February 7, 2012

Unemployment Reality

“We are being asked to take even larger doses of a medicine that has proven to be deadly and to undertake commitments that do not solve the problem, but only temporarily postpone the foretold death of our economy.”
– Hieronymos II, head of Greece’s Orthodox Church in a letter to
Greek Prime Minister Lucas Papademos[1]

Youth Unemployment and Potential Social Consequences

In the same letter to the Greek Prime Minister, the Archbishop of Greece’s Orthodox Church writes:

“The voices of the desperate, the voices of Greeks are being provocatively ignored in decision making…The unprecedented patience of the Greek people is running out, fear is giving way to rage and the risk of a social explosion can no longer be ignored by those who give orders and those who execute their lethal recipes.”[2]

It’s getting bad in Greece as austerity measures dictated by the European Central Bank (ECB) and the International Monetary Fund (IMF) become increasingly unbearable for Greek citizens.  The warnings of “social explosion” by the Greek Archbishop have an ominous ring to them.  I believe concerns over social unrest are legitimate, and the chart below on youth employment in Europe may explain why:

 

As I look back at history, it’s my opinion large numbers of young unemployed people can lead to social instability.  I believe this is especially so when the middle class becomes economically pressured, and disappears.  Such a scenario leads to a wide gap between the (often politically/economically connected) “haves” and the “have-nots.”  When a larger percentage of the young population sees little hope and no prospects for themselves, they often get restless.  The protests and political uprisings in Egypt, Libya, and Syria have often been deemed by the media to be based on “freedom.”  Perhaps, but I feel they were more specifically and predominantly caused by increasing economic hopelessness and desperation among the young.

As austerity is imposed on Europe so big banks can be repaid loans they should never have made to countries which have long proven themselves to be economic children – the young natives could get restless.  Only time will tell, but it bears close observation from a socio-political and economic standpoint.

By the way, the youth (age 16-24) unemployment rate in the U.S. is 23%.[3]  In the U.K. it’s 22%.[4]  As the fiscal scenarios in both countries continue to worsen (including exploding debt levels), it’s important to note (from the chart above) their current youth unemployment rates are at levels similar to Spain’s, Greece’s, and Portugal’s in 2008.
Speaking of Unemployment Statistics…

Back here in the good old USA, we’ve been told via the latest “official” unemployment data that the percentage of the population without jobs has dropped to 8.3%.[5]  However, I cast my jaded eye once again to John William’s Shadowstats.com for assistance via the chart below.  Per Shadowstats, the red line represents the U-3 unemployment rate, which “is the monthly headline number (i.e. the official government rate).”  Per Shadowstats, the gray line is the “U-6 unemployment rate — the Bureau of Labor Statistics’ (BLS) broadest unemployment measure, including short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment.”  And the blue line “is the seasonally-adjusted SGS Alternate Unemployment Rate reflecting current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short term discouraged workers.”

In my opinion, the blue line most closely represents the actual real unemployment rate in the United States.

Paying the Piper

Unrealistic government and personal spending via borrowed money can’t go on forever.  In the end, the piper must be paid – and the debt dramatically reduced.  Individuals have begun their de-leveraging and downsizing.  However, governments are realizing when they are forced to make severe cuts via austerity, voters don’t like it when their specific benefits get cut.  When a large percentage of the population receives some sort of benefit from the government, it can lead to social unrest and politicians can get un-elected.

Thus, the political response today as I see it in the US, is for the government to continue to print ever increasing trillions of dollars to buy off its citizens and attempt to delay the ultimate day of reckoning.  While I don’t see this being able to be sustained forever – I believe the resulting currency debasement will continue to accelerate dramatically.

And thus, we help our clients plan accordingly.

As always, I maintain my positive outlook.  That outlook is based on my belief a bear market in one thing is often a bull market in another.

As we enter this critical time – now, more than ever – I believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances.  Others may feel free to contact us to learn more.

Sincerely,

Stephan R. Ernharth, JD
Vice President
Ernharth Group
www.ernharth.com

Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.

[1] Bloomberg, “Greek Church Head Sees Social ‘Explosion’ From More Austerity” February 3, 2012
[2] Ibid