Why the US Middle Class is in danger of extinction

By Neil Patrick

Current news reports claim the US job market is slowly improving. Is this a return to better days? Sadly no. It’s a transformation for sure, but not back to anything like we all knew 10 years or so ago.

Make no mistake about it, America's middle-class jobs have been destroyed in the wake of the 2007-8 financial collapse. The growth in new jobs reported gleefully by the government have been almost entirely low-wage jobs. And there is little reason to believe this situation can be quickly or easily reversed.

What has caused this? In the next few posts, I want to look at the factors that are behind this tragic state of affairs, dig into what’s happening and what we can do about it.

I believe there is no single cause or culprit. Instead it’s a complex cocktail of seven factors which have collided to create a perfect storm for skilled American workers. In brief these are:

• Record levels of government and personal debt 
• The rise of technology leading to ever falling marginal costs 
• Capital shifts away from labour and into non-human investments 
• The globalisation of businesses 
• Government fiscal policies 
• Demographics and education 
• Finite global resources 

But I am getting ahead. In this post, I am going to look at:

• The nature of the alleged jobs “recovery” 
• Why GDP growth isn’t making people better off
• The transference of government debt to households.

The substitution of high paid jobs by low paid jobs is beyond doubt

A recent presentation from the Federal Reserve Bank of San Francisco describes the jobs “recovery” in stark terms. The vast majority of job losses during the recession were in middle-income occupations, and they've largely been replaced by low-wage jobs since 2010:

Mid-wage occupations, made up a staggering 60% of the job losses during the recession. But mid-wage jobs have made up just 22% of the jobs gained during the recovery.

By contrast, low-wage occupations have totally dominated the recovery. They represent 58% of the job gains since 2010. "Many middle-class workers have lost their jobs and, if they have been able to secure new employment at all, find themselves earning far lower wages post-recession," the San Francisco Fed says.

Nearly 40% of the jobs gained since the recovery began - about 1.7 million - have come from three low-wage sectors: food services, retail, and employment services.

And four low-wage occupations are now the top four types of employment in the US: retail sales, cashiers, office clerks, and food preparation and servers:

The problem is compounded by the fact that industries which employ mid-wage earners, such as construction, manufacturing, insurance, real estate and IT, have either stagnated or grown too slowly to recover their pre-recession losses.

Worse again, budget cuts to federal and state government have eliminated a vast swathe of mid- and higher-wage jobs. And a separate chunk of middle-wage jobs including carpenters, plumbers, plasterers and electricians are still waiting for the U.S. housing market to recover.

The growth of wealth inequality is a problem for all, not just the poorest

This is creating a polarised workforce in the United States. Over the past decade, both high- and low-wage jobs have been growing. But jobs in the middle continue to shrink. Mid-wage jobs suffered a major drop after 2001, largely stagnated during the 2000s, and have now declined even further in the most recent downturn.

Economists have been debating the causes of this divergence. Harvard’s Lawrence Katz and Claudia Goldin, argue that new technologies and machines are now displacing mid-wage jobs.

I believe this is a correct analysis as I talked about here. But it’s not the full story. Some others, such as Larry Mishel of the Economic Policy Institute, point to political factors, from the decline of labor unions to trade liberalization to the dwindling minimum wage. This is a factor too, but again it’s only an ingredient in the mix, not the full disastrous recipe.

But neither of these arguments discuss the lead weight which is pulling the whole economy down. And that weight is government debt. That debt puts massive upward pressure on tax, demands endless quantitative easing (devaluation of the dollar to you and me) and limits government spending – the type of spending which would create more jobs in the public sector.

It seems logical to me that there’s no single simple explanation of what’s going on. It’s multi-factorial which makes it complex to understand and remedy both at a national and individual level.

But if the trend continues, it will amplify something which is already a big problem in the United Sates: income inequality. Not to mention the destruction of the hopes and aspirations of a huge swathe of American society. And needless to say, that’s a bad thing…

GDP growth and household incomes have become separated

For the first time in US history, economic growth is no longer driving income improvements at the household level.

