Monday, September 20, 2010

Where The Jobs Are

¹²Where The Jobs Are.

By Gordon T. Long | 20 September 2010

Jobs And Housing

What we now face is the reality that housing construction is at or near a bottom and is likely to stay there for several years; hence, at the margin, jobs have disappeared and are not likely to increase to any large degree until there is a significant recovery in new housing demand.

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According to a recent 3,400 households' survey by Fannie Mae, a more realistic attitude towards homeownership has emerged as the American dream of owning a home has lost its allure. Only 67% felt housing was any longer a safe investment and 33% said they were likely to rent in the future. The Wall Street Journal recently cited an interesting illustrative example of shifting psychology in which a 26 year graduate student walked away from his down payment to purchase a condo because he felt homeownership was an "economic trap" and "being mobile and adaptable to the job market was far more important than homeownership".

The National Association of Realtors is starting to show signs of panic because this shifting psychology is moving legislators to reconsider federal subsidies for homeownership. It has reacted by launching a campaign on the "value of homeownership". Oh how quickly things change!

Inflation / Deflation

I am continuously troubled by the inflation-deflation debate. One of a number of issues in these debates that concerns me is no one ever defines ‘time’ in their analysis and predictions. Without time specified we could have inflation, then deflation, (or vice versa) as BB and the boys first 'pour it on' then apply the brakes in panic. Maybe even more blatant is that seldom do analysts consider the possibility that we could have both simultaneously. This is the school that I am a believer in.

I predict that over the next few years we will have inflation in the things we NEED and USE [[ie, CPI inflation: normxxx]]. These are the items we buy and consume every week, the items we buy and not finance, the items we need ready and recurring cash for. Food, energy, consumables, and basic services are examples.

We will have deflation in the things we (merely) WANT and/or already OWN, eg, in our ASSETs. These are the items we strive for that we perceive will move our lives to a better/higher standard of living. They are primarily things like: housing, real estate, financial instruments, boats, exotic cars, art, collectibles, etc.— often the items we finance.

It may be as simple as Maslow's Hierarchy of Needs; until our survival needs are met we won’t move towards the ultimate state of 'self actualization'. We don’t think of luxury goods when we are hungry, cold and tired. But what is now pushing us towards the 'survival' end of Maslow’s spectrum? If we live on debt and it becomes harder to secure or service, then this will accomplish that shift, despite new debt being 'cheaper' than it previously was.

The money supply which is a driver of monetary inflation and deflation is now negative, as shown by the broadest money supply measure (M3, which is no longer reported by the government). Despite massive monetary intervention, forced deleveraging of mal-investments has come home to roost [[BB and the boys are so far losing the war.: normxxx]].

Deflation In A Heavily Indebted Society

Deflation can certainly indicate significant underlying economic weakness. These days, it plays into the fears of a 'double-dip' recession a la 1981, 1920 and 1913, as recent data suggest a "soft patch" is developing in the recovery. And, despite its best efforts, the Federal Reserve has so far been unable to stem a reduction in the growth of the money supply at a rate not seen since the '30s— a significant contributor to deflationary pressure. Recent job creation has once again turned negative, and retail sales are on the slide.

For a heavily indebted society like ours, a prolonged and sustained period of deflation would be the worst of all outcomes. It would increase the real value of our debts while our real income would likely turn down (or, at best, remain stagnant. So that $10,000 credit card balance would suddenly feel more like $30,000. The result would be more bank failures, more layoffs and more bankruptcies— the dreaded debt-deflation spiral the great economist Irving Fisher warned of in the aftermath of the Great Depression.

The good news, though, is that this gut-wrenching scenario isn't too likely for very long. The most probable outcome is a relatively speedy return to the inflationary backdrop in which we've all operated for the last 55 years. If I'm right, enjoy those lower prices; they won't last. (Many fear the return of 1980s-style high inflation instead of deflation— or even hyper-inflation— but that's a subject for another day.)

You know, it wasn't always that way. Perpetual inflation is a recent phenomenon. Between 1820 and 1956, periods of inflation and deflation came as regularly as the seasons. The average deflationary period lasted 14 months and came every three-and-a-half years, according to the numbers compiled by Global Financial Data.

As hard as inflation can be, deflation led to a generally more miserable existence in those years for almost everyone except the rich, who were easily able to take full advantage of it. Recessions came with great frequency and lasted much longer. And the lack of secular inflation made debt burdens much harder to carry. The battle over the value of the dollar in the 1890s was the result of farmers, whose crops were worth less and less (as incomes fell during a recession), unable to pay mortgages valued at increasingly higher real levels (as their 'real' value rose). Many watched helplessly as their farms were reclaimed by the banks.

Deflation transfers wealth from borrowers to lenders. Inflation, on the other hand, transfers wealth from lenders to borrowers. So, not only does inflation prevent the debt-deflation death spiral, it's just the thing to stick it to those fat-cat bankers everyone loves to hate. [[Well, not really, bankers are perfectly happy with any predictable rate of inflation.: normxxx]]

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