Friday, November 2, 2007

Making up Jobs

Some good investigating by Floyd Norris at The New York Times today. Many of the new jobs reported appear to be made up! Check out his blog here:

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Lawrence D. Loeb said...


I'm a little confused.

I won't opine either way on Mr. Norris' analysis. If he's right, the unemployment rate will be adjusted upwards over the next few months. We'll see.

Now we have reported unemployment of 4.7%, an increase of 0.3% from last year. The average unemployment rate in 2006 was 4.6%.

To put that in perspective, in 2000 the US average civilian unemployment rate fell to 4.0%, the lowest since 1969 (when our labor force was 53.3% of what it is today). Since 2000, unemployment has been as high as 6.0% in 2003.

Between 1980 and 2000, the unemployment rate ranged from 4.2% (in 1999) to 9.7% (in the depths of the recession in 1982). That 1982 number was the worst since the depression (when unemployment jumped as high as 24.9%). [these numbers are available from and]

The reason that I'm confused is that in your last post you were both for and against the Fed's 25 bp reduction in the Fed Funds and Discount Rates (which itself is a little confusing).

If I read your last point correctly, you don't think the Fed should continue cutting interest rates because of the inflationary effects (and something to do with the mortgage situation). That's a valid point (although global consumption growth could keep the dollar from falling too much, thus somewhat mitigating the effect of increased demand on inflation).

Now, if you seem to be suspicious that the economy is worse than the Labor Department is reporting (Also potentially reasonable (I don't know), are you advocating a policy of fighting inflation, regardless of the negative impact on employment?

It is a perfectly valid argument, but you seem to be focusing on what the government shouldn't be doing rather than what you think should be done. I'm interested in knowing your thoughts on what you think should be done.

Palermo's Blog said...

This post on employment has nothing to do with my post yesterday, as this information was not available then. To answer your question though, I still believe it was a mistake to cut the rate. The point of my article the other day is that if the US consumer is already over-burdened with fixed payments, what good will lowering rates do? Will it encourage consumers to borrow and spend? If it does, is that a good thing given the fixed payment coverage ratios? If the FED lowers the funds rate by 2%, will that really help the consumer all that much?

By saying the FED should not be lowering rates I am saying it should leave rates alone right now. Sorry if that was not clear. I also think the FED should have exercised some control over the mortgage market earlier. It can do that by placing limits on what banks can and cannot offer. This is how they could have intervened in the housing bubble. I will not go down the rating agency and other roads this opens up because it is too late in the morning.

Let me ask you. If the GDP number and the employment number were good numbers, why in the world would the FED have cut rates? If the economy is doing just fine, as you imply, why cut rates? Is the FED worried about deflation? Is it possible that the debt bubble created by the last round of severe cuts and global liquidity is so big that if it bursts we will have a deflationary spiral? If not, why did they cut rates? GDP growth at 3.9, unemployment at 4.7. Oil at $95. Gold at $800, highest since 1980 in real dollars. Food and other commodity prices high. US currency at all time low going back to 1967 is it? Why cut rates now if everything is so great?

Lawrence D. Loeb said...


I don't know why you think I believe that the economy is healthy. I'm not aware of implying that in anything that I've written. I believe that, in my comments regarding M-LEC (and whether the Fed should have cut after the LAST meeting) that I was clear that I am concerned about the potential for a serious cascade through the financial system - leading to a serious recession, or even depression.

I haven't calculated the odds, but a consumer led recession is very possible right now.

I also was not entirely supportive of the ratings agencies.

Your focus on the effect of interest rate policy on consumers is interesting. It's an unconventional way of looking at monetary policy. Typically, monetary policy is viewed through the lens of how it changes the cost of capital for businesses, encouraging or discouraging hiring and investment.

According to Schedule L.1 of the Federal Reserve's latest Z-1 report, consumer borrowings represent 28.5% of debt outstanding. Business borrowings account for 52.4% of the debt outstanding (the rest is from Federal, State, and local governments or non-US borrowers).

