Detroit Files for Bankruptcy

July 19, 2013

One of my predictions for 2013 was that three major U.S. cities would file for bankruptcy, beginning with Detroit.  Now it’s begun.  As reported in this article, Detroit filed yesterday. 

Detroit was once synonymous with U.S. manufacturing prowess. Its automotive giants switched production to planes, tanks and munitions during World War Two, earning the city the nickname of the “Arsenal of Democracy.”

Now a third of Detroit’s 700,000 residents live in poverty and about a fifth are unemployed.

Truth be told, everyone in Detroit is living in poverty.  If not actually poor themselves, they’re living among the effects – the blight highlighted in the article. 

In its heyday, Detroit had over 2 million residents.  The population has since shrunk by nearly two thirds.  The reason is no secret; in its heyday, the domestic auto manufacturers had nearly 100% of the share of the domestic auto market.  Today they have barely half, without picking up any foreign market share.  The blind application of flawed free trade theory has brought Detroit to its knees and, indeed, has hobbled the economy of the entire country. 

Where has all of this auto manufacturing gone?  To high wage nations like Germany, Japan and South Korea.  The problem isn’t low wages or currency manipulation.  The problem is that these nations come to the trading table with nothing to offer but badly bloated labor forces hungry to manufacture for export.  They are so densely populated that their own per capita consumption of automobiles is emaciated by severe overcrowding.  With a population density seven times that of the U.S., Germany is actually the least densely populated of the three.  South Korea is fifteen times as densely populated as the U.S.  Wherever you live in the U.S., just imagine fifteen times as many people trying to crowd onto the roadways and you begin to understand how a rising population density erodes per capita consumption. 

So we blindly give away free access to our market, never thinking about whether we’re getting access to an equivalent market in return.  Free trade with badly overpopulated nations is nothing more than a poverty-sharing program, with the U.S. taking on the poverty that those nations would otherwise have to endure.  Nowhere is it felt more in the U.S. than in Detroit. 

That’s Detroit.  Amongst all the media hubbub about Detroit, little notice was paid to the fact that Moody’s also slashed the city of Chicago’s credit rating yesterday and gave the city a negative outlook.  Chicago’s problems are much the same as Detroit’s – pension obligations – obligations that, when they were made, seemed reasonable but now can’t be met from a tax base that has had so much manufacturing removed from it. 

Our trade deficit in manufactured goods continues to drain away a half trillion dollars from our economy each year – now a cumulative $12 trillion since our last trade surplus in 1975.  It’s no wonder that pension obligations can’t be met.  If the federal government isn’t willing to acknowledge that backstopping and bailing out such key aspects of our economy is part of the price of pursuing failed trade policy, then more bankruptcies are sure to follow.


U6 Unemployment Spikes 0.5% As Economy Gains and Shifts to Low Quality, Part-Time Jobs

July 6, 2013

To hear the media report it, yesterday’s jobs report was great news, with the economy adding 195,000 non-farm jobs.  Unemployment, as measured by U3 (the government’s most narrowly defined measure of unemployment) held steady as growth in the employment level was more than matched by those pesky, once-vanished workers suddenly reappearing in the labor force.  However, the broader measure of unemployment – U6, which includes discouraged workers and those forced into part-time jobs while needing full time jobs – rose by 0.5% to 14.3% – the biggest jump since January, 2009 during the depth of the recession.

And that wasn’t all of the bad news in the report.  Here’s a few more excerpts:

… the civilian labor force participation rate, at 63.5 percent, and the employment-population ratio, at 58.7 percent, changed little in June.  Over the year, the labor force participation rate is down by 0.3 percentage point.

… The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) increased by 322,000 to 8.2 million in June. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

… In June, 2.6 million persons were marginally attached to the labor force, essentially unchanged from a year earlier.

… Among the marginally attached, there were 1.0 million discouraged workers in June, an increase of 206,000 from a year earlier.

