Downward Trend in Initial Jobless Claims Is Flattening Out

Downward Trend in Initial Jobless Claims Is Flattening Out

01/11/2018Ryan McMaken

CNBC reports that "US jobless claims increase for fourth straight week":

The number of Americans filing for unemployment benefits unexpectedly rose last week, hitting their highest level in more than three months, likely as a cold snap kept some workers at home.

The news story uses the seasonally-adjusted numbers, which I'm not crazy about. There's always an easy way to incorporate seasonal issues: simply make year-over-year comparisons. 

If we do this — using the non-seasonally-adjusted data, we find that there is indeed some slow creeping upward in YOY numbers. But note that the YOY changes still mostly remain in negative territory: 

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Last week (January 6), the YOY change in initial claims was still down 2 percent, although the change was flat at zero percent the week before that (December 30). 

As the graph suggests, the downward trend has lessened, and we're seeing more and more YOY changes clustering around zero in recent weeks. 

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A similar trend emerges if we look at monthly totals. December 2017's initial claims were down 5.6 percent compared to December of 2016. That, however, is one of the smaller YOY declines we've seen in recent years. With the monthly data, also, we see a slowing in the downward trend. Initial claims even went up last September, compared to September of 2016, rising 7 percent. But most monthly comparisons continue to show downward movement in total claims. 

This flattening out will probably continue as the current expansion continues, although by itself, this data does not suggest any sort of turning point in the current economic trend. 

For greater context, here's are the monthly numbers over a ten-year period:

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Vermont Senate Votes to Legalize Recreational Marijuana

01/10/2018Ryan McMaken

The Hill reports today that the Vermont Senate has voted to approve the legalization of recreation marijuana for users over 21 years of age.

With its passage in the Senate, the law proceeds to the governor's desk where he is expected to sign. 

While eight states (AlaskaCaliforniaColoradoMaineMassachusettsNevadaOregon, and Washington) have already legalized recreational marijuana, Vermont will be the first state to legalize via action of the state legislature. All other states that have legalized have done through statewide referenda or voter initiative. 

Since 2012, when Colorado voters approved recreational marijuana, state-level voters have repeatedly shown indifference toward federal drug law — which, of course, is in violation of Article I of the Constitution, and the Tenth Amendment. 

But now, for the first time, a state legislature and governor have joined the movement. This comes, we might note, mere weeks after US Attorney General Jeff Sessions announced he plans to ratchet up the Drug War against marijuana users. 

Apparently, Vermont legislators are happy to disregard him. 

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China Considering Ditching US Treasuries

01/10/2018Tho Bishop

A day after Bill Gross called bonds a bear market, reports are out that the Chinese government is considering slowing our halting US Treasury purchases. While it's easy to connect the dots between this potential change and anti-trade rhetoric from President Trump - which, to date, has thankfully been more bark than bite - the larger issue is central banks are slowly backing away from policies that have inflated bond markets. It's a good time to re-vist an article by Thornton Polleit titled "The Super Bubble Is in Trouble":

First and foremost, the US economy appears to be addicted to cheap money. The latest economic recovery has been orchestrated, in particular, through a hefty dose of easy monetary policy. It is therefore fair to assume that market agents will have a hard time coping with higher interest rates. For instance, corporations, consumers, and mortgage borrowers, in general, will face higher credit costs and a less favorable access to funding if and when interest rates edge higher.

In particular, higher interest rates could send the inflated prices of stocks, bonds, and housing southward. For instance, expected future cash flows would be discounted at a higher interest rate, deflating their present values and thus market prices. The deflation of asset markets would hit borrowers hard: Their asset values would nosedive, while nominal debt would remain unchanged so that equity capital is wiped out — a scenario most investors might assume to be undesirable from the viewpoint of central banks.

Moreover, the yield curve has become flatter and flatter in recent years. This, in turn, suggests that banks' profit opportunities from lending have been shrinking, potentially dampening the inflow of new credit into the economic system. A further decline of the yield spread could bring real trouble: In the past, a flat or even inverted yield curve has been accompanied by a significant economic downturn or even a stock market crash.

That said, investors might expect that central banks find it hard to bring interest rates back up, especially back to a level where real interest rates are positive. This holds true for the Fed as well as for all other central banks, including the ECB. This is because the monetary policy of increasing borrowing rates by a significant margin would most likely prick the “Super-Bubble” which has been inflated and nurtured by central banks’ monetary policies over the last decades.

However, it wouldn’t be surprising if, again, central banks, the monopolist producers of fiat money, turn out to be the major course of trouble. After many years of exceptionally low interest rates, central banks may well underestimate the disruptive consequences an increase in borrowing rates has on growth, employment, and the entire fiat money system. In any case, the artificial boom created by central banks must at some point turn into bust, as the Austrian business cycle theory informs us.

