by Howard S. Katz
3-8-10
Well, the train is pulling out of the station. Gold has said goodbye to the $1,000 level and is off for northern climes. It is not your last chance to get on board, but it is your last chance to get on board at these low, low prices. The hard analysis of the past few months has been identifying the intermediate bottom, but now that that is in it is time to step back and once again focus on the big picture. Friday’s Wall Street Journal has an excellent article on unemployment and the “minimum wage” law, and this is a very good time to discuss this most important subject.
The subject of unemployment is the centerpiece of our modern economy. Let us imagine an economic discussion between a “liberal” and a conservative: “Liberal:” I am a sensitive, caring person. I feel the pain of the lower members of society, and I am on their side. I am in favor of all measures intended to reduce unemployment.
Conservative: That is very commendable. So you go down to your local soup kitchen and devote hours each day to helping the poor?
“Liberal:” No, of course not. But I favor social measures to raise these people up to a higher level.
Conservative: Ah, I see. You favor giving my money to the poor.
“Liberal:” You selfish monster, rugged individualist. How can you look yourself in the mirror in the morning?
Conservative: Oh, I’m sorry. I’m sorry. I’m so ashamed.
The reason that unemployment is so important is that, while it seems to be a political or moral issue, it is also an economic issue. And in fact it is the crucial economic issue of our age. As I have noted in the past, Franklin Delano Roosevelt was a Wall Streeter. In the 1920s, he was the manager of a vulture fund (so called because it swoops down on troubled companies and gobbles them up). On his first day in office, he rammed through legislation to give the power to create money to the commercial banks (working hand in glove with the Federal Reserve). It was passed without hearings in one day (illegally), and members of the House of Representatives did not even have copies of the bill to read when they voted on it.
FDR’s objective was to help his Wall Street buddies. He knew (from the experience of WWI) that the issuing of new money by the banks also helps their corporate loan customers, and this is done at the expense of the working people, who suffer a decline in their real wages. In short, FDR wanted to rob from the poor and give to the rich.
If this is what you are trying to do, then you naturally can’t tell anybody. And the well-known positions of the New Deal – that it was robbing from the rich to give to the poor and that it was the party of the working man – were blatant lies. The conservative opponents of FDR were unable to counter his policies in the public mind because they were afraid to penetrate the mask of altruism which he employed.
During WWI, prices in the U.S. had doubled. This had caused a significant decline in the real wages of the average working man. At that time, almost every American was saving for retirement, and the depreciation of the currency sharply reduced the retirement savings of the average American. The Republicans of the day arose as the champions of the working man. They adopted the policy of the “good 5 cent cigar,” which meant a reduction in the money supply and prices back to the levels of 1914. This policy was successful, and prices (Wholesale Price Index, or what we today call the Producer Price Index) by 1933 were back down to their level of 1914 (and 1793). America had experienced 140 years of stable prices, and the savings of the average Americans were restored to their pre-World War I value.
The Republicans were aware that their policy would cause high unemployment. The exact same thing had happened in the 1870s. At that time, the real wages of the working class were also being restored (after being forced down by the paper money of the Civil War). Higher real wages, of course, lead to unemployment. Employers cannot afford to pay the high wages. Also, wages were not being increased in nominal terms. They were only increased in real terms, in terms of what they could buy. But many working people do not understand real wages. They only think of the nominal figure they are receiving (not what it can buy). In the 1870s, these nominal wages were declining, and many wage earners felt insulted that they were being asked to accept a wage beneath their social status. Rather than accept what they felt was an insult, they lived off their increasing real savings while they sought for a job with pay that was much too high for the prices of the time. An incident from the 1930s illustrates the psychology. A businessman was trying to start up an operation and could afford to pay $40/wk. (about $680 per week in today’s money). No takers. So he offered $50/wk. But to get the job in these “bad” times, you had to kick back $10. The workers felt, “I’m a $50 man. I just have to kick back because my employer is unethical, but my status in society is recognized. In the 1870s, America had a free market, and so the unemployment was speedily reduced. The Republicans of the 1920s assumed that the same thing would happen again.
