Sunday, February 12, 2012

The U.S. Unemployment Rate: "Lies, Damned Lies, and Statistics"

The quote from Mark Twain, "Lies, damned lies, and statistics," sums the theme of this blog. Politicians are haunted by one fundamental law of economics; a downturn in an economy leads to an ouster of its political leaders. Hence, our governmental leaders will do anything that is immoral, illegal, or unethical to garner votes for another term in office. Furthermore, the politicians may encourage government agencies to skew, distort, or exaggerate its statistics to appease, mollify, or mislead its citizens, especially the ones who vote. Consequently, this blog examines the U.S. unemployment rate in order to gain insight about the true impact of the 2007 Great Recession.

The first observation of U.S. government statistics is the sheer volume of information, data, and reports a bureaucracy can offer. Each department of the U.S. federal government has a branch that collects, analyzes, and publishes statistics. Then this branch literally publishes hundreds of different statistics with thousands of technical reports. Most people who visit these websites are easily overwhelmed by the information. The Bureau of Labor Statistics is the branch that collects and publishes statistics for the U.S. Department of Labor.

The second observation is the definition of unemployment. The U.S. government defines unemployment (called U3) as a person who is currently not working and actively seeking employment. If a person works one hour per week, he/she is not technically unemployed, although an hour a week cannot support a level of living. If a person wants to work, but the job market is extremely bad, he/she gives up, then that discouraged worker is no longer considered out of work. Consequently, the unemployment rate can decrease if a large number of jobless give up the pursuit for a job. The Bureau of Labor Statistics publishes the labor underutilization statistic (called U6) that includes discouraged workers and part-timers who want to work full time. The (seasonally adjusted) U6 was 15.1% for January 2012.

The third observation is a bureaucracy continuously revises its statistics. Hence the reported numbers are always in flux. For example, the Bureau of Labor Statistics uses telephone surveys to gather unemployment data and examines reports from the states' unemployment offices. Then the statisticians compute the statistic for that month, quarter, or year. Here is the kicker. After a statistic is released to the public, a bureaucracy may boost or reduce this number a few times over the next several months. Why are the numbers constantly revised? Did the statisticians not count all the surveys? Were the states late in reporting their statistics? Hence, government statistics have a degree of arbitrariness as the numbers are continuously revised.

The fourth observation is the statisticians seasonally adjust the numbers for monthly and quarterly data. For instance, the Bureau of Labor Statistics reported the U.S. unemployment rate fell to 8.3% in January 2012. The news reporters blindly reported this number to the masses without any serious analysis or verification. U.S. reporters have regressed into parrots who caw in unison for the government's slogans, sound bites, and propaganda. What does 8.3% really mean? First, this statistic was seasonally adjusted. Statisticians smooth monthly and quarterly statistics; high numbers are reduced while low numbers are increased. The reason is the economic activity is different for every month. January cannot be compared to December because December has more economic activity than January. Once the statistics are seasonally adjusted, then different months or quarters can be compared. The unemployment rate that is not seasonally adjusted was 8.8% for January 2012. Although this number cannot be compared to December, it can be compared to January 2011, which was 9.8%. Similarly, the not seasonally adjusted U6 was 16.2% for January 2012, falling from 17.3% for January 2011.

The fifth observation is the slight upward trend of the unemployment rate. In Figure 1, the annual unemployment rate is plotted between 1947 and 2011. The blue line indicates the jagged oscillations of the unemployment rate. Economists define a recession when the real growth rate of the Gross Domestic Product (GDP) is negative for two consecutive quarters. All recessions since 1947 were drawn with pink boxes on the graph. When examining Figure 1, the Great Recession of 2007 and the recessions of the early 1980s were particularly severe when compared to previous recessions because the unemployment rate soared to 10%. The early 1980s had a quick succession of three recessions. Using statistics to fit the best line through the data yields the red line. Moreover, the examination of Figure 1 shows the impact of the housing bubble during the 2000s. The housing bubble temporarily lowered the unemployment rate below the trend, as the bubble created millions of jobs. Unfortunately, the red line angles upward with a slight slope, indicating over time, the unemployment rate is creeping upward. Thus, the U.S. economy went through structural changes that were not conducive to low unemployment rates. The structural changes were de-industrialization, outsourcing, rise of the service economy, rise of the IT industry, aging population, and growth in government. Consequently, all structural changes impose benefits and costs on society, and they would require a separate blog.