Traditionally, improvements in GDP have directly resulted in increased income and prosperity for citizens. In the US, this link has broken. US median household income is now at a lower level than it was in 1999. In fact even though US GDP has been on the rise since 2009, household income has been falling since 2008:

Here we see the evidence of how as technology continues to increase productivity and reduce marginal costs, so we have GDP growth but no wealth creation except for those who are in the boardrooms and/or major equity owners.

To look at it in its simplest terms, businesses can create higher returns with less human labour inputs than ever before. The first industrial revolution substituted human muscle power with mechanical devices. The second industrial revolution transformed transport and communications. And the third industrial revolution is replacing human cognitive tasks with artificial intelligence.

So until recently, technological improvements have only really affected those who sold their manual capacity to earn a living. Today’s technology is reducing the workforce needed for tasks which required the application of professional and mental skills too. But there’s another problem; if we are selling our manual labour, we need to do nothing to create our commodity. Our bodies are there to be applied to work whenever we want. Little or no training is needed.

But jobs requiring the application of skill and knowledge are different. The acquisition of these skills can take years. Sometime decades. And if no-one wants them anymore, we have a stark choice – dump them and start again or try and compete for unskilled work.

So we have an American middle class with skills that fewer and fewer people want or need to pay for. The keys to the acquisition of wealth are no longer the sale of our labour and skill. They are the ownership of income generating assets. And thanks to booming stockmarkets, owning assets has made most of the wealthy even wealthier over the last few years.

This is the reality of the polarisation of America’s workforce. Greater wealth acquisition by those at the top, those who own assets, but falling income levels for everyone else… not just the poorest, but the vast majority of Americans.

Needless to say, this is also a bad thing…

The burden of government debt is being passed to households

Despite multiple deficit-reduction deals during the past three years, the US national debt is projected to swell to 100 percent of the economy by 2038, due primarily to the enormous cost of caring for an aging society.

Whilst WW2 exceeded the current peak of government debt, the end of WW2 and the global restructuring that arose from its ashes is a very different scenario to that we face today. Post 1945 saw the US emerge as the dominant global super power. It’s huge manufacturing capacity, abundant natural resources and global markets created the wealthiest society on the planet:

But post 1980 has seen the failure of that economic model as the production of cheaper goods of equivalent or even higher quality started to materialize in low wage economies.

Making matters worse, tax cuts for the vast majority of Americans were made permanent during last year's fiscal cliff showdown. If the tax cuts had been allowed to expire, projections showed the debt dropping to 52 percent of GDP during the next 25 years.

In effect, huge government debts are being allowed to accumulate unchecked. But sooner or later these debts will be passed to individual citizens rich and poor through the giant levers of fiscal policy.

And you guessed it; this is also a bad thing…

So these three points define the problem: 

• Millions of jobs for skilled workers in the middle income bracket have simply vanished. 
• Economic growth has become of value only to the asset owning classes. 
• Government debt will continue to be passed onto citizens. 

This isn’t a problem which can be solved by the traditional tools of government. If you want to place your faith there, that’s your prerogative and I hope you are right. My take is that we all need to come up with our own personal solution. It might just be the biggest test of our lives…

I’ll be back with more on this soon.

Why the economy will never be the same again

By Neil Patrick

As we slowly struggle out of recession, it's tempting to hope that the problems it caused will soon fade. But there are clues that things will not and cannot ever return to how they were. In fact the evidence is all around us; static or falling growth in real incomes despite bouyant stock markets, larger and larger wealth inequality, the ongoing injection of liquidity into economies through QE. And biggest of all, the mountain of government debts around the world. 

The real story of the 2008 financial collapse and subsequent recession isn’t about greedy bankers, dozing regulators or complacent politicians although they all played their part. It’s a story which is bigger than all of them put together. It’s a story about the transition of the whole developed world from one economic era to an entirely new one.

It’s tempting to think that all our financial woes were created by 2008 and its aftermath. And yes, it’s true that we’ve been going through possibly the worst recession in history. But the financial crisis wasn’t the cause of this, it was a symptom of a much bigger global problem and transformation which has been underway for decades. 