However, the New Deal had a good thing going. They were robbing from the poor to give to the rich. But they had to pretend to rob from the rich. The paper money and easy credit policies of FDR directly benefited Wall Street and the banks. Low real interest rates cause a rise in both stock prices and corporate profits. (Most corporations carry a significant amount of debt.) And of course, it is very much to the benefit of these large corporations to pay lower real wages. Stock prices about doubled from just prior to FDR’s inauguration to the end of his first year in office and almost quadrupled by the end of his first term. (These profits far outweighed FDR’s progressive income tax, which was done for show and was filled with loopholes)
The Republicans had pursued sound money policies from the end of the Civil War to 1933. These policies had been good for the country and good for the Republicans at the polls. American enterprise produced an explosion in wealth never before seen in any country in the history of the world. Real wages grew by an average of 60% per generation (taken as 30 years). Foreigners flooded into America (to get these higher wages) from all over the world. My ancestors immigrated to America at this time, and it is natural to assume that this large inflow (of immigrants willing to work for very low wages) would have caused unemployment among American workers. Natural but wrong. Historical Statistics of the United States, Colonial Times to 1954 (published by the U.S. Commerce Dept.) lists the unemployment rate for the U.S. in 1906 as 0.8%. That is, it was less than 1%. Those foreigners were being snapped up as they walked off the boat.
This illustrates the unemployment problem of the time. (Today, of course, it is almost 10%.) Indeed, there was no word for unemployment in America prior to the 1870s because there was just no problem.
Further, America is a very good model for the study of unemployment because it went through all of the stages which theoretical economics predicts. When the Pilgrims landed at Plymouth Colony, they were organized under communism. So the question of unemployment did not arise. They abolished communism in March 1623 (according to the diary of Gov. William Bradford). The conversion to private property “had very good success,” and the holiday of Thanksgiving was instituted to celebrate the new system of private property. This first Thanksgiving, by the way, was celebrated at the end of July 1623 (about Aug. 8-9 taking account of the calendar change of the 18th century). Thus Plymouth Colony converted to a self sufficient economy.
Then people began to specialize (division of labor), and each person produced the goods at which he was best (leading to another large increase in wealth). They exchanged their goods using the medium of money. Then, some of the older members of the community realized that they could increase production even more by hiring younger workers and training them. Thus was the relationship of employment born, and the producers of society became divided into employer and employee. This benefited both the young employee and the older employer. Everyone was better off.
The type of phonies and frauds who pander to the paper money faction usually argue that a “capitalist” economy cannot provide full employment. (What the blazes is a capitalist economy? The term was coined by Karl Marx, and I have never heard a definition of capitalist. It changes its meaning from day to day and does nothing more than confuse people who think in terms of it. I advocate a free economy, not a capitalist one.)
Is this true? Is a free economy unable to provide full employment? I would suggest that these people look at the facts. As the employer-employee relationship proved profitable, employers developed a hunger for more and more employees. They kept hiring more and more people. First they hired fellow Americans off the farms, and the late 19th century is a time when Americans flooded from the farms to the cities to get the higher wages of a job. When they ran out of Americans to hire, they started to hire foreigners. The desire of American employers for more workers is insatiable, and there is only one force which can trump it.
This is as follows. Once the New Deal had established (in people’s minds) that it was the party of the working man and that FDR was a traitor to his social class, it found that it needed to increase unemployment. If unemployment was temporarily high, ignorant working people would vote Democrat. High unemployment equaled a Democratic victory.
One of the ways this was accomplished was by backing the Union movement of the day. Union workers (competing with ordinary Americans for jobs) were given the right (by the National Labor Relations Act) to beat up non union workers competing for the same job. These non-union workers were intimidated and forced into unemployment.
Another of the ways was by enacting what are fraudulently called minimum wage laws. If you actually read these laws, they do not guarantee anyone a minimum wage. If the worker’s wage is to be raised, somebody has to pay the extra money, and these laws do not provide any extra money.
The employer simply evades this intent by not hiring the worker, and workers whose labor value is not worth the legal minimum find themselves unemployed. The Friday WSJ article (“The Lost Wages of Youth”) demonstrated that the recent increase in the “minimum wage” (2007-09) from $5.15/hr-$7.25/hr caused massive unemployment, hitting the lowest level of workers hardest.
Total teenage unemployment rose from 15% of the labor force to 27%. Black teenage unemployment rose from 38% to almost 50%. These unemployed teenagers, being idle, drift into crime, and the black-on-black murder rate in this country is horrific. (It should be noted that the first unemployment statistics to separate black from white unemployment showed that the two were almost the same. This was in 1940, when American society was openly racist and blacks were the victim of heavy discrimination. Since that time, due to the “minimum wage” laws, black unemployment has risen to double white despite numerous laws prohibiting discrimination by race.