… Employment in most other major industries, including mining and logging, construction, manufacturing, and transportation and warehousing, showed little change in June.

Regarding that second item – the growth in part-time jobs of 322,000 – that means that not only were the 195,000 jobs that were added to the economy disproportionately part-time jobs, approximately another 125,000 full-time jobs changed to part-time.  This is corroborated by the fact that there was no gain in manufacturing or construction or other jobs that tend to be higher wage jobs.  “Leisure and hospitality” – wait staff, burger flippers and bus boys – accounted for 55,000 of those 195,000 jobs. 

Read the report in its entirety and a completely different picture emerges from the one portrayed by the headline numbers.  This is an economy that’s flat at best, and likely getting worse.

And, to hear the media report it, the “great news” on the jobs front was celebrated on Wall Street, with stocks rising another 1.0%, again knocking on the door of their all-time highs.  Much of the improvement in consumer sentiment has been fed by bullish news about the stock market.  Little notice has been taken of the fact that, while the stock market has been up a bit, there’s been an absolute blood bath in the bond market.  Anyone with anything close to a balanced portfolio – an equal mix of stocks and bonds – has taken a beating over the past few months.  What will happen to consumer sentiment when the majority of investors who don’t keep a keen eye on what’s been happening in both markets open their 2nd quarter statements?  (Not to mention the horrible start to the 3rd quarter that we’ve just witnessed.)  How much “legs” will this economy have then? 

It’s no surprise that this jobs picture isn’t really improving when the president has done nothing to correct trade imbalances (in fact, making matters worse with terrible trade deals like the one with South Korea), while throwing fuel on the fire by flooding the labor market with immigrants workers.  The stage is being set for the next recession.

Exports Drop in May, Lag Obama’s Goal by Record Margin

July 3, 2013

As reported by the Bureau of Economic Analysis this morning, the trade deficit jumped in May to $45.0 billion, the worst performance in six months, as exports fell and imports rose sharply, led by manufactured imports.  Balance of Trade

In January of 2010, President Obama set a goal of doubling U.S. exports in five years.  In May, exports lagged that goal for the 20th consecutive month, and by the largest margin yet – $40.9 billion.  In order to keep pace with the goal of doubling exports, they needed to increase by $27.2 billion in the last 12 months.  Instead, they have risen by only $1.9 billion.  Obamas Goal to Double Exports

Even worse, manufactured exports have actually declined in the past year, and now lag the president’s goal by $26.1 billion – also the worst shortfall since the president set that goal.  Manf’d exports vs. goal.  The trade deficit in manufactured goods jumped by $3.5 billion to $42.6 billion (accounting for nearly all of our overall trade deficit), continuing its decades-long worsening trend.  Manf’d Goods Balance of Trade

Remember the big trade deal that President Obama signed with South Korea in March of last year, hailing it as a big win for American workers?  In May, the U.S. trade deficit with South Korea jumped to a new record, surpassing the previous record set only one month earlier.  The U.S. is on pace for a trade deficit with South Korea in 2013 of $22.7 billion.  The previous record, set in 2004, was $20.0 billion.  No surprise. 

And, oh, by the way, remember the supposed suspension of trade privilieges for Bangladesh following the clothing factory collapse that killed over a thousand people?  The trade deficit with Bangladesh continued unabated in May. 

Something that will probably go unnoticed by the media is that in May, for the first time, imports of food ($9.9 billion) exceeded exports ($9.8 billion).  Long dependent on imported energy, thanks to worsening overpopulation, the U.S. is now dependent on imported food as well. 

President Obama’s trade policies have been an abysmal failure.  It’s consistent with his track record of making grand proclamations and promises, with zero follow-through.  Just yesterday, the Obama administration very quietly delayed a key provision of its health care overhaul.  It seems that they don’t want to risk driving employers out of business at a time when unemployment remains above 10% and the economy is teetering on the edge – especially with an election looming next year. 

When is the media going to call out the president on these blatant failures?  Why does this guy keep getting a free pass?