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semper77 (< 20)

Regarding Alstry's call for 30% unemployment and a 50% cut in American wages.



January 03, 2009 – Comments (7)

Like many of you, I'm an avid reader of Alstry's commentary and insight. His track record and rating in CAPS speaks for itself. However, having said this, I am at odds with his recent blog which calls for a spike in unemployment to 30% and a required 50% nominal cut in American wages before we (as a country) find our way clear of the current downturn.

In short, none of this will come to pass. Future unemployment rates and the value of American salaries will never reach the levels suggested above because current monetary policy will not allow it.

Following what will be a deflationary period in 2009 in which the unemployment rate could reach as high as 10%, the government will flood the economy with money. This process is already underway and it will have two large effects (among others):

1. It will likely cause a period of inflation not unlike that which was last seen in the early 1980's. This will be intentional, as the government will need this inflation to find its way into hard assets like housing, in order to stem the tide of foreclosures casued by downward spiraling prices. 

2.This flood of money will also serve to weaken the American dollar significantly. This will lead to American goods being cheaper in the global marketplace, leading to increased demand for American products and services, and giving rise to U.S. employment.

3. White-collar American workers will become more cost competitive with outsourced overseas resources in this environment. Thousands of these previously outsourced jobs will begin to find their way back to the U.S. beginning in 2010.

4. Those living on a fixed income will suffer in this environment, however the incoming president's stated plan to reduce or eliminate taxes on seniors making 50k or less will ease some of that burden.

5. Oil will bottom in 2009 as production cuts and inflation find its way into the price of crude. Already OPEC is targeting $75/barrel as their "fair" price. 

If any of this sounds familiar, its because this is what I outlined back in my June blog (then written as SemperGumby77). At that time, I also outlined the Obama victory, the short-term crash in oil prices (recall the "$75 vs. $200"  debate I had with Demon Doug), and the Dow crashing at least 2000 points (though the fall swoon even caught me by surprise with its ferocity).



7 Comments – Post Your Own

#1) On January 03, 2009 at 3:15 PM, alstry (< 20) wrote:


You and I pretty much agree...the primary difference is degree.

I am running out to play with the kids, I will elaborate later.

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#2) On January 03, 2009 at 5:25 PM, Entrepreneur58 (38.20) wrote:


 You only consider the "good" side of inflation, namely that our products become cheaper in the world marketplace.  The flip side of that is that our currency becomes less valuable compared to others, so we are no longer able to outbid foreigners for the world's goods and valuables.  We will be forced to work harder and consume less, which means our standard of living is going to go down compared to other countries.   Personally, I would much rather have deflation and a strong currency, but I fear you will be right about inflation.

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#3) On January 03, 2009 at 5:41 PM, goldminingXpert (28.83) wrote:

I also largely agree, but think unemployment could hit 12-15% first. The pumping of money has already begun but has had little to no impact on the economy... I don't think the tide will turn quite as soon as you think. Mid-2010, I think, the deflation/inflation switch may flip.

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#4) On January 03, 2009 at 5:59 PM, Tastylunch (28.71) wrote:

I'm with GMX. The banks know they are holding massive inflation behind them, they won't be inclined to lend much knowing that and knowing that as long we have delfatino their customers are going to be greater and greater risks to default. Classic catch-22 for the banks. Eventually though I bet you'll see the smaller local banks and credit unions force the bigs to lend by stealing eough of their best customers.

It also depends on what measure of unemployment you use. If you use U6 data (the most inclusive and perhaps most analogous to methods used in the GD) Unemployment is already over 10%, If you use U1 it's not there yet.

30% unemployment is more or less a call for America to cease to exist. It's not that it couldn't happen or won't happen, but I would think the gov't will collapse before it does.And that means the gov'twould use every method at its disposal to prevent that for happening. So I do agree wiht you 30% is unlikely (and if it were to happen they will never report it as such).