Figure 1:  The U.S. Unemployment Rate between 1947 and 2011

The sixth observation is the structural change in employment. All the statistics were converted to a percentage of the U.S. population to remove the impact of a growing population. In July 1, 1947, the United States had a population of approximately 144 million, which increased to 312 million by July 1, 2011. In Figure 2, the first trend is the shift to more part-time labor. Part-time labor comprised 5.3% of the population in 1968 and gradually rose to 8.8% in 2011. The second trend is the impact of a recession on full-time employment. Every U.S. recession since 1947 was drawn manually onto Figure 2 in pink boxes. A recession always caused the destruction of full-time jobs. The 2007 Great Recession was particular nasty as the percent of full-time workers decreased from a peak of 40.4% in 1999 to 36.1%. This indicates a loss of approximately 13.5 million full-time jobs in 2011. The third trend is the rise of the number of people who dropped out of the labor force. Again, the 2007 Great Recession had a severe impact on the economy. The percent of people not in the labor force was 27.6% in 2011, increasing from a trough of 24.8% in 2000. Approximately, 8.7 million people left the labor force. Many reasons account for the exit from the labor market, and they are discussed in the next paragraph.

Figure 2:  Full time, Part time, and Unemployed

The seventh observation is a little discussed statistic buried within the Bureau of Labor Statistics' website. The statistic is the labor participation rate as a percentage of the population (age 16 and older). This statistic by nature will never equal 100% because several groups of people are not in the labor force. The groups are teenagers (16 to 18 years old), discouraged workers, retired workers, prisoners, committed patients, students who do not work, and soldiers. Illegal immigrants who work may not be reflected in the participation rate because the Census Bureau counted them in the population, but the Bureau of Labor Statistics did not count them in the labor force. In Figure 3, the labor participation rate is graphed between 1947 and 2011. The U.S. recessions were drawn manually onto Figure 3 as pink boxes, and a recession always lowered the labor participation rate. The 2007 Great Recession was particularly gruesome. The labor participation rate fell to 58.4% in 2011 from a peak of 64.4% in 2000. (The Year 2000 was an exceptional year). Roughly, 14.2 million people left the labor force. (The last paragraph indicated 8.7 million workers dropped out of the labor force; government statistics when viewed from different angles usually yields different results!) The real question is where did these people go? Are they discourage workers who gave up the pursuit of a job? Did more people retire? Did more people enter college without working, or the states incarcerate more prisoners?

Figure 3:  Labor Participation Rate between 1947 and 2011

One important assumption was made in this blog; the assumption is the Bureau of Labor Statistics is not manipulating the numbers. Although U.S. bureaucracies are not political in nature, the top leaders of the bureaucracies are chosen by the President with confirmation of the Senate. Moreover, a bureaucracy's funding depends on the President and Congress. The President and Congressmen want to be re-elected, and they may put pressure on the bureaucracies to release positive statistics. Consequently, bureaucrats have an incentive to skew the statistics, making it appear the economy is improving especially before an election. The 2012 presidential election is around the corner, and the news is reporting optimistic unemployment statistics, indicating a possible economic recovery. However, if one reads the comments at the end of those rosy unemployment stories, the readers' opinions express disbelief in those numbers. Unfortunately, this blog cannot uncover fraudulent government statistics. Nevertheless, the U.S. government's statistics do indicate the following:

  • The 2007 Great Recession was one of the worse recessions to hit the U.S. economy since the Great Depression. 
  • Employers are using more part-time labor and fewer full-time labor.  The 2007 Great Recession was particularly harsh on workers with full-time jobs.
  • A large number of workers left the labor force.  The million-dollar question is why did these workers go?  Did millions of workers become discourage and give up their search for a job?  Are more workers retiring?  If more Americans are retiring, why are the younger workers not filling these vacancies?