The boom turns into bust either by central banks taking away the punchbowl of low interest rates and generous liquidity generation; or the commercial banks, in view of financially overstretched borrowers, stop extending credit; or ever greater quantities of fiat money need be issued by central banks to keep the boom going, inflating prices so that ultimately people start fleeing out of cash. In such an extreme case, the demand for money collapses, and then a Super-Super-Bubble pops.

As Troy Vincent, a market analyst and Mises Wire contributed, offered an additional note this morning on Facebook:

The fact that Bitcoin didn't get bid up in response to this news, while treasury yields and physical gold did, is pretty interesting.

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The Net Worth of Americans Still Hasn't Recovered from the Last Recession

01/09/2018Ryan McMaken

Axios is reporting today on commentary from Deutsche Bank economist Torsten Slok in which Slok concludes that Americans now have a smaller net worth than they did in 1989: 

A greater share of Americans have more debt than money in the bank than at any point since 1962, according to Deutsche Bank economist Torsten Slok. And, in a note to clients yesterday, Slok said that, despite record stock market wealth and home price levels just shy of housing-bubble highs, Americans are poorer than at any point in nearly a quarter century.

Why it matters: The data suggest that the third-longest economic expansion in history, and the lowest jobless rate in 17 years, has benefitted an exceedingly thin slice of the American public.

Here's the graph that goes with the story: 

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Unfortunately, no link is given to the client note. 

If you're like me, though, you always like a context for research like this, and aren't content with a quick blurb. 

So, to add some background to this, I managed to find a working paper from the NBER, titled "Household Wealth Trends in the United States, 1962-2013: What Happened Over the Great Recession?" which goes into a little more detail on these calculations. 

The Deutsche Bank data appears to be continuing Wolff's research from this older NBER report, which stopped with 2013 data. 

In it, we do indeed see that median household net worth as of 2013 was lower than at any other time shown since 1962: 

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As the report notes, household wealth plummeted during the Great Recession, and as of 2013, at least, had not recovered. Slok's update suggest that net worth has increased since then. It looks like median household net worth increased from about $63,000 to about $78,000 between 2013 and 2016. That's good, but it's still well below where it was in both 2001 and 2007. 

But why do households appear to be largely spinning their wheels on household net worth?

For decades, net worth in the United States has been closely connected to housing prices. The homeownership rate reached 69 percent in 2004, and those homeowners saw their net worths expand as home prices expanded in the same period. 

In recent years, home prices have gone up considerably. So why has net worth not done the same? 

According the the NBERreport:

Asset prices [including home prices] plunged between 2007 and 2010 but then rebounded from 2010 to 2013. The most telling finding is that median wealth plummeted by 44 percent over years 2007 to 2010, almost double the drop in housing prices... Relative indebtedness expanded, particularly for the middle class, though the proximate causes were declining net worth and income rather than an increase in absolute indebtedness. The sharp fall in median net worth and the rise in overall wealth inequality over these years are traceable primarily to the high leverage of middle class families and the high share of homes in their portfolio. The racial and ethnic disparity in wealth also widened considerably. Households under age 45 saw their relative and absolute wealth declined sharply. Rather remarkably, there was virtually no change in median wealth from 2010 to 2013 despite the rebound in asset prices. The proximate cause was the high dissavings of the middle class, though their debt continued to fall. 

So, the situation did indeed stabilize as home prices rebounded, but Americans were also neglecting to save any money in other forms. In part, they stopped saving in order to pay off debts, which were substantial:

The stagnation of median wealth from 2010 to 2013 can be traced to the depletion of assets. In particular, the middle class was using up its assets to pay down its debt, which decreased by 8.2 percent over these years. This shows up, in particular, in reduced asset ownership rates. The homeownership rate fell from 68.0 to 66.7 percent, that of pension accounts from 45.8 to 44.4 percent, that of unincorporated businesses from 8.2 to 6.6 percent, and that of stocks and financial securities from 15.3 to 14.2 percent. However, the reduction in assets was greater than the reduction of debt. 

So, we end up with a picture in which Americans did see their asset values increase, which did help net worth. But at the same time, owner asset rates among many Americans actually declined, and at a faster rate than debt declined. 

This is a fairly grim picture, and does paint a good picture for the standard of living Americans will enjoy once their prime earning years pass us by. 

All too often, economic indicators rely on current earnings, and current spending. Net worth, however, gives us a glimpse into the future. If net worth is declining or stagnant, than future retirees will eventually spend down their savings more quickly, and then have to cut back their standard of living to pay for basic necessities. 

