The Depression Is Becoming Greater

June 29, 2009 – I find the accompanying chart to be very interesting, and it is probably one of the most striking and informative charts on economic activity that I have seen in a while. It was first brought to my attention by Casey’s Charts, a publication of Casey Research (http://www.caseyresearch.com/).

The chart presents the actual US unemployment rate (the red dots) plotted against forecasts by the Obama economic team when they were arguing the need for a stimulus plan. It was their contention that the stimulus plan was needed to create jobs, and that unemployment would soon fall once the economic boost they expected from the stimulus took effect. Clearly, their forecasts are far off the mark. Their forecasts cause any reasonable person to question the competence of the economic team, or its integrity. Perhaps they knew the real picture and simply refused to state it.

Regardless of the reasons they got it so wrong, this chart is just another example why no one should rely on government pronouncements. Nor for that matter should government reports be relied upon, including the June unemployment report to be released later this week.

Early information that I have seen prepared by private, non-government forecasters indicates expectations for another jump, and further, that unemployment will climb into double-digits sometime during the summer. Actually, unemployment by some measures is already in double-digits. Like all government reports whose reliability must be questioned, the unemployment report is sugarcoated to be put in the best possible light.

The Bureau of Labor Statistics (BLS) actually prepares 6 unemployment reports (U-1 through U-6), but only the headline report gets covered by the mainstream media. That is the 9.4% unemployment rate for May, which can be seen on the accompanying chart.

A more meaningful report would be U-6, which according to the BLS shows a 16.4% unemployment rate. Why the big difference compared to the headline report?

The U-6 report includes all unemployed persons. The headline report excludes several categories of unemployed or underemployed persons, obviously to make the unemployment rate look better than it really is.

According to the BLS, those excluded from the headline report “are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.” (www.bls.gov)

A 25% rate of unemployment is often said to mark the bottom of the Great Depression. The U-6 report is rapidly approaching that mark, and I do mean rapidly. Just one year ago the U-6 report showed a 9.4% unemployment rate, which is still terribly high but obviously a lot better than where it stands today.

Even though the federal government is doling out money left and right, unemployment continues to climb higher. That is a critically important observation. With unemployment still rising, economic activity must still be contracting. It cannot be otherwise because employment is the linchpin to economic activity. If people are not working, economic activity declines.

In recent letters I have been warning about hyperinflation, and there is a meaningful parallel to what is happening in the US today compared to Weimar Germany when it was on the cusp of hyperinflation in the early 1920s. Unemployment there continued to climb, despite the German government’s best efforts to stop it. Its numerous spending initiatives did not improve employment or economic activity. The only consequence was to worsen its budget deficit, causing the government to borrow increasing amounts of money that eventually was beyond the market’s capacity. When that point was reached, the Reichsbank simply bought the government’s debt and paid for it with printed currency, initiating a vicious cycle that eventually resulted in the hyperinflationary collapse of the Reichsmark. Sadly, the US government is repeating the same mistake.