Housing Starts and Recessions

Nearly every recession in modern history was ended when housing starts began to pickup again, especially deeper recessions. While we are not officially in recession by those who keep track, certainly growth is at best stumbling forward. It is going to take another couple of years to get out of this recession, but in the end, housing will cost less for the middle class, and they will hopefully have some money left to increase demand and employment. As you can see in this chart from Calculated Risk, housing starts and unemployment move with each other. We are going to have to get through this inventory which is decreasing. And of course population is increasing. One might hope that housing starts can begin to rise in a couple of years. Until then, we'll have to hang in there!

 

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Greek Default not Priced into Euro

As we approach increasing probability of a Greek default with one year Greek bonds at over 100% and two year at over 70%, people are starting to wonder if the current price of the Euro is already accounting for a default. Karpowitz of Commerzbank, a currency analyst tends to think not. And one of the reasons is there aren't a lot of places to go for safe havens. Switzerland has put a ceiling on their currency to the Euro, and the Bank of Japan seems ready to make another move. He thinks a contagion that just involved Greece, Portugal and Ireland would be managable, but if you start involving Italy and Spain, the possibility of a complete collapse of the Euro may loom.

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The Purpose of a Bank

It CAN be VERY simple...

A bank receives deposits for people who want to earn interest on their money. For those that want to borrow money, the bank loans money and charges interest on the loans. The money earned from interest is used to pay interest to depositors, and also to pay for costs like the employees who work at the bank, the bank building, etc.

This is EXACTLY how banks worked a few decades ago, and exactly how most credit unions operate today. 

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John Williams on the Economic Outlook

San Francisco Fed President John Williams issued his report today about the economy, and here a few key nuggets from the report:

1. Efforts at debt reduction may reduce demand and already slow a precarious reconvery
2. A huge supply of homes is available for sale, which keeps prices down. Add to that what might be called a shadow inventory of some 4 million homes whose owners are seriously delinquent on their mortgages or in foreclosure. 
3. Sixty-two percent of households expect their income to stay the same or decline over the next year, the worst reading in the over 30 years that this question has been asked. 
4. A full-blown financial meltdown in Europe would hit U.S. exports, which have been one of the economy’s few bright spots. Perhaps more importantly, it could slam U.S. financial markets and deal a further blow to already fragile confidence. 

We have so many people talking about how it is the debt that is causing this country to be in recession, but there really isn't a lot of sense in this. For one, there is a zero risk the United States will not be able to pay its debt. We have the power to print money, which would cause inflation. However, outside of commodities like gold and oil, we are in a defaltionary environment with regard to wages for the middle class and home prices. 

Moreover, there are big problems with demain. People aren't spending money because they have less money through lost jobs, lost equity, and lost wages. Reducing debt would hardly fuel demand. It would do the opposite, because it would mean a reduction in spending which creates a very unhealthy cycle. As the government makes cuts, they lay off government employees and reduce the circulation of money in general such as cuts in benefits, etc.

It could be argued that increased government spending would increase competition for workers, increase the amount of money in curculation and being spent, and reduce unemployment.

If inflation were to take place in home prices or wages, that would not necessarily be a bad thing. Banks may not like it. Companies having to pay hire wages due to competition may not like it. But if the economy improves, it helps everyone. Corporations have record profits right now, yet are not creating jobs. It's time to admit they are not going to come through for us right now until we bring back some healthy inflation, demand, and competition for jobs through government spending.

Then when the economy is back on track, we should cut government spending, which is the proper medication. Government spends more when unemployment increases, and cuts spending when employment is healthy. We have done the opposite in the last decade. It's time to change that.

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Corporate Profits and Unemployment

So often we hear a message that we would be able to create more jobs if only we taxed corporations less. We hear there are too many regulations that are stopping businesses from expanding, and that government needs to "get out of the way" so businesses can grow. Then these businesses will provide these missing jobs that we have been waiting for.

So let's take a look at corporate profits compared with the unemployment rate...

 

As you can see, corporate profits are better than before the recession started. They are doing fantastic after all taxes have been paid. They have more money now to do things like HIRE PEOPLE than they did before the recession started. Even with all the regulations and taxes they are more cash rich than ever!

So why aren't they investing in America? 

I would offer that they would rather drain cash from America by hiring cheap labor elsewhere, and then sell as much as possible to the American people as possible, including extending cheap credit. The problem is that this strategy is working so well that Americans are running out of cash reserves and credit, and obviously demand is down. Demand is down because there are fewer jobs, and thost that remain pay on average less than when the recession started.

How do we fix it?

We create demand by investing in infrastructure. Don't pay corporations to do it for us. Hire the workers directly through the US government, and give corporations competition which they haven't had in quite some time. Make them pay more for workers, not less. And start building better roads, bridges, broadband, a superior power grid, better public transportation, parks, public buildings, etc. This is exactly what China has been doing, and they are struggling to STOP growing so fast.

As people earn higher wages, they can afford more, and they also feed the economy. If we keep cutting, we are just pulling more money out of the ecomomy at the same time corporations are doing the same (yet draining cash and credit reserves). 

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