Bill Bonner, "On the Losing Side of a Credit Battle"
"On the Losing Side of a Credit Battle"
by Bill Bonner
by Bill Bonner
“Many lost jobs in US will never come back…” says The Wall Street Journal. Need we explain why? Because they’re not lost, waiting to be rediscovered. They’re not missing in action, to be repatriated after the fighting stops. Instead, they’re dead. Gone forever.
There have been 7.2 million jobs lost since recession began. Many of these jobs were Bubble Age jobs. Millions of people, for example, earned their money in ‘housing.’ They were putting up houses in the sand states…or building granite countertops…or selling, flipping, financing the houses. Those jobs are gone forever. Never again in our lifetimes are we likely to see such an explosion in the housing industry. Sure, people will still build houses…and do all the other work involved in the traditional housing industry. But it will be only a fraction of the industry it was in the 2002-2007 period.There were also all the jobs involved in selling things to people who didn’t need them and couldn’t afford them. Labor was needed at every step of the way – manufacturing (perhaps in China), shipping, stocking, retailing, fixing, and financing the stuff. And don’t forget all that mall space…and all the trucks…and all the other things that supported the over-consumption of the Bubble Age. And now the Bubble Age is over. It will not come back, no matter how much cash and credit the feds pump into the system. (Not that they can’t make things worse…in a BIGGER bubble…but that is not yet in sight.) In The Wall Street Journal yesterday was an item about Las Vegas. The casinos are folding up their expansion plans, says the WSJ.
But the big news yesterday was that the service industries are growing again…at least that’s what the latest figures show. This news so delighted investors that they bid up Dow stocks 112 points. Oil rose above $70. Gold posted a $13 gain. Don’t get too excited about that rise in the service sector. Everything bounces…even dead jobs. Dead jobs bounce; they still don’t get up. After months of decline, it may be true that the service industries have had a rebound, but don’t expect them to begin recovering the stamina and strength of the bubble years. A few more people may have gotten jobs serving drinks in Detroit’s bars last month, but it is not likely to turn into a durable recovery of the job market.
In the 1990s, the US economy added 2.15 million new jobs every year. It needed to add at least 1.5 million or so just to remain at full employment – that is, with about 5% of the workforce unemployed at any time. To put that number in perspective, this year the economy as LOST 2.5 million jobs, just in the last six months. Those jobs aren’t coming back. As we keep saying, this is a depression. It is a major correction, in which the economy needs to find new jobs…because it can’t continue to do what it has been doing.
New jobs are typically created by new businesses – small businesses that are growing. Big businesses already have all the market share they’re going to get. They also typically have all the employees they need. Then, when hard times come, they discover that they don’t need all that they have, so they cut back. Job cuts from large businesses is what you expect in a recession. But this time it is different. This time, big businesses have let people go by the million. But small business has not been hiring them either. So not only is unemployment growing…the trend shows no signs of coming to an end.
Economists are reconciled to high unemployment levels for a long time. The head of the IMF says unemployment might peak out in 8 to 12 months. Even if that were true, it will be a very long time before the job market recovers. Just do the math. We’ll keep it simple. The economy needs, say, 1.5 million new jobs per year. Instead, over the last two years, it lost 7.5 million. Now, it has to stop losing jobs…let’s just say that happens a year from now. By then, the total of jobs lost may be near 10 million. Plus, there are the new jobs it needed – but never got – over that 3 year period. That’s another 4.5 million. So, the total will be about 14.5 million jobs down. Then, let us say, because we are in a generous and optimistic mood, that the economy then begins creating jobs again…at the rate it did during the ’90s. What ho! After five years, that still leaves the economy more than 10 million jobs short, doesn’t it?
In order to get back to full employment, the economy has to surprise us on the upside. It has not merely to return to the growth levels of the ’90s…it has to surpass them. It needs to grow so fast it creates 3 million jobs per year. And even then, it would take nearly 10 years to get back to full employment.
Pretty grim, huh? Well, don’t worry about it. It won’t be like that. It will be worse. Keep reading…
“Uh…Bill…what do you mean, ‘worse’?” Glad you asked.
In the typical post-war recession, jobs are lost…then they are recovered when the economy gets on its feet again. But this happened in the credit expansion of the ’45-’07 period. Each recession was just a pause, when the economy was catching its breath. Then, it was off again…in the same direction – up the mountain of credit. This time, it’s not a typical post-war recession. It’s something different. Now, we’ve reached the peak. We’re coming down the other side…wheee! Look out below!
Now we don’t need all those people building houses, stocking the shelves and selling things. We don’t need such a big financial industry either. Now, people want to get rid of credit, not get more. And the businesses that were goosed up in the credit bubble are now deflating fast. They’re not just taking a break. They’re lining up the jobs and shooting them in the back of the head. Those jobs are gone. In a ‘normal’ recession, jobs reappear because the economy continues in the same direction. In a depression, it changes course. Debts are paid off. Spending goes down, more or less permanently. The economy actually contracts…until consumer debt is once again down at an acceptable level…or a new model for growth can be found.
The Wall Street Journal mentions a statistician who was making $100,000 a year. He too is a victim of depression. His job has been outsourced to India. Businesses, with less revenue coming in the door, must cut costs in whatever way they can. Labor is the single biggest item on most firms’ ledgers. They will reduce it however they can. And once the change is made, there is little chance that the job will come back. It is a little like a battle. In an attack, troops often get separated. They are ‘lost’ – for a while. Then, the winning side is able to recover its missing troops as it advances. But the losing side gives up its troops forever. They are stuck behind enemy lines and cannot rejoin their units.
We are now on the losing side of a credit battle. Having gained so much ground, and so many jobs, in the advance, the United States is now giving them up.
“I expect over the next several months, mainstream pundits and forecasters will start worrying about tepid hiring, even as the pace of job losses slows,” "Strategic Short Report’s" Dan Amoss chimes in. “As we ‘lap’ the 2009 corporate cost cutting by early 2010, and top lines fail to rebound, earnings estimates will have to come back down. I’m amazed at how many sell-side analysts are modeling V-shaped recoveries in 2010 earnings. Most stock prices are disconnected from reality.” And here is a story we foretold years ago. Private equity was mostly a fraud, we said. Sharp operators bought companies for more than they were worth, loaded them with debt, collected huge fees, and then sold them back to the public or to other private equity firms. Come the revolution, we mused, these deals would go bad. Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. Well, the revolution has come. The deals have gone bad."
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