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Less Manufacturing = Less Recession Job Losses?

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February 02, 2008 – Comments (9)

I am reading John Mauldin and he points out there would be less job losses from recession because of how much smaller the manufacturing sector is and how those jobs tend to be cyclic, increasing and declining with the business cycle, which is part of what he claims led to the 9-10% unemployment of the 70s and 80s.  He says today a 10% decline in manufacturing would only be a 2% increase in unemployment.

Well, a few posts back I linked to a post with a picture which showed the difference in employment with lending.  It used to be pretty much just the bank involved, but it evolved into more "make work, do nothing except skim wealth for no added value what-so-ever."  The extra work came with the mortgage brokers, a middleman, and then there was the people that packed the loans into the mortgage backed investments, another middle man.  And that created more work for the fraudulent rating agencies, and then there were those creating the incompetent risk assessment programs, and then there were the investment sales people, and so on...

All these new people were skimming from home equity and other than pushing paper around, they added absolutely nothing substantial of value to the economy.  Instead of making the system more cost effective, well, look at how many layers of different wages were added to the mortgage sector.  And my impression is that these weren't low paying jobs, but jobs with wages that would be the envy of many people.  And yet in the big picture they added absolutely nothing material to the economy, except that they had money to spend in the economy on other goods so there was a trickle down effect of this massive over paid incompetence.

Somewhere in the last year or two I read that the financial sector had increased from a low of 12% of the market to 28% of the market, or perhaps it was the earnings.  It doesn't matter if it was earnings, the stock market or the economy, nothing changed in the financial sector to suggest they increased their value to economy by 133%.  Indeed, with online banking and automation, their percentage probably should have declined...  Anyway, when I read that, it was about when I started suggesting to all of my friends they exit their bank stocks and I am pleased that most did prior to last summer.

Mauldin is probably right that the economy will not take the same hit from a loss of manufacturing jobs, however I would tend to think the hit and trickle down effect from the financial sector could dwarf the historical hit to the manufacturing sector.  At least the manufacturing sector produced real goods and never got into an unsustainable loop dependent on indefinite exponential fiat growth. 

And that's the thing as well, the financial system was creating money through credit which was financing their insanity.  They simply don't have the ability to create money like that anymore.  With the billions of write-offs that we are seeing in the financial markets we are seeing that money they created wasn't real, although they packaged it up with the appearance that it was real.  The scam is up and I predict they go back to their lows...

 

9 Comments – Post Your Own

#1) On February 02, 2008 at 10:57 AM, dwot (67.78) wrote:

Here's another interesting one on my reading list, foreign exchange losses of China's central bank.

The US dollar has declined significantly in comparison to other currencies, (as do all currencies as the debt burden increases).

China holds an enormous amount of US dollars.  The very act that they hold them as opposed to them being spent in the economy has kept inflation down.  Inflation is an increase in the money system.  The money system increased, but stuffing the money in a matress has the same effect that the money has been removed from the monetary system.

Foreign governments are not buying US dollars anymore.  The way I see this is that essentially, inflation is not being exported anymore... 

Yuck:

 "The accounting losses central banks will soon report as a result of foreign exchange market moves has all the markers of an issue that is about to explode. Richard McGregor found that this issue was so hot that his usual range of Chinese sources declined comment."

 

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#2) On February 02, 2008 at 11:22 AM, dwot (67.78) wrote:

More reading, I'm not going back to find the link, but mortgage equity lines of credit are being halted, I believe the story involved Countrywide.  I'd be absolutely choked if my bank all of a sudden said to me that my line of credit was cut off, well I supposed mine was cut off as well.  Mine was cut off because I sold my home and it was a home equity line of credit.  You expect it to be gone when you sell the underlying asset...

The one I just read that reminded me about the home equity lines of credit is that credit cards are being cancelled

I am still reacting very strongly to various pieces of news as I read it.  This one, 7 freaking percent of its credit card customers have been given 35 days notice that their credit card agreements were being cancelled.  Holy creek...  Maybe 7% seems small to some, but it seems large to me.  That's 161,000 people that may all of sudden find themselves with increased difficulting in trying to figure out how to manage their finances.

These are known as credit contractions...

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#3) On February 02, 2008 at 11:33 AM, dwot (67.78) wrote:

Here's another, the BLS overstated job creation by 14.4% in 2007.  It seems to me that more than one of the mini-rallies since the summer was based on how strong the economy was because of job growth...