Moreover, if the current trend continues, Americans will begin the next recession from a far lower level of net worth than they started the 2007-2009 recession with. That is, we'll begin the next recession with our net worth not even having recovered from the last one. That's not a great place to start. 

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Minimum Wage Laws: More Losses at Red Robin

01/09/2018Mark Thornton

The Red Robin chain of 570 restaurants has decided to eliminate busboys due to rising labor costs. Its business is mostly in western states several of which have raised the local minimum wage rate. Previously they eliminated the job of "expediter" who prepared plates in the kitchen due to rising labor costs. Clearly the labor force is losing jobs due to the increases in the minimum wage. However, also notice that the cook and wait staff are going to take on new responsibilities in terms of preparing plates and cleaning tables. This means that customers are also losing in terms of time, quality of service, cleanliness, and the visual appeal of their meals.

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Bovard: Cliven Bundy-FBI debacle: Another example of why the feds need to be leashed

01/05/2018James Bovard

Writes James Bovard in USA Today:

The Justice Department was caught in another high-profile travesty last month that continues to reverberate through the western states. On Dec. 20, federal judge Gloria Navarro declared a mistrial in the case against Nevada rancher Cliven Bundy and others after prosecutors were caught withholding massive amounts of evidence undermining federal charges. This is the latest in a long series of federal law enforcement debacles that have spurred vast distrust of Washington.

Bundy, a 71-year old Nevadan rancher, and his sons and supporters were involved in an armed standoff with the Bureau of Land Management (BLM) beginning in 2014 stemming from decades of unpaid cattle grazing fees and restrictions. The Bundys have long claimed the feds were on a vendetta against them, and 3,300 pages of documents the Justice Department wrongfully concealed from their lawyers provides smoking guns that buttress their case.

A whistleblowing memo by BLM chief investigator Larry Wooten charges that BLM chose "the most intrusive, oppressive, large scale and militaristic trespass cattle (seizure) possible'' against Bundy. He also cited a "widespread pattern of bad judgment, lack of discipline, incredible bias, unprofessionalism and misconduct, as well as likely policy, ethical and legal violations" by BLM officials in the case. BLM agents even "bragged about roughing up Dave Bundy, grinding his face into the ground and Dave Bundy having little bits of gravel stuck in his face'' while he was videotaping federal agents. Wooten also stated that anti-Mormon prejudice pervaded BLM's crackdown.

The feds charged the Bundys with conspiracy in large part because the ranchers summoned militia to defend them after they claimed that FBI snipers had surrounded their ranch. Justice Department lawyers scoffed at this claim in prior trials involving the standoff but newly-released documents confirm that snipers were in place prior to the Bundy’s call for help.

The feds also belatedly turned over multiple threat assessments which revealed that the Bundys were not violent or dangerous, including an FBI analysis that concluded that BLM  was "trying to provoke a conflict" with the Bundys. As an analysis in the left-leaning Intercept observed, federal missteps in this case “fueled longstanding perceptions among the right-wing groups and militias that the federal government is an underhanded institution that will stop at nothing to crush the little guy and cover up its own misdeeds.”

Read the rest of the article at USA Today.

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Sessions to Renew War on Cannabis

01/04/2018Mark Thornton

According to multiple sources, Attorney General Jeff Sessions is going to revoke the Obama-era Cole Memo, which directed federal law enforcement to respect states' marijuana legalization laws. Once revoked, federal prosecutors in states where marijuana has been legalized will independently decide how to enforce federal marijuana policy in their states. This could create chaos in the fast-growing cannabis business which has been creating large numbers of jobs and burgeoning tax revenues for state and local governments.

It is unclear how Mr. Sessions thinks that such a move would benefit Sessions or help him carry out his job, other than repealing an Obama-era rule might get him back into the graces of President Trump.

The only other option is that Session is supposed to help address the Opioid Crisis. He thinks that cannabis has somehow contributed to the crisis ala the Gateway Theory of drugs, which assumes that cannabis smokers will turn into heroin addicts. The Gateway Theory has long been debunked for many reasons. In fact, cannabis and cannabis legalization has actually reduced the crisis somewhat. Cannabis is now being successfully used to treat opioid addiction. In states that have legalized cannabis, the number of opioid overdose deaths have actually decreased.

In any case, it will be interesting to see how people react to a new crackdown on cannabis in states that have successfully repealed federal law and enjoy very positive results.

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Poor Logic from Forbes and Paul Tudor Jones

01/03/2018Hunter Lewis

As the Austrian School has pointed out, the ultimate source of human poverty and failure lies in poor logic.