Monday, February 6, 2012

Hyperinflation: Effects, Cause, and Survival

Many Americans have never experienced hyperinflation, and they do not know how to protect themselves from it. We had an excellent political and economic system that sheltered us from hyperinflation for two centuries. Hyperinflation is the rapid, excessive growth of prices, when a country's inflation rate exceeds 130% per month. What does this mean in real terms? If the United States has 100% inflation rate per year, then every year on average, prices would more than double. If your favorite bubbly soda cost $1 at the beginning of the year, subsequently, its price would rise to $2.00 by the end of the year. If your house were appraised at $150,000, then its price would climb to $300,000 by the end of the year. Thus, hyperinflation increases the prices of all products and services in our economy.

Hyperinflation, unfortunately, disrupts an economy. Hyperinflation rapidly decreases consumers' purchasing power because prices in an economy rise faster than workers' wages. Employers and workers who once enjoyed the comforts of middle class can be shoved into poverty overnight. For example, if our economy experiences an inflation rate of 100% and workers' wages rise by 50%, then these workers suffer a decline in their purchasing power. For instance, you earn $30,000 per year at the beginning of the year, and your favorite soda costs $1. Thus, your income allows you to buy 30,000 sodas. However, if the inflation rate is 100% while your salary rises by 50%, then you can only buy 22,500 sodas at the end of the year. The price for soda rises to $2 each while your salary climbs to $45,000, causing a 25% decline in purchasing power.

Hyperinflation causes interest rates to soar. The increase in interest rates is similar to a decline in purchasing power. If the inflation rate equals zero, and a bank charged a 5% interest rate on a loan, subsequently, economists call this interest rate real because the borrower repays his loan with 5% more money. If the inflation rate climbs to 10% and the bank still charged 5% interest, at the end of one year, the average prices in our society increased by 10%, but the bank only collects 5% more money. Consequently, the purchasing power for the banks falls by 5%. Thus, hyperinflation can disrupt a country's financial sector. Banks and financial institutions can collapse overnight as the value of their loans shrivels to nothing.

Hyperinflation harms the savers. If a person saves money by hiding it in their mattress or deposits it in a bank account, his or her savings lose value. For example, Brazil saw a hyperinflation rate of 10,000% per year during the 1980s. At the beginning of the year, a city bus ride cost one peso that soared to 10,000 pesos by the end of the year. Hyperinflation wipes out savings as consumer prices rise to astronomical levels. If a saver deposits their savings at a bank and the bank pays a low interest rate, then hyperinflation reduces the savings’ purchasing power. (Of course, we assume the bank can remain in business). Thus, savers must convert their savings into a stable currency or into physical assets to protect their purchasing power.

Hyperinflation is cruel to people on fixed incomes. Hyperinflation quickly erodes a person’s income from Social Security, an annuity, fixed investment income, or government aid. The U.S. government does index Social Security for inflation. Hence, government payments automatically rise with inflation, or at least in theory. However, hyperinflation causes prices to soar quickly, and the government might not boost Social Security in step with inflation. Consequently, people on fixed incomes will become the most vulnerable in society and will succumb to hyperinflation.

