US depression returns

The past week has provided a steady stream of dismal news on the US economy. Let’s start with the housing market, which, after a brief rebound, now appears to be double dipping, with the major indices hitting new post-bubble lows. In the words of S&P, which is not exactly given to hyperbole, “home prices continue on their downward spiral with no relief in sight.”

In the worst markets such as Miami, Las Vegas, and Phoenix, Arizona, prices have already declined more than 50% from their peaks. And even in some markets that have held up well (New York City for example), banks are under increasing pressure to foreclose on mounting numbers of delinquent borrowers. Some argue that this points to disaster ahead.

Ultimately, the housing market is not going to recover until employment picks up. And on this front, there is further cause for concern. Data last week showed that the US economy added only 54,000 jobs in May, while the unemployment rate rose again, from 9.1% to 9.2%. Just to put the abysmal numbers in context, a net increase of 54,000 jobs isn’t even enough to keep up with natural growth in the US labour force, which averages about 90,000 people a month. The chart below from Calculated Risk shows just what an unmitigated disaster the current “economic recovery” is from an employment point of view.

According to last week’s data, the average unemployed person in the US has now been out of work for almost 40 weeks, the longest since records began in 1948. So how long is it going to take to dig ourselves out of this hole? The chart below from Zero Hedge shows that even if employment growth was to return to 250,000 a month (a fairly heroic assumption given all the talk of slashing public spending), it’s going to take another 7 years or so to replace all the jobs lost since 2007.

It’s not a pretty picture. Now, I have written about this before in this blog, but it is absolutely astounding that there is not more debate in US politics and the mainstream media about the scourge of mass unemployment.

Instead of acting now to mitigate a real problem that actually exists (mass unemployment), we are caught up in a nonsense debate about an entirely self-imposed constraint called the “debt ceiling”. It’s looking more and more like we’re heading towards a 1937 replay.

Latest posts by _EcoRon_ (see all)


  1. What makes you think that unemployment should decline? Spain has an unemployment rate of 21.3% and Greece has 12.9%.

    Credit growth is unlikely to grow significantly, given recent events. So there is unlikely to be any significant source of new money.

    Even the low exchange rate does not help because the country has a floating exchange rate system, designed to isolate the domestic economy from foreign stimuli.

    • Hi Leigh. Not quite sure what you’re getting at here. What do Spain and Greece have to do with US unemployment?

      I agree about credit growth and the exchange rate. What I’m saying is that given these factors, the unemployment problem is only going to get worse if they push ahead with major budget cuts now.

      • Hi
        I agree. All I was trying to say was that we should not assume that there are forces in the US economy to reduce unemployment. The economic forces of countries such as Spain and Greece have driven their population to live with higher rates of unemployment.

        Budget cuts would have the effect of pushing US unemployment to the levels of Greece and Spain, rather than lowering unemployment.

        • No worries. I completely agree. It’s hard to see credit growth picking up again any time soon. I think Richard Koo’s “balance sheet recession” view is pretty spot on. We won’t be getting out of this mess in a hurry.

          • I agree we will not be getting out of this mess in a hurry.

            But it is a pity. It is such a simple problem to get around. It is not the hardware that is the problem; it just requires tweeking the software (monetary)side if the economy for it to prosper.

  2. …or we could just consider and except that one cannot escape the consequences of misallocation of capital and value…

    …and that deflation is the only answer…

      • I guess I should be less casual about my use of ambiguous terms, sorry…

        In the context of assuming that little to nothing can effectively be done to escape the consequences of economic decisions made in the past, I am suggesting that deflation (not targeted inflationary “growth” to out-grow debt and its obligations, as is the current politico-economic paradigm) is a better way of dealing the systemic debt problems.

        ie. destroy the debt and destroy some money.

        But “allow” it occur and stop trying to fight what cannot be stopped – as either deflation or inflation (or really nasty bi-flation) are ultimately going to wreak the “necessary” destruction of mis-allocated value anyway.

        In this sense, deflation is the path of least resistance, most efficient destruction of mis-allocated capital, and (I assert) is of shortest duration, compared to alternative scenarios of outright inflation and bi-flation.

        Deflation is also the most “fair” (moral, ethical, social, political issue) as it involves the minimum (of the range of scenarios) inflationary wealth transfer from one “group” to another.

        So, in summary, to answer “How would deflation be a solution”…it is because I assume that misallocations of capital/value/etc is the “problem” (economically speaking), and, since deflation’s primary action is to destroy misallocated capital/value, then deflation is “a solution”

        …and, I advocate, the “best” solution, for the sorts of reasons outlined above…

        /takes a breath

        Hope that made sense, was actually on-topic, and wasn’t too verbose!!!