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#4) On February 02, 2008 at 12:20 PM, abitare (39.45) wrote:

dwot,

Great post! We definately think a like on these issues. I like Maudin, but he thinks this recession is not going to be that severe. But the US has become a "70% consumption" based economy with an enormous debt, I do not see how this is going to end in 18 months?

Marc Faber has written in his book, this was the war China has been fighting to undermine the US. China could not match the US military, so it kept its currency low in order to aquire production and make the Americans feel "rich". China has now aquired enough money to really undermine the dollar.

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#5) On February 02, 2008 at 12:45 PM, dwot (67.78) wrote:

Here's another...  This one on these derivative things that really are the main reason I am not in the market.  I know I don't understand them, I only understand that there is so much money involved I can't see investments escaping it.  Even if you do your best to steer clear, something that interacts with your investments isn't going to steer clear and there will be tons of indirect hits.  Even if Peter is solid, if Paul doesn't pay him, he might not be able to pay his creditors...

So this link is how a CSD that was supposed to insure went wrong... Unfortunately this is one I have to study to understand.  It looks to me like the legal battle over a technical wording and a scam to get get out of the intent of the insurance agreement based on how it was worded.

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#6) On February 02, 2008 at 4:05 PM, QualityPicks (63.80) wrote:

Great post as usual. I do agree in many respects with Mauldin. The US does not have to have a major recession. I think he very well describes the current scenario as the "Muddle Through" economy. Seriously, most of my friends are not living way above their means. Although a lot of them are borrowing more than they should, they can still manage to pay their debt. Some are, some aren't saving for retirement. Sure, a big percentage of people abused the system, and will cause a lot of problems in the economy as things get corrected.

But I think that the Fed and economic stimulus will prevent a very deep recession. We will likely have the "Muddle Through" scenario. I mean people will keep spending, I know that because is "embedded" in the culture. Marketing and sales "tactics" here in the US are just amazing. Companies manage to squeeze every penny out of you. They make you feel like you need whatever they are selling, like if you are a loser if you don't keep moving forward and accumulating toys, better homes, cars, furniture, etc. Some people will learn their lessons with the recession, but most may not. They will keep spending whatever they have, but many won't have as much to spend as before. But that is what the "Muddle Through" will be like. Companies will go bust, new ones will be invented, etc.

Depression scenario would only happen if the Fed/government were "tough", or some may say "cruel". Well, it is obvious that is not going to happen.

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#7) On February 02, 2008 at 5:35 PM, abitare (39.45) wrote:

dwot,

Great post! We definately think a like on these issues. I like Maudin, but he thinks this recession is not going to be that severe. But the US has become a "70% consumption" based economy with an enormous debt, I do not see how this is going to end in 18 months?

Marc Faber has written in his book, this was the war China has been fighting to undermine the US. China could not match the US military, so it kept its currency low in order to aquire production and make the Americans feel "rich". China has now aquired enough money to really undermine the dollar.

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#8) On February 02, 2008 at 6:21 PM, Imperial1964 (97.76) wrote:

Mortgage equity lines halted, credit cards cancelled.

I know banks are hurting pretty bad.  Do you think this is "contained" or do you think it will turn into a full-blown credit contraction? 

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#9) On February 02, 2008 at 7:15 PM, dwot (67.78) wrote:

Qualitypicks, I am thinking this one is going to be worse than Mauldin is thinking.  I've seen both Japan and Canada blamed for policy that left the economy sluggish, but I think when you reach a level of debt you don't have a choice.  Credit is already contracting and people won't be able to just buy those things.  The Fed can't change that.  The fed stimulus program is a drop in the bucket and ultimately has to be paid back.  It makes things worse, like washing an open wound with an infected cloth.

Abitarecatania, I don't believe China deliberately did any such thing. 

Imperial1964, I am in the deflation camp, money supply is going to contract.  It recently occurred to me that we haven't felt the effects of the degree of money supply expansion in the economy yet.  Look at how expensive New York has become, where much of this money creation has occurred, and the degree of trickle down in wages.  It is no surprise that that is where they are scamming to keep the credit ponzi scheme going by trying to prop up the insurance companies.

This is the M1 and M2 money supply:

M1 and M2 Money

The M2/M1 shows that the leverage of lending has been growing like crazy. M2/M1 should be a flat line.  That it has gone up is a statement of increased fiancial instability.

M2 to M1 Ratio

The Vancouver housing market has kept up with the increase in the M2, whereas the wages probably have not even kept up with M1.  Either you have a contraction, or prices have to catch up to the money supply. 

I think foreigners are holding a lot of these dollars...  Regardless, a lot of this extra money supply isn't being circulated, yet...

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