A third technique was to put burdens on employers, such as making them pay health care costs. Today this makes it almost impossible for older workers to get jobs because health insurance for these people is prohibitively expensive. In sum, the cause of unemployment in America is the (New Deal version of the) Democratic Party. If a magic wand could be waved which transported all Democrats to the planet Klingon, then unemployment would pretty much disappear in America, and our economy would dramatically revive. Meanwhile the Klingon economy would collapse, and their unemployment rate would go through the roof.
But the most common way of increasing unemployment is via the Federal Reserve. The Fed has had a repeated policy since it was created of first easing and then tightening credit. The easing brings profits to credit sensitive industries (such as housing) and draws workers into jobs created in those fields. But then the money created by the Fed causes higher prices and a public demand for the Fed to tighten. Then we have a period of higher interest rates (e.g., 1979-81) and the jobs created originally are now abolished. (Today’s unemployment rate is mostly caused by the Fed tightening of 2004-06). I have charts on the economy going back to WWII, and one can clearly see the Fed easings, followed by a drop in unemployment, and the Fed tightenings, followed by a rise in unemployment. This is the part of the unemployment cycle which gets all the attention from our (short-term oriented) media.
In these articles, I try to present an economic overview so that you can get an appreciation for the massive irrationality and ignorance of facts which pervades our society on the subject of economics. For people who already understand this and are looking for specific advice on how to protect yourself (and profit) from the dishonest policies of our government, I publish a fortnightly (every two weeks) newsletter which gives specific buy and sell signals and discusses tactics (such as whether you should be in gold or gold stocks, and what kinds of stocks). This newsletter is The One-handed Economist, and the cost is $300 per year. (It has proven a very good investment for subscribers over the past 10 years). You may subscribe either by going to my web site, www.thegoldspeculator.com and hitting the Paypal button or via the old fashion way by using the U.S. mail. Simply send a check to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.
I am increasing the cash discount for using the mail to $10. So include a check for $290. (However, OHE has been at the same price for a decade, and a cost of living adjustment is due to keep the real price the same. This is a few months away.) We do not accept credit cards. OHE is sent primarily via e-mail, so be sure to include your e-mail address. But any subscriber is free to request regular mail delivery as well as e-mail.
Thank you for your interest
This entry was posted on Friday, March 19th, 2010 at 1:03 pm and is filed under Articles. You can follow any responses to this entry through the comments RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site. Edit this entry.
UNEMPLOYMENT (Part II)
UNEMPLOYMENT, Part II (CONT.)
by Howard S. Katz
3-15-10
Some questions were raised by my article on unemployment of last week and so I want to continue the same subject.
Unemployment has become the central issue of our day and perfectly illustrates the genius of Ayn Rand in putting the spotlight on altruism as the central concept which is destroying our society. Today (but not when Rand wrote) the conservatives have adopted the left-wing’s ideas on economics. They are screaming that Obama has failed because, after little over a year in office the unemployment rate is 10%.
The conservatives are doing well in the polls and are looking forward to a big victory in November. Hopefully, Obama will keep talking about health care because every time he opens his mouth about that subject he digs both his own grave and the graves of his fellow Democrats. But if the attention of the American public ever shifts to economics, the conservatives are dead meat.
Last week I touched on cyclical unemployment. This is the kind that makes the headlines and stirs people up politically. For example, from early 2007 to late 2009 unemployment in this country rose from 5% to 10%. From 2000 to 2003, it rose from 4% to 6%. From 1989 to 1991, it rose from 5% to 8%. All of these increases were caused by previous Federal Reserve increases in the rate of interest: e.g., the Fed tightening of 2004-06, the Fed tightening of 1993-2000 and the Fed tightening of 1986-89.
Whenever the Fed changes the interest rate, the effect is to influence interest-sensitive areas of the economy. For example, I have data on the U.S. economy going back to the 1940s. Every time the Fed eases, housing (which is a very interest rate sensitive area) booms. The number of housing starts then goes from approximately 1 million per year to 2 million per year. The same thing happens in all other interest-sensitive areas. The total effect is to significantly reduce unemployment. Then the political left brags that they have reduced unemployment.
