Marian Spiral Fractal by Bryan Evan

Marian Spiral Fractal by Bryan Evan

Well, we’re up to six months of job losses (pdf). The long term carnage in manufacturing had spread to construction some time ago. It has now been joined in administrative services, with admin and support services shedding over 70K jobs. The temp market is drying up, but so is office hiring of all kinds.

What hasn’t shown up on this report, but will be showing up in months to come is a contraction in bad jobs. Starbucks, for example, will be closing 600 stores. That’s a lot of jobs. This won’t be isolated to Starbucks; retail and hospitality of all kinds will start contracting as people shop less and eat in more. With consumer credit being restricted by banks, with jobs being lost and with fixed expenses for heating, gasoline and food going up, the consumer is not going to be able to keep up the spending pace. This crisis didn’t start out as a classic consumer demand recession, but it’s about to experience some significant consumer demand contraction nonetheless.

Governments increased hiring last month, but government hiring is also going to come under significant pressure. State revenues dropped 5.3% from last year, they will continue to drop. Municipal tax bases are going to be absolutely annihilated by the real estate meltdown, which still has at least 2, and possibly 4 years to play out and which will see declines of at least 20% on average before it’s done. As real estate is revalued, tax assessments will crash. Municipal and state governments will find themselves with a lot less money than they’re used to and will be forced to make cuts.

Meanwhile the Feds are going to have lower receipts than they expected. The carnage in the markets is going to lead to a huge decline in capital gains taxes and unemployment will lead to lower than expected taxes on wages and payroll taxes. If the Fed starts increasing interest rates to fight inflation, interest rates will go through the roof. Indeed, even if it doesn’t, the market is likely to start demanding higher interest rates on federal debt in any case. So financing costs will be increasing, even as receipts are declining. If that sounds familiar to oldsters it should, it’s what caused the huge deficits and debts of the late 70’s and the 80’s – declining real tax income plus massively increasing debt servicing costs. Rock, say hello to hard place.

The correct, though counterintuitive, fiscal response to this at this time, is to increase taxation, especially progressive taxation and, at the same time, to trim expenses in areas where there is excessive pork (the military, health care). You then take that money and you use it for a smart infrastructure stimulus. Obama is actually planning to more or less do that, but his plan won’t be sufficient (there’s not enough cutting, not enough of a tax increase, and not enough of a stimulus).

All of this before we get to oil, and the effects that it is having on the economy by causing an inflation/deflation riptide, where fixed costs for food and fuel are rising even as the economy experiences deflation in housing and other assets, and soon, deflation in real wages.

We’ll come back to the oil issue, and how oil is being driven higher by unmanaged demand, dangerous monetary policy and free market fundamentalist beliefs in a later piece.

For now though, things are going to get worse before they get better. So batten down your hatches, what we’ve seen so far is only the hurricane’s outriding winds. We’re far from the eye of the storm yet.

Related posts:

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  3. The Downturn is Over for Wall Street, but Main Street’s is Still Going On
  4. Surprise: No Jobs Means No Consumer-Led Recovery
  5. Seance on Wall Street