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Thursday, November 12, 2009

More Stimulus (Debt) Equals More Unemployment

Real Clear Markets provides a look at the three-month moving average (TMMA) of changes in total employment in relation to stimulus spending and the debt incurred:

As the financial crisis gathered momentum in late 2008, the TMMA fell continuously, reaching a bottom of 853,000 jobs lost per month in January 2009. Then this indicator began improving. By June 2009, when stories about "green shoots" were common in the financial press, the TMMA was "only" 230,000. However, it then began falling again. The October BLS numbers pushed the TMMA down to 589,000 jobs lost per month.

Economic growth is supposed to create jobs. However, the U.S. economy shed twice as many jobs (1,332,000) in the third quarter of 2009, when GDP grew at a robust 3.5% annual rate, than it did in the second quarter (691,000), when the economy contracted at a 0.7% rate.

How can this be? To paraphrase the 1992 Clinton campaign, "It's the bonds, stupid!"

The massive sales of U.S. Treasury bonds to finance "stimulus", bailouts, and other government spending is sucking capital out of the private sector and destroying jobs. Once again, the October 6th BLS report tells the tale.

The BLS "household survey" showed job losses of 589,000, while their "establishment survey" showed a reduction of payrolls of only 190,000. This shows that most of the damage is being done in small business, "under the radar screen" of the BLS.

Small businesses-especially new small businesses-account for essentially all net job growth. However, business creation and expansion requires capital, and more and more of the nation's capital is being commandeered by the U.S. Treasury in the name of "stimulus".

The FY2009 Federal deficit was $1.4 trillion. This was almost a trillion dollars higher than FY2008. The capital to buy this additional debt had to come from somewhere, and much of it was squeezed out of business. Here are some indicators, both statistical and anecdotal:

• During FY2009, "Gross Domestic Private Investment" fell by 25% (almost $500 billion/year). It would have needed to grow by 5% to keep the unemployment rate from rising from an already-too-high 6.2%.

• Many venture capital firms are informing entrepreneurs that there is no money available for new startups. The firms say that they must husband their capital to meet the needs of their existing portfolio companies.

• The 500 largest U.S. non-financial companies now hold more than $1 trillion in Treasury bills, amounting to more than 10% of their total assets. Corporate cash flows are rising, but the money is being invested in government bonds, rather than growth.

• Banks have cut credit card credit lines by 25%, or $1.25 trillion. Because small businesses are often financed with personal credit cards, this has a direct impact on small business survival and growth.

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