, I can't help you very much. We're a moody bunch. It comes from your Irish ancestors. We're a race of dreamers and diehards, full of romantic illusions, and probably better off doing masonry than poetry. But whatever you decide to do, you're probably better off getting on with it...

"You know, you can treat an artistic career in a businesslike way too. Not all artists are tortured souls. In fact, it's probably more of a posture than a reality. And very hard to maintain for a long time. Those tortured souls tend to end badly and early. The real professionals keep going.

"Some writers, for example, will put their pens down at 5 o'clock...even in the middle of a sentence. Yes, it's probably a good idea to keep some distance between your soul and your work. Work in a businesslike fashion. Torture your soul on weekends. Or, replace barn roofs.

"Hope this advice helps."

***

Shouldn't do it; couldn't do it anyway

Paul Krugman, Martin Wolf and the other big spenders are remarkably resilient. And cunning. On their advice, the world's governments put up as much as 4 years' worth of the entire planet's savings to bring about a 'recovery.' On the evidence of the last couple of weeks, it didn't work.

In world's leading economy, 8 million jobs have been lost. The US government disappeared almost a million jobseekers from the unemployment lists in the last two months to try to make the numbers look better. Still, fewer people have jobs now than when the stimulus began. Those workers with jobs earn less than they did then. And those who lose their jobs wait longer than ever to find a new one. Housing is sinking again, too, with nearly half of all the mortgaged houses already worth less than their mortgages. Illinois has stopped paying its bills. California is laying people off wholesale.

But instead of falling on their swords in shame, the economists behind the stimulus efforts are positioning themselves for an 'I told you so," moment.

In our last installment, Britain and Euroland had just turned towards austerity. Alone among the Western nations, the United States of America pledged to stay the course, continuing its program of counter-cyclical stimulus. Then, last week, the US Senate rejected a measure to extend unemployment benefits. Suddenly, we're all austerians now.

Krugman was quick to distance himself: "As I and others have been arguing at length, penny-pinching in the midst of a severely depressed economy is no way to deal with our long-run budget problems. And penny-pinching at the expense of the unemployed is cruel as well as misguided."

'Spend now; cut later,' is still his advice. But with so much spending...and so little to show for it... you'd think he'd be shy about proposing more. At least, he might feel the burden of proof more heavily upon his shoulders. Is there any evidence that increased government spending - even in time of private sector retrenching - makes people better off? And even if 'spend now, cut later' were good advice, is there any evidence that they can actually do it? None that we know of.

Based on the experience of the '80s and '90s, we observed last week that it didn't seem to matter what governments did or what they said...the markets went about their business. Today, we add a further provocation.

Let us take a look back at the penultimate budget of the Clinton years:.

"Eight years ago, our future was at risk," Bill Clinton congratulated himself on Sept. 27, 2000. "Economic growth was low, unemployment was high, interest rates were high, the federal debt had quadrupled in the previous 12 years. When Vice President Gore and I took office, the budget deficit was $290 billion, and it was projected this year the budget deficit would be $455 billion."

The Clinton team claimed to have turned things around. They claimed credit for a budget surplus of $122 billion. This was the third surplus in a quartet...the only surpluses in US budget history after 1972. That year may be significant. Before then, the world did business in dollars backed by gold; if a nation spent too much, its gold would be called away to settle its debt. After that, the US could spend as much as it wanted; the gold parked in Ft. Knox stayed put.

And so the deficits grew year after year like the children of Abraham. But in the '90s, a remarkable thing happened. Practically the entire developed world began running fiscal surpluses. The US. Canada. Sweden. Finland. Europe. The entire OECD. From deficits of about 1% of GDP, budgets improved, with surpluses of about 2% by the end of the '90s. This seemed to prove that civilized men and women, even in the time of paper money, can get control of their budgets. We already knew they could 'spend now.' It was beginning to look like they could 'cut later' too.

In June 2000, Clinton administration economists predicted that the surpluses would keep coming, rising to as much as $1 trillion over the next 10 years. But the US economy seems to have gone from Heaven to Hell in less than a decade. The race that turned deficits into surpluses lost its magic touch within 18 months. By 2002 deficits were back. And they were staggering, nearly $3 trillion worth of deficits in 2009 and 2010 alone.

The economists completely misunderstood what was going on. The triumph they celebrated was not in themselves but in their stars. They had just been lucky. Bill Clinton's administration had kept up spending just as the Reagan team had before them, from $1.4 trillion in '94 to $1.8 trillion in 2001. But interest rates fell. Credit grew. And the economy boomed.

The Clinton era boom is now the Obama era bust. When the contraction hit, the feds followed the formula. They mustered their fiscal and monetary stimulus. But they got no recovery. Spending more now won't help. Not because the Obama team is less competent than the Clinton crowd. They are just unluckier. Credit is contracting.

So Krugman will be proven right after all after all. Austerity will not bring prosperity. But then, neither would stimulus. Krugman will say 'I told you so'... and spend the rest of his career in darkness and confirmed delusion.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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2 Responses to "Salaries are bound to go down"

SD

Jul 12, 2010

Wonderful article, enjoyed reading.... but didn't diminish worries anyway.

Like 

nb

Jul 10, 2010

As this is a daily article, can you make it little shorter. I have very little time, yet want to read your views.
Anyway I liked the article.

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