Unemployment Drops, but the Big Picture Still Isn’t Pretty

Tim Bean

10/5/2012

 

Being the first Friday of the month the monthly employment report was released, 114,000 jobs were added in the month of September, and the unemployment rate dipped below 8% for the first time since January of 2009, to 7.8%.  That is relatively good news – unless you are Mitt Romney.

Then there is the fact that the stock market has been going up; and because of the employment numbers above, the markets are up today too (at the time writing this).  Though lately it seems that the markets have been going up regardless of what kind of news is out there, good, bad, or none, the general stock indices have gone up.  That’s relatively good news too – unless you are Mitt Romney.

There is a strong correlation between stock market performance and the re-election of a sitting President (read this article for more on this), and given the above information it is hard to say with too much certainty that Mitt Romney will be successful in his bid to unseat President Obama from the Oval Office.  It will be a tough task to continue hitting the “are you better off than you were four years ago” button when we have finally been treated with a better than bad employment report, and the Dow Jones Industrial Average tickling its all-time high of 14,198.

Obviously this does not mean that the GOP should just fold its tents and call it over, but it does point to a very difficult and uphill road for their Presidential candidate Mitt Romney to haul; regardless of how well he did in the previous debate.  Quite honestly that employment report has taken a bit of the wind out of the sails for Mitt, and has to at least pump the brakes on whatever momentum he gained from Wednesday’s debate.

If you are a Romney supporter then you must be a little torn, because you should be glad to hear that fewer Americans are on in the unemployment line, but at the same time you are probably a little concerned knowing that President Obama now has something to point to and say, “See, I told you things are getting better.”  I would hope that very few people out there would root for poor economic news, just so they candidate they like the best has a better shot at winning the election.  Sadly, I am sure there are some who would do this.

The thing about the recent rise in the stock markets though is that it is fueled by the Federal Reserve’s monetary policies, and in artificially keeping interest rates low.  By their continued efforts to hold interest rates low they are punishing those who wish to put money into savings, and those who are on a fixed income; specifically retirees.  The Fed’s continued printing of money also lowers the purchasing power that each dollar has, thus making things appear to cost more; in short, it is inflationary.  I guess to put it in the simplest of terms, the Federal Reserve’s actions are making the average working person poorer, because we all will have to work longer and harder to earn enough money to keep up with the artificially created rise in product prices.

We also need to consider that eventually market forces will exceed the Federal Reserve’s ability to keep interest rates artificially low.  Think of what they are doing with interest rates like trying to continue to hold a beach ball underwater by sitting on it, eventually you will fall off of it and when you do the beach ball rockets to the surface.  The Fed cannot continue to purchase treasuries (U.S. debt) forever, which is just one of the ways that they work to keep interest rates low.  Through all of the quantitative easing exercises they have done, and all of the printing of dollars too, America’s credit rating has been lowered – twice.  Uncle Sam used to have sterling credit, and now, not so much, going from AAA to AA minus; and with each lowering of Uncle Sam’s credit score, the subsequent credit reports say that the outlook is negative; meaning that the agencies who monitor such things don’t have a warm and fuzzy feeling about Uncle Sam’s ability to improve his financial situation anytime soon.

So, what does that mean?  Well, what that means is if the trend continues of printing more money and all of the other voodoo economics that the Fed does, then at some point there will be less demand for U.S. treasuries (debt) and those who hold a substantial amount of U.S. treasuries (think China) will start selling the treasuries that they hold, which will drive interest rates higher. And thus make it harder for Uncle Sam to continue financing his $16 trillion and growing debt; essentially the Fed will fall off the beach ball.  When this happens it will not be funny, and it certainly won’t be good.

As it stands right now though Uncle Sam owns the best house in a bad neighborhood; meaning that the rest of the world’s financial situation looks a lot worse than America’s.  There is also a symbiotic relationship between China and the U.S.  They make the goods that we buy, so they really kind of have an interest in their continued buying of our debt, for fear of killing the goose that laid the golden egg.  There will be a tipping point though, and it is anyone’s guess as to what, or when that tipping point is; and it will make the recent recession of 2008 seem like a walk in the park.

So, yes, today’s employment report is good news – in the short term – but the big picture, long term outlook for our country isn’t so rosey.

It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.  (Henry Ford)

In central banking as in diplomacy, style, conservative tailoring, and an easy association with the affluent count greatly and results far much less.  (John Kenneth Galbraith)

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