Hyperinflation could benefit the debtors, depending on the loan type. For example, if a debtor owes $100,000 mortgage on his house with a fixed interest rate, a debtor can repay this debt with devalued money. The hyperinflation boosts the value of the house and the debtor's wages, but the monthly loan payments remain fixed while people repay them. If the loans have an adjustable interest rate, the debtor's monthly payment rises as both the interest rate and hyperinflation rise. Then the debtor could default as his monthly payments spiral to high, new levels, far beyond his income. Consequently, debtors with fixed interest rate loans will benefit, while those with adjustable interest rates will most likely default.

A country in the throes of hyperinflation will suffer from a severe recession or depression. As the currency’s value rapidly deteriorates, hyperinflation shoves the savers and people on fixed incomes into poverty. Consequently, Hyperinflation quickly erodes the value of their savings and fixed income. The loss of purchasing power will reduce imports, improving a trade deficit. (Hyperinflation could boost exports if the exporting industries can survive the hyperinflation). Moreover, foreign countries will also stop accepting that country's currency for payment. Then hyperinflation causes interest rates to rise to insane levels, shutting down the financial system. Banks, finance companies, and pension fund companies will close their doors. Finally, hyperinflation destroys the tax base, causing government tax revenues to fall. People may evade their taxes if they know their tax office is devastated. (A tax authority cannot audit a person if tax officials do not report to work.)

Hyperinflation has only one source if it exceeds 10% per year. That country's central bank creates inflation by expanding the money supply. For instance, the central bank can help a government finance its budget deficit and debt. Consequently, government in countries with towering deficits and debt tend to experience high inflation rates. Many believe the United States will experience hyperinflation as the Federal Reserve finances the U.S. government's deficit and debt. The U.S. government debt has grown to a catastrophic $1.5 trillion deficit and a soaring $16 trillion debt. The U.S. government does not index most of its debt for inflation. Thus, hyperinflation can wipe this debt clean. Unfortunately, the United States would enter a severe recession that we would export to the world. Finally, the U.S. dollar as the world's reserve currency ends.

The expansion of the money supply is more complicated than printing money. For example, the Federal Reserve granted anywhere from $2 trillion to $8 trillion in emergency loans to banks during the 2008 Financial Crisis. (Nobody really knows the exact amount except the Board of Governors of the Federal Reserve). The Federal Reserve changed numbers in their computer system for the loan amount that the banks held at the Federal Reserve. Nevertheless, the banks chose to save this money. If banks loaned this money to borrowers, then the banks convert their reserves into loans that people eventually deposit in checking and savings accounts, boosting the money supply. Then inflation tails the growth in the money supply.

People will have a warning sign before the hyperinflation strikes the U.S. economy. Observe the international investors. Investors and governments in China, Kazakhstan, South Korea, Russia, etc. believe the U.S. growing debt is unsustainable. Consequently, investors would reduce their holdings of both U.S. dollars and U.S. government securities. Subsequently, the U.S. debt will reach a point when investors stop buying U.S. government securities. Then the U.S. government would be short of cash in the trillion-dollar range. If the U.S. government does not have the cash, then it cannot pay its workers, bureaucrats, soldiers, or citizens receiving entitlement benefits. Thus, the Federal Reserve could buy this debt, and the inflation begins to soar as the government spends the reserves, injecting the reserves into the economy.

The U.S. government could increase taxes or reduce government spending to reduce the deficit and slow the debt’s growth. However, we will reach a point of no return. Congress and the President remain at an impasse, and they have no intentions to boost taxes or reduce government spending or eliminate the trillion-dollar deficit. In 2012, the average U.S. debt per every American man, woman, and child was approximately $50,000, far exceeding most people's income level. Unfortunately, Americans have entered a dangerous time, when deficit spending sparks a severe financial crisis while the United States enters the Second Great Depression.

How do you protect yourself from hyperinflation?

1) Hyperinflation will lead to a breakdown in society. Store shelves will become empty and bare as food prices exponentially rise. You need to stock up on the following items:

  • If you require medications, then you need to stock a year supply or more. Furthermore, you must stock a first-aid kit that includes antibiotics and painkillers.

