jobs and why the economy won't recover anytime soon

If you think the economy is on the mend, think again. Never mind the upbeat news reports from Ford and the fact that Cisco will hire 2,000 people. Remember that Cisco laid off close to 10 times that number in 2009, not to mention the cuts in pay and other restructuring efforts. Cisco's CEO is just trying to sound optimistic and ride the wave of profits for a while longer so the well paid executives have time to cash in their options and collect their bonuses.

Let me, once more, repeat the basic dilemma. Over half the American households have zero net worth. They are worth nothing. They are living from paycheck to paycheck and that is all that is keeping them off the street. Never mind that they were probably stupid enough to worry about the deficit, and raise their voices against healthcare reform, so that if they get ill, they will be on the street for sure. They are also getting older like so many Americans and have no retirement benefits either. What that means is that things will get worse, a lot worse, before they get better.

However bad that may sound, widespread poverty alone is not enough to cause an economic crisis. Unless the economy in question is dependent on consumer spending. Unfortunately, two thirds of the US economy is directly related to consumer spending. The real wealth producing jobs and skills have been exported to China, because it was cheaper to do so.

So what do you get when you need consumers to spend and those consumers have no money?

But wait a minute! What about the fabulous stock market rally of 2009?

Here is a very simple explanation for this bizarre phenomenon. Remember that a fairly large group of people made a lot of money in the years prior to the crisis. As a matter of fact, because of the wealth shifting that forms the basis of our economy, these people are extremely well off.

When the crisis hit, they did not want to be seen as indifferent, or out of touch, so they curtailed their spending along with everyone else. They also pulled their remaining money out of investments for fear of losing more. Yes, they did lose, but their losses -unlike those of the rest of America- were paper losses only. You know, the ones that give you tax breaks.

For a while that worked fine and the rich suffered alongside the poor. We won't detail the hardships they endured, which were no doubt heart-wrenchingly terrible, but focus on what came next instead. By about mid-year the rich were tired of suffering so they started looking for ways to put their money to work. They also exhaled and started spending. There is only so much suffering the well-off can partake in before they get tired.

So we got a little rally.

Now consider this. The majority of foreclosures in both residential and commercial real estate are still to come. More people will lose their homes, home prices will fall more and more families will go underwater leading to deteriorating fundamentals -how is that for econo-speak?

Job losses are mounting and even the most optimistic, non-delusional, experts predict things won't get better before year end. Meanwhile Obama has lost his shine, and the Republicans are eager reduce the deficit that was started by the war in Iraq, and increase the tax cuts for the rich. That can only lead to more job losses.

Forget the deficit. If we can't get jobs the deficit will only keep growing. We can't save our way out of this hole as the Republicans seem intent on doing. We have already tightened our belts to no avail.

Without income, there is no solution. And unless someone is willing to spend big time, there won't be jobs to produce the only possible solution: income. See a vicious circle?

dead cat bounce

Investors have a cute name for a short term rally that follows a steep and prolonged decline. It is called a dead cat bounce. The idea is that even a dead cat will bounce once or twice when you drop it from a high enough place. Unlike a live cat however, it will stay down after that. 

What we are seeing in the housing market now, is a version of the infamous dead cat bounce. Housing rebounded somewhat in December. Some too-eager investors, hoping for a quick turnaround no doubt, are snapping up properties at what they think is a bargain. But is it a bargain? Will the market recover in 2009? Don't bet on it. 

While housing was the proximate cause of the crisis, much like an infection that kills a patient with lung fibrosis, it wasn't the real problem. The real problem is that Americans have been spending for decades like there was no tomorrow. Now their net worth has fallen to zero or below. They are done spending. 

For an economy that depends on spending for 3/4's of its bulk, that is not good news. Layoffs will continue and continue to grow. The crisis has now spread beyond housing into job losses. These losses will then precipitate another round of foreclosures and another drop in housing prices. This vicious circle will continue for a while to come.

As a matter of fact, almost 70,000 layoffs were announced yesterday, but investors chose to ignore these. Why?

One was the Pfizer-Wyeth merger. Mega-mergers like Pfizer-Wyeth always stimulate the market for a variety of reasons. But for those smart enough to look past the headlines, the merger showed none of these healthy signs. All it illustrated was how badly broken this economy is. Pfizer had trouble getting loans, even though it reportedly has $30 billion in cash. Pfizer did not want to use that cash, because in doing so it would have had to bring it into the country and pay taxes on it. By lending Pfizer avoids taxes and gets a tax break on interest to boot. So much for tax cuts!

The second reason is that layoffs often mean higher profits. Investors see layoffs as trimming fat, a move that helps the bottom line. But these layoffs are no such thing. These are layoffs caused by lack of demand. These are desperate layoffs that are meant to keep companies afloat in adverse conditions.

If I could suggest one thing to Obama, it would be to create jobs and to do so directly by starting government projects. I would only caution that it be done wisely. Not to beef up our highway infrastructure, but to dismantle it and to replace it with a more sensible, public transportation-friendly infrastructure.

Let's not invest in "green" (or any other color) energy. Let's instead invest in using less energy. Let's bring back repair jobs that allow people to keep items around longer. Bring back the tailors, the shoemakers, the grocers. It is not Walmart we need (ironically enough WM has been doing very well and that should worry us a lot!), it is local grocery and retail stores. Not suburbia and malls, but local walk-to businesses. No cheap China-goods, but locally produced artisan products with lasting value.

Not vitamin D, bran, or for that matter melamine enhanced mass-produced food products concocted together in far away places, but local organic produce and meat. Not cherries and watermelons in winter, but seasonal fare. The list is endless. Let's create jobs that matter, Mr. Obama. Not cogs in a big churning, wealth shifting, and value destroying, gas-guzzling monster.