And it’s only if we understand the nature of this transformation that we can figure out what each of us will have to do in the coming years to ensure that we don’t become victims. Many of us have suffered enough already from the economic collapse. But the collapse wasn’t a singular event. It was a symptom of the failure of a monetary system which has passed it use by date. The aftershocks will be just as painful to many more of us. Possibly even more, if we don’t individually figure out our own survival plan now.

But I’m getting ahead. We first need to look at what’s been going on and why.

Who is really to blame for the recession?

It’s tempting to adopt over simplistic knee-jerk explanations. People were too greedy. Lenders were too careless. Big bonuses encouraged unethical and even illegal practices. Politicians were self-serving and in league with big business. There is plenty of evidence of all these things of course, but they don’t lie at the root of the problem. They were symptoms of much more fundamental changes in the world.

The real culprits are in the shadows, or at least so low profile and mysterious to most that they attract very little attention from the general public. They are the central banks. The borrowing spree was made possible because the central banks allowed it to become possible. The money banks were lending was only available to lend in the first place because of central banks’ rules around what bankers call fractional reserves. And without over-lax fractional reserve rules, there could have been no explosion in lending and no financial crisis. Whilst much of this story is complex, this is one aspect that is really simple.

How central banks made it all possible

Central banks like the Federal Reserve and the Bank of England, require a bank to keep a reserve of capital that is in direct proportion to the amount it has lent. So let’s say the central bank imposes a fractional reserve requirement of 10%, if a bank has £100 million of deposits, they cannot lend more than a total of £900 million. The questionable idea behind this policy is that banks are responsible and prudent institutions and no event could ever undermine depositor confidence so much that everyone wishes to withdraw all their money at the same time, thereby bankrupting the bank(s).

It seems like a crazy notion when we remember that there have been plenty of bank runs throughout history. For the record these include, the Dutch Tulip manias (1634–1637), the British South Sea Bubble (1717–1719), the French Mississippi Company (1717–1720), the post-Napoleonic depression (1815–1830) and the Great Depression (1929–1939).

With hindsight today, it seems incredible that the idea of fractional reserves could persist, but it did and it still does…the fractional reserve system hasn’t been dropped. It’s merely been tweaked round the edges with requirements for slightly higher capital reserves and greater risk mitigation. The main driver of this is the Basel Accords I, II and III which have sought to apply progressively increased solvency and capital reserve requirements on banks.

The system is still viewed by governments and central banks as a reasonable means to support their economies by enabling businesses to borrow money to grow and consumers to spend. Oh and governments can easily borrow too, so their own financial position is never under too much pressure. When they need to, they can simply borrow more money…

Governments are incentivised to spend not save

Western democracy encourages politicians to make voters happy. So they can get re-elected and stay in power. But you don’t get popular by spending responsibly. You get popular by building more schools, providing better healthcare, cutting taxes, creating more policemen to keep us safe from the bad people….the list goes on and on.

There’s one slight problem though. How can a government afford to do this? Especially if the economy isn’t doing too well. Someone has to foot the bill. And that’s where the central banks become super useful to governments. Central bankers are not stupid. They are not simply going to hand over billions to governments just because they are asked. No, they demand in exchange a promise from the government that the money is in the form of a loan. The central bank issues a bill for the loan amount to the government. And in return, the government gives the bank a promise to pay the bank from its future income. It’s called a bond. Through the use of bonds, the government is mortgaging the future wealth of the nation – i.e. the future work and earnings of its population to pay for its spending today.

But governments are not just mortgaging our future work, they’re making the rich richer in the process

And then there’s quantitative easing (QE). In order to prop up the economy in times of extreme stress, like now, central banks print more money to maintain liquidity. Or in other words to keep everything limping along in the economy. In the US and UK this has been carried out by the Federal Reserve and the Bank of England. It’s a medicine with severe and nasty side effects though.

In August 2012, the Bank of England issued a report stating that its quantitative easing policies had benefited mainly the wealthy. The report said that the QE program had boosted the value of stocks and bonds by 26%, or about $970 billion. About 40% of those gains went to the richest 5% of British households. Dhaval Joshi of BCA Research wrote that "QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it".