  • Stock up on nonperishable food because they can be stored safely for years. Many dried fruits, dried milk, dried vegetables, dried soups, dried beans, and dried lentils could be stored for years and safely eaten. Canned products could spoil within a year or two. Some recommend you scatter your food over several secret storage sites. As millions go hungry, they will resort to violence, theft, or home invasions, searching for food and supplies.

  • Accumulate weapons, such as guns, bullets, and knives to protect yourself and your family. If riots break out in the cities and hyperinflation whittles police paychecks to nothing, then the police may not show during outbursts of violence. In some U.S. cities in 2011, police do not show for minor offenses.

  • Become self-sufficient. Learn to grow a garden, raise chickens, fish, or hunt. You would also need to stockpile equipment that supports these activities. Even if you do not smoke tobacco, you should grow tobacco. You can use tobacco to barter with friends and neighbors for things you need.

  • You need access to safe drinking water. You may need to boil water to kill any microorganisms.

  • Accumulate useful items such as an emergency radio, flashlight, small propane stove, tools, etc. Some good items include a hand crank radio, or a solar cell panel that charges batteries.

2) Money becomes useless during hyperinflation as money quickly loses its value. People who depend on the government for income such as Social Security, Medicaid, Medicare, food stamps, etc. will see their benefits erode. A government will raise the benefits slower than the inflation rate. Unfortunately, our most vulnerable citizens might perish during a bout of hyperinflation.

3) If you are still earning wages, then once your employer pays you, you convert your wages into assets. Many analysts recommend people to invest in gold, silver, and other precious metals. With the downturn in the world economy in 2012, these metals could rapidly soar in price. However, they may or may not be good investments. First, government can pass laws to confiscate gold and precious metals to protect its national security. Usually government officials worry about their safety and security before their citizens. Second, people cannot appraise the value of a gold coin. The person must know the purity of the gold because coins can be gold plated with a zinc core. However, any assets other than precious metals will retain their value. Once money becomes useless, people will barter for goods, they need. Medications, seeds, guns, bullets, gasoline, cigarettes, liquor, and nonperishable food become the new currency.

4) If you want to transfer money outside of the country, transfer it now. During a financial crisis, a country can impose capital controls. Often capital controls limit the outflow of currency or precious metals. If you are planning to flee the country searching for greener pastures, then you must do this before hyperinflation strikes. Other countries will erect barriers to isolate themselves from the crisis and prevent an influx of refugees. Fleeing to another country does entail risk. If a worldwide depression ensues after the U.S. hyperinflation, a country may expel all the foreigners. For example, Britain plans to close its borders, expel foreigners, and impose capital controls after the euro collapses and the European Union begins disintegrating.

5) Many Americans live from paycheck to paycheck and do not have financial resources to weather and survive a hyperinflation. Riots and civil unrest will erupt in the cities as people search for food to feed their friends and family. The Occupy Wall Street protestors were tame and would pale in comparison to civil unrest from a starving population. Unfortunately, government officials will do anything to retain their power and control. If hyperinflation severely limits and reduces a government's resources, it will use soldiers to fire real ammunition on its citizens, retaining control over society. Rural towns become the best places to live, far away from large cities. Then you become friends with your neighbors, and watch each other's backs, forming a true community.

6) Do not count on the media to warn their viewers of imminent hyperinflation. Unfortunately, reporters rely on the government for information, and they never ask our political leaders the difficult questions or rarely checks facts. Most government officials will not inform the public after hyperinflation strikes the economy. However, the news will bombard the viewers with the hyperinflation diet, how to look fabulous on a hyperinflation income, or dating secrets for singles who have hyperinflation troubles. Unfortunately, hyperinflation comes swiftly and unannounced like a torrential storm system pummeling a small town. The only signal is investors stop buying U.S. government debt. Afterwards, prices for food and consumer goods begin rising gradually at first, and then the prices accelerate to insane high levels.