S I agree with you Semper more than Alstry, but I can think we can all agree that it's bad,  but there is significant disagreement about timing and scale,which considering the circumstances might be critically importnat in determing what the gov't does.

Time will tell which of us (or none of us) are right.

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#5) On January 03, 2009 at 6:09 PM, loj04 (81.94) wrote:

I'm not sure inflation is in our future. You would have expected the same thing from Japan during their "lost decade", all their government expenditures and lowering their interest rate to essentially 0% didn't inflate prices. With Paul Volker in Obama's advisory group, I'm not sure he'll let prices spiral out of control.

Yes, the government appears determined to defeat deflation, but I'm not entirely convinced they'll be able to outdo the Japanese.

I'm not sure point 2 is in the cards either. China seems recalcitrant to letting the RMB fall versus the USD. And although the US has an absolutely massive deficit that seems to be only getting larger, the recent rally of the USD doesn't seem like we're heading towards currency balance anytime soon. We would have to switch from importer to exporter, and I wonder who could we export to? Not China. Japan? Maybe & hopefully. The EU? Africa? South America? Even if the USD devalues, we could get into a "beggar thy neighbor" scenario where other countries also devalue to prop up their exporters.

All in all, I think things could go either way, and I'm scared as hell of how this will turn out. I've been looking to go long both commodities and bonds, in either case. I think most equities will trade sideways, ala Japan.

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#6) On January 03, 2009 at 6:25 PM, nthought (< 20) wrote:

I think your inflationary prediction is very premature. 


Count up the amount of money that's been eliminated in the past year.  Count the loss in equities, count the losses in real estate, and don't forget to count the money being hoarded by scared consumers.  Add to that high unemployment...and you think inflation?


Nope.  The big problem is deflation.  Right now, everything is overpriced, even though we think they are cheaper.  The dollar has weakened in the past few weaks (after strengthening after the stock collapse), but that's all speculation.  Reality is about to hit, and that reality is a deflationary spiral.


Therefore, I think the government has the right approach but actually isn't doing enough, despite perceptions that they aggressively spending.  I write about this in my most recent blog.  I think I'm taking an opposite view than yours.     

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#7) On January 04, 2009 at 1:48 AM, semper77 (< 20) wrote:



You’re correct in saying that I am not painting the full inflation picture. I only portrayed that part of it that I felt would make Alstry’s 50-30 call an impossibility. I also think that you’re right when you suggest that other countries going forward will now begin to catch up to our standard of living. In fact, I think that this may well be the dominant theme that defines the next 25 years. We are likely to be the generation that sees the “leveling of the playfield” between the U.S. standard of living and the rest of the world. We can have a separate debate about this, but I don’t necessarily think that is a bad thing.




You may end up being right – there’s been a lot of wealth destruction over the past year. So much so that even increasing the money supply at a 37% YOY clip (which we are now doing) won’t avoid the short-term pain of deflation. My hope is that companies (particularly high tech companies who’s staffing and training usually takes at least 6 months) will take a hard look at the huge policy response and limit cutbacks in order to be able to be positioned for expansion when the economy pulls out of its slump in 2010. We can only wait and see.




That’s pretty much my read on it, too. As much as I absolutely hated the bailouts, I think that had everything been allowed to fail its likely that the financial system would have collapsed, 30% unemployment would have been a reality, and the results would have been calamitous. The government couldn’t allow that to happen.


I disagreed with their response (I felt the better solution would have been to drop ALL mortgage rates to 3%, thus bailing out Main Street instead of bailing out Wall Street), however some action had to be taken, even if it was the wrong action.




You bring up an interesting international “race to devalue” scenario that I’m sure has already been the subject of debate among the G7. My feeling on the matter is that the current US dollar strength is a correction in a larger long-term bear market for the dollar. As such, you will not be proven wrong taking a long-term position in either oil or gold.




I think you missed the sentence where I described  2009 as a deflationary year. My inflation scenario doesn’t start to kick in until 2010 sometime, maybe even late in the year.

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