Of course, the money that the Fed has to print to promote all this employment then threatens to cause “inflation.” To head off this threat, the Fed then allows interest rates to come back up toward their free market level. Then the interest-sensitive industries suffer a loss of sales, and they lay off workers. In short, the workers are initially drawn into jobs which are fundamentally unstable, and when these jobs disappear, they are thrown out of work again. With regard to housing, I have proof that this has been going on since the 1940s, and chances are that it has been going on for a lot longer than that. Ludwig von Mises coined the term malinvestment to indicate how the central bank is distorting the economy. By analogy, we can speak of malemployment. False employment is created for a few years. It draws workers into jobs which will ultimately disappear. And then, through no fault of their own, they are back on the unemployment rolls.
Who is to blame for this recurrent cycle of unemployment? It is the New Deal version of the Democratic Party, which poses as the party of the working man. Now applying this theory to today, what do we find? We find that interest rates last peaked in 2006 and have made an incredible fall between 2007 and today. This fall in rates will have the same effect it has had every other time. It will stimulate the interest-sensitive areas of the economy. These areas will boom, and they will start to hire unemployed workers. The exact timing on this is hard to predict because it depends on exactly how fast the private banks lend out the money which the Fed is pumping into them. But it is a good bet that we have already seen the peak in unemployment (at the 10% level) and that the official unemployment rate will be down for the remainder of this year.
In short, by drawing the public’s attention to unemployment and saying that Obama has failed to lower it, the Republicans are shooting themselves in the foot. They are also giving credence to the Democratic argument that unemployment is a measure of the economy. It is things like this that give me the impression that everyone is crazy.
Haven’t the conservatives of 2010 heard of a country called the Soviet Union? This was a country that was based on the principle of full employment. The Soviet Union had full employment. However, it did not have (hardly) any wealth. The purpose of an economy is to create wealth. An economy where no wealth is created but there is full employment is a good definition of a prison camp (and this is also a good description of the Soviet Union). Notice that the Soviet Union began to break down its prison camp aspect at the same time that it began to abandon its Marxist (full employment) economic system.
As I noted last week, the free economy of 19th century America had so little unemployment that the language did not even have a word for it until the 1870s. It also produced more wealth than any other society through the entire course of human history. Even this understates the case. Britain and the Commonwealth countries also had a (largely) free economy differing only in having a central bank. And if one compares the English speaking world of that period with the rest of mankind, the wealth gap is absolutely amazing. The English speaking people not only beat the rest of the world. They ran away with the prize.
On the other hand, the full-employment Soviet Union voluntarily dropped out of the race. In 1959, Nikita Khrushchev (head of the Communist Party of the U.S.S.R.) visited the U.S. He challenged the U.S. to a peaceful competition to see which system could produce more wealth (as opposed to the military competition of the Cold War). He predicted that in 25 years the U.S.S.R. would surpass the U.S. in economic production. This prediction was ignored in the West, but it was taken very seriously in the Soviet Union. They had been trying to catch up with the U.S. ever since 1917, and time and again they had failed (badly). Khrushchev gave them one last hope. The leaders of the U.S.S.R. focused on Khrushchev’s prediction. 25 + 1959 = 1984.
What happened in 1984 in the Soviet Union? Its top leaders finally gave up hope of besting the U.S. The Soviet Union finally gave up faith in communism. Communism was not defeated in a great military battle (as many conservatives were looking for). It was defeated from within. In 1989, it abolished itself.
So indeed, we have to ask, why is it that American conservatives are pretty much the only people in the world who are still peddling Marxist economics?
A reader named Mac at asks the following question:
“in regards to stocks and the broader commodities – if we see a pullback/crash in these asset classes, my thinking is that capital will shift back into the US dollar, at least in the short term….I am of the view that it is still possible for gold to take a short-term hit in the event of a global market sell off….I am wondering if a panic in global markets will take the form of ‘sell first, ask questions’ later, where even holders of assets like GLD might start unloading en masse while running to US Treasuries.”
As a theoretical matter, it is important to keep in mind that it is highly unnatural for a stock market to continually go up. In a free market, wealth initially is created by the great producers. Then it passes through to the general public. The stock market is a capital market and, as such, is in competition with all other capital markets. For example for most of the 19th century, safe (what we today call AAA) bonds yielded 5%, and stocks yielded 8%. The extra 3% was what the market felt was a fair return for the extra risk on stocks. This means that the P:E ratio on stocks was always close to 12:1. And since earnings remained constant, stock prices could not climb. (Different companies on the stock market are always in competition with each other. If Ford makes more money, GM probably makes less. For NYNH&H to make more money, other railroads had to make less.)