Economist Anthony Randazzo of the Reason Foundation wrote that QE "is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality".

In May 2013, Federal Reserve Bank of Dallas President Richard Fisher said that cheap money has made rich people richer, but has not done quite as much for working Americans. Most of the financial assets in America are owned by the wealthiest 5% of Americans. According to Fed data, the top 5% own 60% of the nation's individually held financial assets. They own 82% of individually held stocks and over 90% of individually held bonds.

As the majority of people get poorer, so they are less able and less inclined to borrow money. And this is exactly what we see happening. In the UK, government debt has risen exponentially in the wake of 2008 whilst private debt has been falling:

The system makes it much easier for governments to borrow than save

To say “bond bingeing” has become a bad habit is an understatement. In the US today, government borrowing has become a debt crisis. In Between September 30 and October 17, 2013, much of the US government infrastructure was forced into shutdown due to inability of Congress to agree about how the costs of Obamacare could be met.

You’d expect in a financial crisis that a responsible government would look for every way possible to reduce spending. And yes, they attempt this. But not very successfully. Every proposal to reduce spending prompts a counter argument that it’s unfair, unpopular, impossible, or will lead to extra costs elsewhere. And this is where our governments fail us. Unlike businesses which will act fast and ruthlessly slash costs, doing whatever they can to remain solvent, governments are huge unwieldy bureaucracies and every cost cutting proposal becomes bogged down in debate, argument and ultimately delay and compromise.

Meanwhile US government debt is in crisis as it continues to soar out of control. But unlike every recession before, when government spending reduced or slowed, in the wake of the 2008 crisis, the opposite happened and it took off like a rocket:

Total US public debt in 2013 was $17.6 trillion. That’s $36,653 for every man, woman and child in the USA today. It’s 31.3% of all the debt in the world and has overtaken GDP in the US.

But other western economies are not far behind. In the UK, government debt per person is $32,553. In Germany, it is $31,945. France is $31,915 and Italy $37,956. In the most struggling western economies, the situation is even worse. Greek debt per person is $40,486, a staggering 161% of GDP.

But the worst is behind us now…isn’t it?

This wouldn’t be so frightening if western economies were showing improving domestic incomes and earnings. But this isn’t happening. In fact the reverse has been happening for over 40 years.

Despite rising productivity, in the US, real household income has hardly grown at all since 1970!:

What we see here is critical. The vital connection between GDP and household income has broken. Permanently. And this reality has nothing to do with the financial collapse and the recession. It’s been staring us in the face for forty years or more. As technology continues to accelerate productivity, relentlessly reducing production costs and thereby lessening the need for human labor, there is absolutely no reason to believe that future GDP growth will result in increased household incomes.

This situation has little or nothing to do with party politics. It’s not about left vs. right or capitalism vs. communism. It’s to do with global economic and monetary systems, energy, technology, communications and society’s expectations.

And in the west, the expectations of what the system can and should deliver have completely outstripped its abilities to meet those expectations.

Why US jobs data is meaningless - well just plain wrong actually

By Matthew O’Brien

The real legacy of the Lehman collapse wasn't an economic meltdown. (That would have happened anyway.) It was three years of wrong information about the economy.

You know something is really boring when economists say it is. That's what I thought to myself when the economists at the Brookings Institution's Panel on Economic Activity said only the "serious" ones would stick around for the last paper on seasonal adjustmentzzzzzzz...

... but a funny thing happened on the way to catching up on sleep. It turns out seasonal adjustments are really interesting! They explain why, ever since Lehmangeddon, the economy has looked like it's speeding up in the winter and slowing down in the summer.

In other words, everything you've read about "Recovery Winter" the past few winters has just been a statistical artifact of naïve seasonal adjustments. Oops.

Okay, but what are seasonal adjustments, and how do they work? Well, you know the jobs number we obsess over every month? It's cooked, in a way -- but not how Jack Welch thinks. For example, the economy didn't really add 169,000 jobs in August. It added 378,000 jobs. But that 378,000 number doesn't tell us too much. See, the economy pretty predictably adds more jobs during some months more than others.

