Wednesday Links — March 3, 2010

I feel very far behind in my readings of the Economist this week, but I kept up with the blog world a little better than usual. Let’s do some links:

• Couldn’t agree more with Miranda on physical gold.  The slippage on entering and leaving physical gold is immense.
• Great article by our friend Fred on green savings strategies, for those rare occasions when your pocketbook and your conscience might align.
• Let’s give Poorer Than You a round of applause for netting four dollars and a Plutus Award!
• Online Investing AI discusses finance apps.   Relevant to me as I’m desperately trying to figure out what phone to get.
• Trend technician discusses the black swan in Greece and why I’d be far too scared to chase it.

Long Term Joblessness

The unemployment statistics in America are confusing.  Sometimes you will see unemployment go down without jobs being created.  How can this be?  As it turns out there are many different definitions of unemployment and the number you see is only one of them.  In fact, if you don’t have a job for a certain amount of time, you’re considered to be “out of the workforce,” and no longer counted in the common measure.  As it turns out, long-term joblessness is a danger to societies and this has implications for many of us in our personal life.

Measures of Unemployment

In understanding the impact of long term joblessness, it’s good to understand how unemployment rates are calculated.  In America there are six different unemployment numbers, U1 through U6:

• U1: Percentage of labor force unemployed 15 weeks or longer.
• U2: Percentage of labor force who lost jobs or completed temporary work.
• U3: Official unemployment rate per ILO definition.
• U4: U3 + “discouraged workers”, or those who have stopped looking for work because current economic conditions make them believe that no work is available for them.
• U5: U4 + other “marginally attached workers”, or “loosely attached workers”, or those who “would like” and are able to work, but have not looked for work recently.
• U6: U5 + Part time workers who want to work full time, but cannot due to economic reasons.1

So as you can see, sometimes a job seeker simply “gives up.”  They’re no longer counted in unemployment statistics, but they certainly don’t have a job.  As it turns out, this is actually the worst kind of unemployment, even though we don’t see it measured very often.

Long Term Havoc

A study by the Cologne Institute for the German Economy is one of many supporting the belief that the longer a person is out of a job, the less likely they are to return to the workforce.2 Their job skills atrophy and they lose hope.  They basically get locked into a self-reinforcing cycle of poverty.  You may know someone like this, who used to be in the workforce, but now seems unable to return. (more…)

1. Wikipedia — Unemployment [↩]
2. German Think Tank Says Joblessness Behind Poverty [↩]

Why a Clawback Might Be In Order

Photo by: Wildcat Dunny

When the financial crisis was in high gear I argued that the pitchforks and torches being raised against AIG were counter-productive.  I felt like it was a feel-good symbolic gesture that was more for making people feel vengeful than getting at sound economic policy.  I still stand by that idea, however in the face of record profits from companies like Goldman Sachs, one has to reconsider whether the idea of clawbacks don’t have a place in the banking discussion.

A clawback would be some kind of tax levied against the companies that took bailout money, or maybe more broadly to the financial industry as a whole.  While the legality of such a tax may be in question, there are some reasons to consider whether this is a reasonable course of action.  Many of these banks have paid back, or are paying back, the money they borrowed from the government, but that debt doesn’t fully quantify the advantages that financial institutions received from the government.

The first example of this is the asymmetry introduced by preventing various stocks from being shorted during the crisis.  This is obviously beneficial to leveraged companies that are using this stock as an asset to offset their liabilities.  This is on top of the benefits that come from being able to borrow money from the Federal Reserve Bank essentially for free, and the money that is being funneled into the stock market by the low interest rates. (more…)

Is America Still the Land of Opportunity?

Photo by: stephen.moore

When it comes to investing, is America still the most sensible place to keep your money?  This question involves a lot of elements and has no simple answer.  There are however, some pieces of conventional wisdom that may deserve a little extra attention.

Is China the Future?

Listening to the media, you would think the ascendancy of the Chinese is all but assured.  They are one of the few economies to truly start enjoying an alleged rebound from the economic crisis and were already becoming a behemoth before the latest financial woes.  Surely Asia is where the future lies.

What is often forgotten in all of this is that China is not an open society.  In the modern era we assume that the wool can’t be pulled over investors’ eyes.  China however can easily give out misleading numbers to investors.1 Moreover, because of the amount of their economy that is centrally planned, they can essentially manipulate their own markets very easily.  Their current stimulus may largely consist of creating unused infrastructure to keep their populace employed.2

Inflation: The Ugly Contest

Another supposed factor in why our money should be fleeing US Dollars is the hyper-inflation that will be driven by all the stimulus spending.  The thinking goes that any kind of recovery in the economy will be coupled with inflation from all the money that’s been printed to finance the stimulus.  While this seems reasonable, at the same time it’s been suggested that as much as 40 percent of the World’s wealth was destroyed by the financial crisis.3 With a good deal of that being in America, it seems that we may be able to survive some quantitative easing. (more…)

1. Economist: The Art of Chinese Massage [↩]
2. The Economist:: China’s Stimulus: Got a Light [↩]
3. Telegraph: WEF 2009: Global crisis ‘has destroyed 40pc of World’s wealth’ [↩]

The Problem with Uncertainty

Photo by: whatmegsaid

When it comes to government policy it is rarely acceptable for politicians to do nothing.  Even if it’s only to give the appearance of doing something and instilling confidence, the government actually does have a role to play.   While there is certainly a case for stimulus and crisis management, too much government intervention can completely upset the whole purpose of free markets.  Even worse, the fear of government intervention can inject the same uncertainty in the market that it is supposed to help assuage.

The 2008 Crisis

In retrospect there is a lot of criticism about the TARP-the Troubled Asset Relief Program.1 Some politicians complain that the prices paid for the equities were too high.  This criticism is somewhat problematic, since the whole purpose of the TARP was to pay more than the market was willing to pay for distressed banks.2 Others claim that it was unnecessary, and that the market would have sorted things out itself.  These criticisms conveniently forget the abject panic that had beset the markets when the idea was put forth.  There was a tremendous amount of uncertainty as to whether the banking system was going to completely collapse and how the world would react.

With all its flaws the TARP may very well have injected some confidence into the market.  The same can be said of Obama’s sweeping stimulus.  Investors and businessmen knew that a large dose of spending was coming and had broad ideas about what it would include.  Economists may argue, but a case can be made for all these changes, particularly when they’re done quickly and in a sweeping fashion.

The Problem

The problem arises when the government becomes a first resort instead of a last resort.  When people expect the government, instead of natural forces, to correct all the ills of the market, uncertainty is sure to follow.  The government can’t do everything, so the economy becomes a guessing game of trying to determine which programs the government will implement.  Even worse it can become a hotbed of cronyism, where the supporters of those in power get bailouts and the rest watch despairingly.

(more…)

1. Wall Street Journal – Panel Steps Up Criticism of Treasury Over TARP [↩]
2. The Economist – Carping about the TARP [↩]