Charles Dow invented the Dow Jones Industrials in 1896. But he had constructed a rail average as early as 1885. This rail average remained flat from 1885 to 1896. And his Dow Jones Industrials, despite a few ups and downs, did not change from 1896 to 1932. In short, for the 47 years in which the U.S. economy was a free market (and for which we have real time stock prices) these prices did not go up. This validated the prediction made by the free market economists of the 19th century that under a free market (including a gold standard) wealth flows through to the average person and does not remain concentrated in a few hands.
But of course you know what happened next. The U.S. stock market rose by a factor of 341 times between 1932 and 2007. Over the middle of the 20th century, the real wages of the average working man slowed their gains. Once the last tie to gold was cut in 1971, real wages went into the worst decline in American history, and that is the condition which obtains today. That is, it was the revolution instituted by the New Deal to rob from the average working man and give this wealth to the rich people who trade in the stock market. This is, of course, the exact opposite of what you have been taught, and the reason is that your education has been a pack of lies. Whenever there has been a redistribution of the wealth, in any society, at any time in history it has robbed from the poor and given to the rich. (Under the New Deal, the graduated income tax was used to hide this fact, but the wealth transferred via taxes could not approach the wealth transferred in the opposite direction via monetary policy.)
Therefore, the U.S. (and all other) stock market(s) are wildly over priced. If the DJI were to drop to 41 (its 1885-1932 value) or 697 (its 1885-1932 value in real terms), it would be a long overdue correction which would restore the country to economic health. Note the stock bear market of Oct. 2007 to March 2009. It was caused by the Fed tightening of 2004-06. The price structure of the markets is so distorted that even a return to semi-normal interest rates caused a 50% bear market in stocks. What the (U.S. and world) power structure is desperately trying to do is to keep pumping up the markets and prevent such a return to health. However, this gets harder and harder, and we must continually be on the alert for a major stock market decline. This is not imminent and will not occur until Bernanke tightens, but when that happens, it will be beautiful to behold.
Note that gold stocks are affected both by the price of gold and by the price of stocks. They sort of follow a middle-of-the-road path between gold and stocks. So if (when) the U.S stock market tanks, one should switch one’s precious metals portfolio away from gold stocks and into gold or silver bullion.
We will not see another replay of late 2008 where everything went down. That was a very unusual event where the New York Times hit the panic button, scared the blazes out of the entire country and almost caused their own bankruptcy. Their fight with the Boston Globe unions was one for the history books and violated all of the left-wing labor relations principles that they have been preaching to the country for much of the past century. For the most part, gold (and other commodities) can ignore a rise in interest rates for a much longer time than stocks. For example, the Fed tightened in 1973. Over the next two years, the stock market fell almost in half, and the price of gold went from about $65/oz. to almost $200. The Fed next tightened in 1978. From ’78 to ’82, the stock market went sideways, and from ’78 to early ‘80 the price of gold went from $350/oz. to over $800.
A stock market decline will have to be preceded by a Fed tightening, and this tightening will almost certainly be triggered by an outbreak of rising prices (itself caused by the commodity pendulum). When the Fed does tighten, the best strategy will be to be in gold because the lag between the Fed tightening and stocks declining is much shorter than the lag between the Fed tightening and gold declining. You should be in gold, but watching stocks out of the corner of your eye because stock bear markets are easy to predict. They start off slow and build momentum. After a certain point, all signals are lower, and you can safely go short (especially if the play looks to last until October as many stock bear markets end with an October crash).
These, however, are general considerations. For specific plays and near term analysis, I invite you to subscribe to my newsletter, the One-handed Economist. OHE is published fortnightly (every two weeks) at a price of $300/year. Cash customers (via the US mail) get a $10 discount. Write to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055. Computer people can visit my website, www.thegoldspeculator.com, and press the Paypal button. We do not take credit cards. Regular issues of OHE are written every other Friday and are usually in the mail by Saturday. Normally, issues are sent out via e-mail, but you have the right to request a regular mail copy at no extra cost. From time to time, if the market moves suddenly, I may put out a short special bulletin between issues to clarify the situation.
This world in which we live evokes the old Chinese expression, “May you live in interesting times. Thank you for your interest.
# # #
Posted by D.Stewart Armstrong in Articles
Edit
This entry was posted on Friday, March 19th, 2010 at 1:06 pm and is filed under Articles. You can follow any responses to this entry through the comments RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site. Edit this entry.
Comments are closed.
Home | Contact Us | Disclaimer | © 2007 - 2008, Seacoast Consulting
Posted by D.Stewart Armstrong in Articles