Things like warmer weather (which helps construction), summer break, and holiday shopping create these annual up-and-downs. So to give us an idea of how good or bad each month actually is, the Bureau of Labor Statistics adjusts for how many jobs we would expect at that time of year. This doesn't change how many jobs we think have gotten created over the course of the year; it changes how many jobs we think have gotten created each month of the year.

You can see how that smooths out the data in the chart below from Johns Hopkins professor Jonathan Wright's Brookings paper. It compares the adjusted (blue) and unadjusted (red) numbers for total employment going back to 1990.

But there's a problem. The BLS only looks at the past 3 years to figure out what a "typical" September (or October or November, etc.) looks like. So, if there's, say, a once-in-three-generations financial crisis in the fall, it could throw off the seasonal adjustments for quite a while. Which is, of course, exactly what happened. The BLS's model didn't know about Lehman. It only knew about the calendar. So it saw all the layoffs in late 2008 and early 2009, and interpreted them the only way it knew how: as seasonality, not a shadow banking run.

And that messed things up for years. Because the BLS's model thought the job losses from the financial crisis were just from winter, it thought those kind of job losses would happen every winter. And, like any good seasonal model, it tried to smooth them out. So it added jobs it shouldn't have to future winters to make up for what it expected would be big seasonal job losses. And it subtracted jobs it shouldn't have from the summer to do so. You can see Wright's estimate of just how much this changed the monthly jobs in the chart below, which I've annotated with when the Fed stopped and started its unconventional policies. Notice a pattern?

The Fed has stepped on the gas when seasonal adjustments have made the recovery look weaker than it actually was. And the Fed has stepped off the gas when seasonal adjustments have made the recovery look stronger than it actually was. Now, this is certainly suggestive, but it's not dispositive. As Wright points out, Fed economists are aware of Lehman's seasonal distortions: it's why they changed their seasonal adjustments for calculating industrial production.

But there is still a question how aware the policymakers on the Federal Open Market Committee are of this. Indeed, St. Louis Fed president James Bullard said one reason they didn't taper their bond purchases in September was weak data -- and that "sometimes the jobs report can change the whole contour of how the [FOMC] look at the data." (Though, to be fair, House Republicans threatening to blow up the world economy again was probably a bigger reason for the no-taper). In other words, bad data might be influencing the Fed's bad stop-start policy.

Just how bad are the data? Well, keep in mind that the jobs report's margin of error is supposed to be about 90,000. But these post-crisis seasonal errors have almost doubled it to about 170,000. That's right: the jobs report's real margin of error has been about as big as the average jobs report itself the past few years. 

Now, the one bit of good news here is this effect has already faded away for the most part. Remember, the BLS only looks back at the past 3 years of data when it comes up with its seasonal adjustments -- so the Lehman panic has fallen out of the sample.

Here are two words we should retire: Recovery Winter. It was never a thing. The economy wasn't actually accelerating when the days got shorter, nor was it decelerating when the days got longer. It was mostly growing at the same, kind-of-miserable pace. 

Of course, we journalists (myself included) scrambled to explain what turned out to be a spurious trend: it was the pentup demand for housing or cars or ... something that had the economy looking up every winter. Eventually some Wall Street firms, and journalists like Cardiff Garcia of FT Alphaville, began to suspect something was screwy with the seasonals. But in the meantime, everyone else showed off our infinite capacity for rationalization. There's always a story you can tell, and we certainly told them. After all, stories are more interesting than disclaimers about margins of error and seasonal adjustments.

Now, seasonal adjustments might not sound sexy, but there's nothing sexier than getting the jobs numbers right. They matter for the Fed. They matter for markets. And they matter for our own understanding of the economy.

The BLS can, and should, do better.

This post originally appeared here:

http://www.theatlantic.com/business/archive/2013/09/how-bad-data-warped-everything-we-thought-we-knew-about-the-jobs-recovery/279923/

The Fed keeps the insane party going and why this is bad news for (nearly) all of us

By Neil Patrick

Investors have been stressing since the spring about the autumn prospect of Ben Bernanke printing just a few dollars less than before. Whole economies, like India, have wobbled before the threat that the Fed might print ‘just’ $75bn a month instead of $85bn.