Here is an example from Forbes Magazine and a leading hedge fund investor who is also a major charitable donor genuinely devoted to helping humanity and the planet.

The editor of Forbes, Randall Lane, quotes Paul Tudor Jones, as follows

There is no bigger threat to our democracy than wealth disparity. It is a story normally reserved for monarchies, dictatorships and plutocracies….We got into this pickle because over the past 40 years the corporate focus on profits took on manic proportions relative to other stakeholders such as employees, communities and the planet.

There are several things wrong with this logic. In the first place, a focus on profits is not at odds with a focus on employees, customers, communities, or the planet. Profit, properly defined, is the net present value of all future profits, that is, what you should be able to realize by selling that profit stream today. To maximize profit, therefore, one must take a long term view and seek to provide exemplary service over many, many years to employees, customers, communities, and the planet. What Paul Tudor Jones is describing is not profit maximization, but rather short term profit taking, which will actually reduce the net present value of all future profits. As Henry Hazlitt pointed out in Economics in One Lesson, real capitalism focuses on the long run, not just the short run, and considers all consumers, not just some.

The problem of course is that we have never had the benefit of real capitalism. Thanks to the interventions of government into the economy, and especially into the pricing system, we get crony capitalism instead. This is bound to happen in a monarchy or dictatorship. But, contra Mr. Jones,  it is no less likely to happen in an American style democracy, as American history has shown. So long as government influences, manipulates, or controls prices, powerful special interests will strive to use the power of government to gain monopolies or other advantages. There are, however, certain periods in which government ( and in particular central bank) policy puts crony capitalism on steroids, with a resultant sharp increase in economic inequality,  and that is what we are seeing today.

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What's a Rare Luxury Today will Be Owned by the Average Man Tomorrow

01/02/2018Ryan McMaken

In 2015, the federal government (namely, the FCC) implemented new monopolistic regulations which it called "net neutrality." In 2017, the FCC then repealed some of these regulations. In the weeks and months preceding the repeal, various billionaires and other leftists hysterically predicted that the end of net neutrality would usher in a dystopia in which only the super rich could access the internet. 

What they were really opposing, of course, was a return to the internet's status quo of 2015. And we all know what a living nighmare that was! 

In reality, of course, internet access has grown continually over the past two decades in the absence of net neutrality, and has now become commonplace. Like most technologies, public access to this "luxury" has only grown over time. 

This is how markets work, as Ludwig von Mises pointed out: 

Thirty-five years ago there were no automobiles; twenty years ago the possession of such a vehicle was the sign of a particularly luxurious mode of living; today in the United States even the worker has his Ford. This is the course of economic history. The luxury of today is the necessity of tomorrow. Every advance first comes into being as the luxury of a few rich people, only to become, after a time, the indispensable necessity taken for granted by everyone. Luxury consumption provides industry with the stimulus to discover and introduce new, things. It is one of the dynamic factors in our economy. To it we owe the progressive innovations by which the standard of living of all strata of the population has been gradually raised.

In a recent column for Forbes, John Tamny takes note of this reality, examining how the left's alarmism over net neutrality has no basis in the actual experience of the marketplace:

In 2006 Ford Motor Company discontinued its Ford Taurus. At the time Saturday Night Live’s comedy writers described the Taurus (this is a slight paraphrase) as “the car for people who’ve given up." Eventually Ford brought back the automobile associated with average. Interesting there is that a $31,000 2018 Taurus has 4-wheel ABS, dual front side mounted airbags, front and rear head airbags, dusk-sensing headlights, a blind spot warning accident avoidance system, rear parking sensors and a rear-backup camera (to avoid dings), and a heated steering wheel. Electric seats are a given.

Back in 2006, only the higher-end suites at the Four Seasons in Austin, TX (the city's most luxurious hotel) had flat-screen televisions. The regular rooms still had the box-shaped version. But by 2015 flat-screen tvs were standard not just in rooms at the Four Seasons, but also in most any Motel 6.

Air travel? Those rich enough to fly used to travel with flip flops, but only in their bags. They dressed up for what was a rare luxury. Nowadays people walk on to planes in flip flops, shorts, tank tops, and other garments associated with highly casual dress. Flying is what we all do now.

All of this is a reminder of what readers of this column know well: “luxury” is an ephemeral concept. Today’s obscure bauble of the superrich is tomorrow’s common good. In a growing economy prices are falling all the time. They are because investment is the driver of growth, and investment is all about producing more for less.

