Agora Financial’s Rude Awakening

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• The Dow’s crazy rollercoaster ride and a whopping daily average,
• The real cause of all this joblessness and why it should be obvious,
• A hairdresser, a fireman, six words to look out for and plenty more…   

Joel Bowman, reporting from back in the Persian Gulf…

Prices go up…and prices go down. Lo and grab hold!

While your Rude editors were embarking on their gastronomic pilgrimage around the west coast of France, the market was busy treating investors to a rollercoaster ride of gut-wrenching falls and mind-boggling rallies. Fortunately for the investor, more days this month have ended in the black than in the red…so far.

During the past ten trading sessions, the Dow Jones Industrial Average posted a total of 7 triple digit moves. Six moves exceeded 200 points in magnitude. Two days topped 300-points. We hope you packed the Pepto-Bismol!

A one-month snapshot shows the Industrials Average has piled on more than 500 points, or about 4.5%. Not bad. In fact, if the three-month snapshot did not reveal a loss of nearly 8%, it would be worth rejoicing. And if we weren’t down over 11% for the year, a congratulatory back slap or two might even be in order.

Still, a rally must begin somewhere, right?
  
One might be forgiven for thinking that sound footing for such a rally should begin with job growth in meaningful industries. That is to say, in manufacturing and the production of tangible goods. Alas, this has not been the case. Job reports of late have been dismal. In fact, the news out of Washington at the beginning of this month’s tremendous rally could hardly have been worse for the working man. Figures for July revealed the seventh straight month of job losses.

“[T]he overall loss of 51,000 jobs reported in Friday’s U.S. employment report was not as gruesome as many on Wall Street had feared,” reported Reuters back on August 1. Importantly, data from the Labor Department’s report showed 35,000 of those sacked positions were factory jobs.

“Not as gruesome” is not usually a phrase upon which positive outcomes are built.

“I’m sorry sir,” the fireman might say, “by the time we arrived at your apartment, the blaze had all but gutted the joint. Still, the charred remains of your pet were not as gruesome as we feared.”

“Well ma’am,” the hairdresser might wince, “it’s not exactly the style you asked for, but it’s not as gruesome as we feared.” The hairdresser would reasonably expect to have to duck and dodge his own scissors before he would expect a generous tip.

And yet, “not as gruesome” appears to be A.O.K. for Wall Street. So far this month, the Dow has since risen approximately one point for every one hundred jobs lost last month.

Your editors do not profess to be mathematicians. Even so, our back-of-the-envelope scribbles tell us half a million job cuts a year might hinder an economy’s ability to sustain a meaningful market rally. 50,000 layoffs here…50,000 layoffs there…pretty soon you’re talking about a real slump in the productivity of your workforce.

In the column that follows, Bill Bonner taps some wisdom of yore to help explain why unemployment really does matter and why the current trend of lay-offs does not bode well for the Empire. Please enjoy and send any comments to us at the address below…

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Homage to Jacques Rueff
By Bill Bonner

Our dollar-based financial system is like a loaded pistol…

Today, we take a summer rest and let a dead man do the talking. Jacques Rueff died 30 years ago. But in a couple of articles written for Le Monde in February 1976, this economic advisor to Charles de Gaulle, explained today’s monetary system and what was likely to become of it. His articles were unusual, in several respects. It is rare for an economist to have any idea what is going on – especially a French one. And on the subject of economics, Le Monde has things worth reading about as often as Leap Years.

To fully appreciate Rueff’s insight – and how it applies to the macro-economic circus circa 2008 – you have to begin by understanding the problem of unemployment. In the world of the ’30s, the triumph of capitalism was no sure thing. Communism, for all its faults, at least put people to work. Capitalism often left them ’sittin’ on the dock of the bay.’ And here we have our first measure of how far we have come since the ’70s; the average post-Mitterand Frenchman now believes that there are worse things than not working. Such as working, for example. Today, he is eager to pass laws to prevent it.