And just as they were getting used to the idea, he goes and bails out at the last minute. This astonished almost everyone.What is going on?

Is this what Bernanke wants to leave behind?

I don’t wish to sound smug, but I wasn't as surprised as some people by this latest Fed stunt.

Why? Well primarily because the U.S. economy remains so weak that there are serious risks in actually initiating this move. Of course, the time must come when the Fed will begin to reduce its dollar printing. It seemed fair to assume that with all the advance warnings, the markets had already priced it in. And so I suspected the Fed might be much less aggressive than almost everyone anticipated.

But you can easily argue that the financial markets have become so accustomed to the Fed’s easy money policy that the quantitative easing (QE) addiction is now seriously ingrained. In other words, the stock market has consumed so much booze that the hangover will be so severe that it’s really preferable (not to say easier) to stay drunk.

However, I did think they would at least do something. After all, the market has been given so long to get used to this idea.

If the Fed actually ever intends to stop printing money, now looked a good time to make at least a small gesture in that direction. Even a 'tiny' reduction of $5bn would not have upset the markets too much, and would start getting them used to a slightly more sober environment with just a little less QE.

But no. Even with US stock markets at a record high, $5bn was too much for Bernanke. The Fed will keep printing $85bn a month…for now. And there’s no obvious prospect of this changing before the end of the year.

Markets were both stunned and cheered. Hurrah…even more free money! Gold soared. Emerging markets jumped, developed markets too. Pretty much everything jumped except the US dollar.

The Fed provided a few excuses for its inaction. It doesn't like the fact that bond yields have jumped so quickly in recent months. It’s worried about the impact of this on the housing recovery. And there’s also the threat of another big crisis over government spending, as the debt ceiling hovers ever closer.

As Paul Ashworth of Capital Economics pointed out, the Fed is probably “also increasingly concerned… that Congress could trigger a Federal shutdown within the next month.”

But if Ben’s really worried about the politicians not getting their fingers out to try and agree on something, then he should take away the security blanket of less QE. As Heidi Moore noted yesterday, he should “force the economy, the markets and Congress to think for themselves.”

So it’s all a load of shabby excuses. If this proves anything, it’s that Ben Bernanke doesn’t want to be remembered as the man who pulled the plug on the recovery too early, plunging the US into the Great Depression of the 2010s.

I guess he’d rather risk being remembered as the guy who acted too late to prevent the Hyperinflationary Collapse of the 2020s…

So what can we expect to see now?

It seems reasonable to assume from this that when it eventually happens, the actual process of tapering will be slow and gradual with the goal of minimizing any potential market disruptions.

But this is exactly where the difficulty lies. After all, everyone knows that the Fed cannot continue expanding the money supply at the current rate. Therefore, the challenge is how to taper with the least amount of market disruption.

I suspect this will include an increase in market ‘signals’ from the Fed to gauge the market’s reaction to various possible Fed actions and having contingency plans in place to try to control any unforeseen reactions and consequences which arise.

Tapering will mean higher interest rates

Most believe that tapering will result in an increase in interest rates, especially at the higher risk end of the market (like your mortgage, especially if it’s large or your earnings and credit history are anything less than dazzling). So, in this scenario, the housing market recovery could be stopped dead in its tracks.

Some claim that the delay on the part of the Fed may be politically motivated as it helps the Democrats by keeping interest rates low. Only a few people actually know the truth. The rest of us are left to speculate.

So, if the Fed does eventually get around to tapering, interest rates rise, the housing market recovery stalls, and the federal government deficit and debt spike, at election time, the Republicans will surely have all fingers pointed at the Democrats.

However, since the Republicans couldn't pull off victory in the last presidential election when the unemployment rate was at 8.2%, and given that Obama was the first incumbent in the modern era to be re-elected when the unemployment rate was above 8.0%, I’m not convinced that the Republicans would automatically benefit.

But the fact remains that higher interest rates will hurt everyone. Everyone that is except investors who rely on interest income.


So what does all this mean for most of us?