What's also crucial when it comes to falling prices is the “venture buyer.” And while the truth about “venture buyers” may cause the heads of the overly sensitive to explode, venture buyers are rich. Often wildly rich. So rich that they can spend enormous sums on goods and services that aren’t broadly used, or understood. These buyers are crucial to progress because they can uniquely test the products put on the market by entrepreneurs and businesses. If they prove useful, great. If they’re duds, the rich are out substantial sums. That’s ok. Figure that they’re superrich.

Still, the goods and services deemed worthy by venture buyers act as a signal to the entrepreneurs and businesses, and the signal is clear: the innovators capable of mass-producing what superrich venture buyers uniquely enjoy will similarly become superrich themselves. There. It’s been said. Great wealth, the kind of wealth that causes inequality to soar, is frequently a function of entrepreneurs democratizing access to the goods and services formerly enjoyed by the rich alone.

There is no reason whatsoever to believe that access to the internet is going to diminish in the absence of a 2-year-old regulation that has been recently repealed. Experience suggests exactly the opposite.

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Murphy on Bitcoin and the Regression Theorem

01/02/2018Tho Bishop

Based on how frequently the subject came up with friends and families during the holidays, I have a feeling that the topic of cryptocurrencies will not be going away in 2018. 

One question I see frequently raised in online Austrian circles is how Bitcoin and other crypto fit with Mises's regression thereom, and so I wanted to share a great blog post by Bob Murphy in 2014 on this topic to help clarify the subject for any interested readers:

It was necessary for Mises to come up with his regression theorem–which traced the purchasing power of money back to the time at which it was valued as a mere commodity in direct barter–in order to ensure that his application of subjective value theory didn’t set up an infinite regress. Since Mises was ultimately explaining today’s purchasing power of money by reference to observations of its purchasing power yesterday, it seemed that he was merely pushing back the problem one step, but not really explaining the value of money in a logically complete way. Yet Mises pointed out that it was not an infinite regress; once we reached the historical point at which the money good was used in direct exchange, then standard price theory took over and the regress stopped.

So, what relevance does this have to Bitcoin? The short answer: none whatsoever. There is no question that people today have a way of estimating the purchasing power of Bitcoin; they can look up the spot price online. If we object that the current price is largely dependent on yesterday’s price, then we start back with the regress. And where do we stop? In early 2009 when the first Bitcoin transactions were negotiated, including a pizza that sold for 10,000 BTC.

If Austrian economists want to say, “But those people had no basis for saying whether that pizza should have been 100 BTC or 1 million BTC!!” OK fair enough. But they did decide, somehow; those initial transactions provided a frame of reference that guided subsequent transactions involving bitcoins. If you want to argue that this odd origin means that subjective value theory can’t be applied to Bitcoin, OK, then so much the worse for subjective value theory.

People right now are exchanging bitcoins against “real” goods and services, and the sellers intend to use at least some of the acquired bitcoins to obtain other “real” goods and services down the road. There is no question that Bitcoin is currently a medium of exchange, though I would not christen it a money yet.

Some people concede that Bitcoin could exist temporarily, but that it would by its very nature be in a bubble with a fundamental value of zero. OK, but by the same token then, the US dollar has been in the same situation for 43 years, and the only reason this is in peril is that the authorities have been printing more dollars with reckless abandon (something that can’t happen under Bitcoin). So when people say, “Bitcoin will never last as money,” are they conceding that yes it might be the world’s reserve currency for a half century?

In conclusion, Ludwig von Mises’ regression theorem has nothing to say about the empirical question of whether Bitcoin will move beyond a medium of exchange and become a true money. If you think that subjective value theory somehow “proves” that a digital currency can never get off the ground because nobody would have any experience with which to evaluate it, then you are simply wrong; it happened in 2009.

 

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Economic Value and the Post Office

12/31/2017Peter G. Klein

Paul Waldman tries to defend the US Postal Services in this Twitter rant, but all he does is show the need for better economics education. He lists a bunch of things the post office does and deems it a "fricking marvel." Well, nobody disputes that the post office does home pickup and delivery, charges prices independent of distance, and provides services in small towns and low-income areas. The economic question is whether the post office should do these things -- or, more precisely, whether the value (to consumers) of the goods and services produced exceeds the opportunity cost of the resources used to produce them. That, as the Austrian economists have emphasized more vigorously than any other thinkers and writers, can only be determined on the market, in a system of private property and free prices.

Waldman has made the common error, which I've written about often in the context of government-funded science and technology, of confusing economic value and technological or engineering value. The former relates to economic well-being, the latter to the technical aspect of doing X, Y, or Z. The fact that something is produced or performed does not tell us whether the production or performance is valuable. When government is paying the bills (not to mention owning the property and, often, outlawing competition), there is no way to know.

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