The real cause of joblessness is obvious, even to an economist. People don’t have jobs when it costs more to employ them than employers can get out of them. And in an economic downturn, the unemployment rate goes up. Because, in a slump, prices for ‘things’ fall quickly. But labor rates tend to be sticky. Workers have contracts. And rights! Employers’ profit margins are soon squeezed between slippery revenue…and stubborn costs for labor. Result: output falls and fewer workers can earn their keep.

In a free market, wages eventually ease their way down to levels that allow capitalists to exploit workers again. Always have. But for some reason, in Britain in the 1920s, this didn’t happen. Rueff identified the culprit even before Milton Friedman did: 

“Since 1911, there existed in England a system of unemployment insurance that gave an indemnity to jobless workers, known as the “dole.” The consequence of this regime was to establish a minimum salary level, at which workers would prefer to ask for the dole rather than work for less. It appears that in the beginning of 1923 salaries, which had been declining with other prices in England, suddenly hit this new minimum. There, they stopped falling, and since then, they practically ceased to move.”

That’s why France runs such high unemployment rates today; its dole is bountiful. When you add up the costs of “charges sociales,” paperwork, and the minimum wage, more than one in ten potential workers is not worth the money. But no right thinking politician is about to suggest the obvious solution: get rid of the dole. So, Keynes came up with a subterfuge. The central bank should cause price inflation during a slump, he proposed. Rising prices for ‘things’ meant that salaries – in real terms – would go down. That was the greasy scam behind Keynes’ General Theory of Employment, Interest and Money: inflation robbed the working class of their wages without them realizing it. The poor schmucks even thank the politicians for picking their pockets: “salary cuts without tears,” Rueff called them.

“Full employment” was soon no longer a wish, but an obligation. In France, the Constitution of 1946 obliged the government to present year an annual economic plan that achieves the goal of full employment. In the same year, Harry Truman pushed an Employment Act through the US Congress. And today the central bank of the USA has a “dual mission” – to preserve the value of the dollar while assuring full employment.

“No religion spread as fast as the belief in full employment,” wrote Rueff. “…and in this roundabout way, allowed governments that had exhausted their tax and borrowing resources to ressort to the phony delights of monetary inflation. »

This is where the post-’71, dollar-based monetary system comes in. It allowed the US to issue dollars – and never have to redeem them in gold. At first, the inflation caused by the build up of dollars was moderate and agreeable, said Rueff. It reduced the cost of labor. Then, when the tether with gold was hacked off in the early ’70s, inflation began “galloping away.” Readers may remember that inflation got the bit between its teeth in the ’70s, racing along at a record speed of 14.8% in the US in March, 1980, and even faster in Britain. The US government was forced to borrow at 15% yields. Britain could
barely borrow at all.

Rueff died in 1978. Had he lived, he probably would have been as surprised as we have been by the stamina of the monetary horses. Except for a brief rest while Paul Volcker was managing the stables, they have run from bubble to bubble…delivering more liquidity wherever it would do the most damage. All the while, inflation continued to cut the price of labor. Between ‘74 and ‘84, real wages fell as much as 30%. Then, more moderate levels of inflation held them down for the next 24 years.

But Rueff’s insight comes with a warning. The faith-based, dollar-dependent monetary system is like a loaded pistol in front of a depressed man. It is too easy for the US to end its financial troubles, Rueff pointed out, just by printing more dollars. Eventually, this “exorbitant privilege” will be “suicidal” for the western economies, he predicted.

Paul Volcker put the pistol in the drawer. Ben Bernanke has found it. And Jacques Rueff must look on in amusement to see what happens next.

[Joel's Note: Bill Bonner is the founder and editor of The Daily Reckoning . He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here: Mobs, Messiahs and Markets

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[Rude Endnote: Fortunately for us – that’s you and me – gold took a break while we were on vacation the past few weeks. The yellow metal dipped well below the $900 mark and trades this morning for the discount buyer’s price of just $869.

Oil too has come of the boil quite a bit. A barrel of the goo trades for around $115. More on these funny moves later in the week. For now, we’ll just say good luck in today’s trading. The average daily fluctuation over the past two weeks was 189 points, just so you know.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com