Friday, April 29, 2011

CWP=D: Part I - Where Are The Jobs At?

This is the first of a multi-part post on CWP=D (consumption without production equals debt) that will hopefully provide some clarity into how we got into this current mess (high levels of debt and unemployment) we are in. The reason for the multi-part structure? I am not exactly sure where this is going.


What I do know is the last section will hopefully be “What Does it All Mean for Investing?” and follow up sections may include more on the Federal Reserves misunderstanding of NAIRU, “forced” consumption, misallocation of capital, the subsequent rise in private then public debt, and what it means for future growth.

Let’s see how this goes…

Part I: Where Are The Jobs At?

The chart below outlines the dramatic shift in the Chinese labor force from 1999-2009, which along with a number of mercantilist emerging economies dramatically shifted the global labor force. Specific to China, the number of workers within primary sectors (defined as sectors that extract or harvest products from the earth) declined, while the number in secondary sectors (sectors of the economy that manufacturer finished goods) and tertiary sectors (those that provide services to the general population) spiked. To put this in perspective… that 50 million increase in the secondary sector labor force is equal to roughly 40% of the ENTIRE U.S. labor force.



Some may argue that the increase in secondary labor was caused by U.S. demand for Chinese goods rather the Chinese riding on the coat tails of the U.S. consumer, but either way it is clear from the following two charts (trade balance and currency reserves) that China's secondary workforce increased not only to meet aggregate demand coming from China, but global (and U.S.) demand as well.

U.S. – China Trade



Chinese Currency Reserves



The impact of a huge supply shock in any good or service (all else equal) should be a substantial decrease in the price of that good or service. In the case of U.S. employment, which tends to be sticky (i.e. prices have a hard time going down), the impact would also mean a decline in the quantity of U.S. labor demanded by the global economy.

As I will outline in section two, the Fed's misunderstanding of the source of the reduced demand for U.S. labor (i.e. the jobless recovery experienced early last decade) led to a monetary response that emphasized easy money to stimulate aggregate demand, when aggregate demand from the U.S. was not the issue.

To Be Continued....

Source: Haver Analytics