Even when the Fed does eventually begin to taper, I think they will remain “highly accommodative.” In other words, they will not raise short-term interest rates sharply for quite some time. Recently, when the Fed merely hinted that they might begin to taper, stocks sold off sharply.

So when will the Fed begin to taper? Some say December, but that’s during the holiday season, a period when the economy typically sees a brief uplift. This seasonality makes it difficult to determine if the economy is really healing or just experiencing a Christmas boost. Therefore, even though it’s possible the Fed will taper later this year, I don’t believe they will until at least 2014.

Despite the fact that many U.S. stock markets are reaching record highs, investors need to have a plan in place to protect themselves against a very possible and very nasty collapse. We are a long way from being out of the woods yet. In the interim, with GDP under 2.0%, stock values are continuing with their unwarranted inflation and I think the prospect of a severe correction in equity values just keeps on getting more and more frightening.

So investors need to keep a sharp eye on their assets and protect them against the very real threat of a severe market correction. Keep in mind that at some point, the Fed must take away the punch bowl, the party will end, and the probability of a collapse in not just stock values but other asset classes too is high. Really high.



What does this mean for investments, jobs and your financial future?

If you are an investor, hold your course. If you were happy with what you were doing before the 'vapor taper', you’ll be fairly pleased this week – almost everything you own has gone up in value (for now). Cheap Eurozone stocks still look good, Japan is still doing the business, and if you still have any, you should hang on to gold, specifically as a hedge against the real risk of systemic collapse which hasn't retreated from view.

But I wouldn't expect an easy ride in the coming months. Once the delusional euphoria of ‘QE forever’ wears off, there are going to be a lot of confused investors in the markets. As Eric Green at TD Securities told the FT: “The Fed had the market precisely where it needed to be.” This delay ” “ultimately makes that first step in the tapering process harder to achieve.(My emphasis)

It also puts a lot of pressure on Mark Carney at the Bank of England. On the one hand, Mr Carney will be pleased. The Fed’s 'vapor taper' might take some of the pressure off global interest rates in the short term. On the other hand, the slump in the dollar has pushed sterling higher. Carney won’t be too happy about that.

Anyway, what does this all mean for the outlook for most of us? Not investors with big investment portfolios but people with normal jobs and normal financial commitments. You probably know what I’m going to say.

The impact of this for business and hence jobs is hardly encouraging. The outlook for federal sector employment remains bleak and only confident growth in the private sector can offset this. But whilst share prices continue to inflate, significant GDP growth and business confidence remain elusive. So while growth in earnings remains subdued, employers will remain cautious about increasing workforce overheads.

We are likely to see a continued expansion of all the things employees dread like short term contracts, outsourcing, cut backs on management and support teams, in other words, growth in low paid, short term jobs, but contraction of secure, well paid jobs.

So we can all expect our basic costs of living to keep on rising at a scary rate amidst a really tough job market. And as I've talked about previously, slashing our outgoings, reducing our borrowings and increasing our income level through the acquisition of income generating assets is now more important than ever.

The crazy Fed party will end soon hopefully with a whimper not a bang.

USA: The jobs crisis carries on and our ‘leaders’ have no solutions

By Neil Patrick

I get really cross when I read pronouncements from regulators and bankers about the recession. The members of both groups are securely cosseted from actually feeling any of the real effects themselves. And each blames the other for the crisis. Regulators blame poor bank governance, bankers cite excessive and disruptive government interventions.

I believe both are right actually. It’s not rocket science to work out that these are not mutually exclusive. One does not preclude the other.

It’s actually a rather cosy mutual support mechanism, enabling each to pass responsibility to the other, whilst happily continuing to pursue their own self-interest.

But we need to look forwards not just backwards to restore growth to the US.

On Sunday, the former Federal Reserve Vice Chair, Roger Ferguson admitted the US economy is still suffering "lingering effects" from the financial crisis. Growth he said was too "modest" to bring down unemployment or increase labor force participation at a satisfactory pace.

(Well said Roger; we hadn’t actually noticed that).


We need to remind you who the bad people are (and that’s not us).

