Thursday, November 12, 2009

Hyper-Debt and Unemployment as a Lagging Indicator

Unemployment is a lagging indicator when Economic Recovery begins. That is conventional wisdom. (1) (2) (3)

(A) Unemployment as a lagging indicator is true in a normal Business Cycle.

(B) Unemployment is a lagging indicator in a normal debt level situation of households, businesses, and government.

(C) Unemployment is a lagging indicator when leverage begins to become readily available as recovery begins in the business cycle.

Conventional Wisdom gets upset from time to time. (4)(5) As the business cycle tries to move into a recovery stage, what if Unemployment is not a lagging indicator? Hmmm.

Is this a normal Business Cycle Recovery?

Consider these items:

(a) businesses and households are deleveraging,

(b) fixed overhead-capital values having fallen in value by Trillions of dollars,

(c) other wealth items having fallen by Trillions of dollars,

(d) sprinkle in some major open market operations aka Quantitative Easing,

(e) add in a falling dollar and the specter of rising taxes.

(f) plummeting Government Tax Revenues and Expanding Expenditures creating unmanageable deficits.

(g) State, Local, and the Federal Governments having over spent for decades while simultaneously creating unfunded entitlements creating an unmanageable accumulated debt level.

(h) looming inflationary pressures.

What is a Published Unemployment Rate of 10.2% and a Real Unemployment Rate north of 16% really indicating?

Given a Real Unemployment rate north of 16%, what about the sharp increases in Underemployment, Part Time Employment, Structural Unemployment? What about discouraged workers increasing at an increasing rate? What is being "indicated"? What about the remaining employed having an average work week of 33.2 hours? What does this all "indicate"?

Unemployment is not acting as a lagging indicator this time around? This time around Unemployment as a Lagging Indicator is a statistical outlier?


Of the items mentioned above affecting this particular Business Cycle, the summation of accumulated debt, that is the past use of debt to accelerate future consumption into the present, may in effect be a major influence on unemployment.

We certainly know that "debt" is a drag on any economy. What if the summation of accumulated debt becomes so large its referred to as Hyper-Debt? From Social Security through the Great Society Programs, through the transition to a "service economy", through decades of Keynesian Deficit Government Stimulus Plans , through decades of Politicians buying votes via Pork Barrel Spending, to the decades of the Financial Sector, Consumers, and Businesses over leveraging......that surely the accumulation of too much debt sends up an "indicator" at some point in time.

If borrowing is viewed as accelerating future consumption into the present, that consumer goods, business goods, and government goods can be enjoyed in the present by borrowing from the future. Then at some point future consumption is affected by past borrowing.

However, if you mismanage debt, that you mismanage to the point of reaching a Hyper-Debt state, there are consequences. One consequence of hyper-borrowing, hyper accelerating future consumption into the present, is that you find yourself in the future (time marches on) with no funds to support past consumption patterns. If you over borrow, that is, over consume in the present at the expense of future consumption, and do it on a regular basis, then future consumption must suffer at some point.

Debt is a drag on an economy. Then Hyper-Debt is a Hyper-Drag on an economy.

We may very well have reached that point, upon the time line of Hyper-Debt, that the past borrowing, of accelerating future consumption into the present, has caused present consumption to look completely different than past consumption. That past consumption patterns now effect current consumption patterns.

Consumption of goods and services, the Demand for goods and services, directly effects the amount of human capital employed. If you accelerate too much future consumption into the present then the level of employment of human capital mirrors this over acceleration of future consumption into the present facilitated by Hyper-Debt. When the Hyper-Debt becomes unsustainable, that the cost to service the Hyper-Debt and the need to retire Hyper Debt trumps any further leveraging, then deleveraging becomes vogue.

However, if past employment levels were strongly associated with over accelerating future consumption into the present, and the accelerating of future consumption into the present via leveraging abruptly ends, then employment must fall.

Further, its one thing to deleverage from debt and yet another thing to deleverage from Hyper-Debt. The cost to deleverage from Hyper-Debt is extreme. Hence the new consumption pattern is devoid of acceleration and actually decelerates as the high cost of Hyper-Debt deleveraging demands a greater share of current and additional income, income that otherwise would have, in large part, been used for consumption.

Moreover, its not deleveraging from Debt, its deleveraging from Hyper-Debt. This deleverageing causes a demand for goods and services that is unlike past demand patterns. That deleveraging from Debt takes time, that deleveraging from Hyper-Debt takes a long time. Therefore the new level of demand requires less employment of human resources. That the old level of demand was false due to Hyper-Debt over accelerating future consumption into the present causing an employment level that was accelerated.

Rather than Unemployment being a lagging indicator, Unemployment will remain high and persistent and comparisons of current unemployment to past unemployment figure are apples and oranges as past employment was based on Hyper-Debt over accelerating consumption into the present and causing employment levels to over accelerate.

If in fact Hyper-Debt, over time, is deleveraged and debt levels return to manageable debt levels, then income once used for deleveraging Hyper Debt by Businesses and Households will become available for consumption. The question becomes how long will it take to deleverage from Hyper-Debt to Manageable Debt?






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