10.13.11
Difficulties Around the Globe
The latest employment statistics give some hope to the belief that the US economy may not be sliding into another recession This is only a small comfort however, given the net loss of over 6 million jobs from pre-recession amounts (see below graph). The dour situation not only exists in the US, but abroad as well. Sovereign debt concerns in Greece, Italy and some other countries have spread to the European banking community and even more solvent governments that have guaranteed bank asserts. And in China, private sector erosion and loss of faith in accounting and governmental statistical standards is definitely underway. Some economists are of the belief that global economic problems are now being felt domestically, slowing down the tepid pace of the US recovery.
All of these items points toward a long and slow recovery from a financial crisis that has become disparate and world-wide in nature and scope.
On the Domestic Labor Front. Nonfarm employment increased 103,000 in September with the unemployment holding at 9.1%, but the underemployed increasing to 16.5%. Source: DOL, 10-7-11. 6.6 million jobs remain lost at the national level however. In the local area, 61,000 net jobs have been lost since employment peaked in Feb. 2008, with the average duration of unemployment extending to 40.3 weeks. Source: St. Louis Post Dispatch, 9-25-11, at E1. At the federal level, the Obama Administration has been pushing a jobs bill to be paid by taxes on individuals making more than $250,000 per year. The bill has drawn significant partisan fire. New jobless claims decreased by 4,000 in early October to 414,000 on a four week moving average basis. Seasonally adjusted initial jobless benefits are now at 401,000. Source: DOL, 10-6-11. This suggests that employment may be stabilizing after a drop in jobs in August and early September, possibly again coming close to recession.
Employment levels in thousands from 2000 to 2011
The Spreading Contagion in Europe. With continuing pressure on European sovereign debt loads, the major casualty may be the European banking industry, and possibly even governments with firm economic foundations. Since banks overseas tend to hold large amounts of sovereign debt of many EU nations, a default by any one nation on the continent may set off a chain reaction in the banks. The German and French governments, as well other Euro-zone entities, have been working of a recapitalization of banks and unsustainable debt in Greece. Some governments also have issued guarantees of redemption on these banks, and this has now resulted in Moody’s placing Belgium governmental credit rating under review. Source: WSJ, 10-11-11. Some municipalities in the US may even be affected, with borrowing costs rising from a loss of access to financial credit in Europe. Source: WSJ, 10-5-11.
The Continuing Saga in China. Loss of credibility in Chinese accounting standards and government statistics has severely weakened demand for Chinese financial securities in the last few weeks. Several accusations have been leveled by investors of Chinese private assets as well as public debt. The situation has deteriorated to the point where national sovereign wealth fund is buying shares in banks in order to stem a free fall in share pricing. Source: WSJ, 10-11-11. The loss of market-level credence in Chinese assets is rather ironic, given that government’s criticism last year of US deficits destabilizing bond valuations.
Meanwhile, Chinese wage inflation has been increasing since 2006, and food prices are also sharply rising. The yuan currency has increased 30% against the US dollar since 2005, but this has not deterred US Trade representatives from recently questioning hundreds of subsidies by the Chinese in possible violations of world trade rules. Additionally, a bill has now passed the US Senate which would penalize China for manipulating its currency to artificially low levels in order to stimulate Chinese exports.
Regulatory and Litigation Response. In the wake of the financial crisis commencing in 2008, numerous governmental proposals have been under consideration as well as associated litigation. The Volker Rule, which was recently leaked onto the Internet, would effectively ban proprietary trading at banks and financial institutions using their own capital assets. A recent settlement of a shareholder action against a bank may limit investment banks form offering “staple financing”, or buyer financing when they also advise the seller. S&P is under pressure for previously evaluating financial products on the basis of typical “or dummy” assets held rather than worst case scenarios. And, federal and California state officials are proposing a $25 Billion settlement against certain financial institutions for their foreclosure practices. The fall-out is likely to continue for some time. Source: WSJ, 10-7-11.