Of course, Ferguson did not offer any monetary or fiscal policy prescriptions for accelerating economic growth as he accepted the National Association for Business Economics' annual Adam Smith Award. Instead, he focused on the need to restore public trust in the financial sector and to improve corporate governance.

(That’s right Roger, this recession has nothing to do with out of control government debt, it’s those greedy heartless bankers we need to blame).

Ferguson has been mentioned as a possible successor to Ben Bernanke. Currently president and CEO of financial services firm TIAA-CREF, Ferguson told the NABE's annual meeting "we have continued on a path of modest growth in the U.S., and while we all would wish for more, it is a far better scenario than we might have imagined five years ago today."

(That’s really great news Roger, thanks).


Of course we cannot risk upsetting the (massively overvalued) equities markets…

He also said the "still-modest growth" pace - 2.5% in the second quarter but less than 2% so far in the third quarter - should not be viewed as acceptable. He said, “it serves as a reminder that today, five years on from some of the darkest days of the financial crisis, we continue to deal with its lingering effects."

"The unemployment rate remains stubbornly high and labor force participation low. The markets have been volatile in the face of concerns about the Fed's tapering plans."


…much better to continue devaluing the dollar

Although he mentioned concerns about the Fed "tapering" its large-scale asset purchases, Ferguson did not say how he thinks the Fed should proceed in scaling back its $85 billion a month in "quantitative easing" or how monetary policy could be applied to stimulate growth.

Rather, he said "it would be wise to turn our collective energies to ensuring that we never have to endure a crisis like that again."

(That’s right Roger, we need lots more regulation to ensure we only get the right sort of growth).


And the solution is…lots more regulation

Although reams of financial service regulations have been implemented in connection with the Dodd-Franks Act, with more to come, Ferguson said "they are not enough."

(No that’s right Roger, our financial institutions need lots more government bureaucracy to make sure they cannot ever again become a burden to the government but only fill the government coffers with lots of ‘good’ money).

"It's equally important to further improve corporate governance at financial firms," he said. "We need stronger and more effective corporate governance approaches, particularly at the institutions that have been deemed systemically important.

The need for better "governance" in the financial services industry is underscored by what he called "a widespread lack of trust" in financial firms and by Americans' "angst" over their retirement prospects.

(Erm…isn’t that the same lack of trust that people have for politicians and regulators Roger?)

Ferguson said "it's vital that Americans regain trust in the financial services industry, because the industry is simply too important to our economy and our global competitiveness to be looked on so warily by so many people."

In saying "weak corporate governance" lay at the root of the financial crisis, Ferguson was referring to, among other things, commercial banks' increased "involvement in risky trading activities; growth in securitized credit; increased leverage; failure of banks to manage financial risks; inadequate capital buffers, and a misplaced reliance on complex math and credit ratings in assessing risk."

(I accept these are huge failings, but if you constantly point them out to the media, how will that help restore the much needed trust you talk about?).


We’ll tell you how to run your business

Ferguson highlighted recommendations of the Group of 30, an international forum of public- and private-sector financial leaders of which he is a member:

"First, we urge boards to take a long-term view that encourages long-term value creation in the interest of shareholders ... "Second, we urge management to model the right kind of behavior and to support a culture that promotes long-term thinking, discipline, sound risk management, and accountability ...

"Third, we urge regulators and supervisors to take a broader view of their roles, one that includes understanding the overall business, strategy, people, and culture of the firms they oversee ...

(Well said Roger…even though this is the only new and constructive thing I’ve heard you say).

"And finally, we urge long-term shareholders to use their influence to keep companies honest about performance and focused on improving governance."


I apologise for my mockery of Mr Ferguson,but…

Actually I am being hard on Mr Ferguson here. But he's more than big enough to take it I think and he's the one winning the awards not me. I think most of the things he describes are good aspirations. But great vision is one thing, effective execution is totally another. And little of the above actually helps solve the problem that is slowly killing the US every day it continues.

We need at least as much focus on driving an equitable recovery and household income growth as we do on looking backwards and learning the lessons of the past. And that means a really constructive dialogue between government and business, not just a witch hunt and lots more regulators and rules.