Saturday, September 29, 2007

Housing, Jobs and Interest rates

I am truly fed up with "analysts" who claim that the economy is "fine" - "just a spot of trouble in the housing sector"... "job creation is strong"... "personal spending is holding up"... yack, yack, yack. Well, you be the judge.

Here is a chart (click to enlarge) showing the correlation between new housing completions (red line) and job creation (blue line). Notice the extremely tight relationship, right up to 2001. What happened then? In response to the dotcom collapse and the 9/11 events, the Fed panicked and cut rates to near zero (real rates went way negative), thus creating the artificial real estate super-bubble which "goosed" the economy (Fed Funds rates are shown in green - no scale).

The housing market has now fallen off the cliff, employment growth is rolling over and this time the Fed has painted itself in a corner. Rates are lower than at any previous cycle peak (i.e. it does not have as much room to cut), household debt is enormous and Americans are spending more than they earn; borrowing even more is simply not possible, even if it were desirable. Furthermore, 2.3 billion Chinese and Indian consumers with newly found money in their wallets means that cost inflation is already a very serious threat. And last, but certainly not least, the dollar as global reserve currency has credible competition for the first time since WWII - the euro.


  1. Agree 100%. I think analysts believe that all the jobs being created, waiters, customer service, etc are great for our future global competitive advantage.

    With 2 trillion USD the Chinese have to buy foreign assets, you better believe a super inflationary period is coming.


  2. Of the total 7 million new private sector jobs created since 2004, one million were in restaurants and bars (tips and minimum wage).

    Another 1.4 million were in private healthcare (doctor offices, outpatient care, hospitals, nursing homes, etc.)

    Retail and wholesale...900.000

    Manufacturing... LOST 300.000 jobs.

    But hey, as long as we have McDees and *$$ we have "low unemployment".

  3. Where can you find the breakdown of the new jobs that you mentioned, Hellasious?

  4. Hellasious,

    What advice do you have on wealth preservation in the face of a large scale global inflation?

  5. The amount of absolute horse shit that is spewed on a daily basis by the minions of the street could fertilize every acre of farm land from Northern Maine to Southern California. The culture of lies that is promulgated here in Freedom's Land is truly a wonder to behold, and in no area is it more entrenched and rotten than in the spheres of financial and economic reporting.

    And, yh, I don't think a super-inflationary period is likely. A hyper-inflationary outcome, however severe we define it, can't hold sway because a massive debasement of the currency will be massively deflationary once it drives the cost of living way up. IF there is a true run on the dollar, the cost of living will become not just painful, but lethal.

  6. Job data can be found at the Bureau of Labor statistics ( the section titled payroll employment. The data is broken down by sector and year, month and seasonal or not adjustment. Nice graph functions, too.

    But the further sorting and calculation you have to do yourself.


  7. Hellasious,

    It sounds like you've moved to the "global decoupling/inflation" camp?

    If the US consumer hits the wall, where is the excess production capacity in Asia going to go?

  8. Rick Ackerman on the likely outcome of the collapsing dollar induced inflation. In a word, DEFLATION!

  9. The Euro? How do you square that with your earlier post? When one looks at external debt to GDP ratio . . .

    Italy - 111%
    Greece - 118%
    Portugal - 130%
    Spain - 143%
    Finland - 144%
    Germany - 148%
    France - 182%
    Austria - 209%
    Belgium - 307%
    Netherlands - 359%
    Ireland - 769%

    The US looks somewhat better at 77%.

  10. "With 2 trillion USD the Chinese have to buy foreign assets" WRONG, chinese can't buy any USA asset. they will have diversify out of USD and invest in EUR denominated asset. why, because USA people won't let them.