The cost of Treasuries (Fed policy can influence short maturity Treasuries) sets the base line of return for all other financial assets (including equities, corporate bonds, corporate loans, etc.). I believe that it is worth considering the impact of Fed policy on overall markets when trying to understand what they are trying to achieve.

You've made it REALLY clear that you believe the Federal Reserve is, in your opinion, responsible for the real estate bubble. Your opinion is not that uncommon, although there are other regulators.

I agree that it would have been nice if something could have been done to prevent the bubble. I just don't believe that it's that simple.

For one thing, there has been a push in this Country to increase home ownership. I believe the idea is that ownership will improve the conditions of the lower middle class and the poor (which, I believe, is part of the reason that lenders got as creative as they did in making mortgages affordable).

I believe that it is also necessary to recognize that there are other forces in the market that effect interest rates.

In the early 1980s, EVERYONE on Wall Street closely annualized the weekly report on money supply. That report moved markets! The Fed still has significant influence on the markets, but significantly less than they did back then.

Today, China alone has over $1.2 TRILLION in foreign exchange assets that they are holding overseas. According to Schedule L.107 of the Z-1, foreigners own a total of $15.4 Trillion in US financial assets.

Palermo's Blog said...

Larry - thanks for the data, good stuff. My focus on the consumer is due to my belief that business can only improve the economy if there is slack in employment and consumers are ready and willing to spend to purchase what businesses produce. I believe at this point consumers are not up to the task, as they are over-leveraged. Hence my coverage ratio analysis.

Do you remember Greenspan's appearances before congress in the early 1990s when Al Demato would yell at him? His response was, paraphrased of course, that until consumers pay off some debt and de-leverage they will not be in a position to spend and we cannot expect economic activity to expand until the consumer is ready. I think this housing downturn is much worse and those words are even more relevant today.

Feeding more debt to a system that is just beginning to understand where all of the skeletons are is scary too. I don't think the bad loan problems are limited to subprime housing. The Einhorn piece you linked to the other day goes in that direction. (Good piece by the way - I read the summary in Hedgeworld but could not find the transcript.) If the over-leveraging is systemic we are in for a real treat. Some believe it could trigger a deflationary environment, at least for asset prices.

Lawrence D. Loeb said...


The focus on business relating to Fed policy relates to how it drives employment (and thus consumer's ability to buy things).

I am very concerned about the consumer. We only have data that looks backwards. The information that we have about what's currently going on is generally anecdotal; and it's never clear how indicative the anecdotal is of real conditions (a problem that is also faced by all decision makers). So we really are guessing about what needs to be done.

On top of this normal uncertainty, we now also have opaque risks in the credit markets.

Fed policy generally takes six months to effect the economy, so we have to wait and see how those changes play out.

I am particularly concerned about The Bankruptcy Abuse Prevention and Consumer Protection Act.

The change in the bankruptcy law was intended to make it harder for consumers to free themselves of ill advised borrowings. Under prior law, bankruptcy filers could generally elect to file under Chapter 7, liquidating their assets and discharging all but a few (like child support) of their debts. Under the new law, filers may be forced to file under Chapter 13, requiring them to continue paying off their pre-filing debts.

This law, depending on how many people are unable to discharge their debts, could exacerbate any recession by reducing their ability to consume.

Reportedly, thus far the law has not had a significant impact and, under the means test, borrowers that are over-levered may retain their ability to file under Chapter 7.

We'll have to see how things play out.

Palermo's Blog said...
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Palermo's Blog said...

Larry - I have looked into this and I agree. The home mortgage, I think, has always been protected in that the court could not order it be modified without the lender's approval. The legislation up now, S.2136 (available here: is intended to allow a bankruptcy court to modify a home mortgage by preventing a rate increase (or reducing an already increased one), waiving pre-payment penalties, and on agreement by both lender and borrower, write down the principal of the loan. The congressional record of the introduction of the Bill is here:

The bill also provides a limitation on liability for securitizers.