Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Wednesday, September 25, 2013

The tipping point of 2008

As before, I have compiled this graph from official figures released by BLS and the US Fed.

Scatterplot of unemployment rate vs real interest rate (3-mo. treauries - inflation).

As some commentators have noted, the fall in unemployment rate is not supported by the fall in labor force participation, and it is likely that unemployment is understated because of the large number of individuals who have become discouraged.

In any event, we see a major change happened in late 2008, accompanied by a short-lived spike in real interest rate (mainly due to falling prices). Since then, interest rates have been slammed to real lows, but the unemployment rate has not significantly changed.

The transition from the lower area of concentration to the higher one is an example of a state change in a complex system. The system has switched from one mode of operation to another.

What are the two modes of operation? We can assume that one of them is an ideal economy in which most of the players are involved in some sort of productive enterprise. It is this economy which behaves more-or-less as predicted by economists--a drop in interest rates tends to cause a marginal increase in productive investment.

The trouble is that over the past couple of decades, an increasingly large proportion of economic activity was based on non-productive, or rent-seeking, activities--such as speculation, carry trades, and increased fees for normal financial activity. When the financial crisis hit in 2008, guess which sector received the majority of aid from central banking authorities. It wasn't the productive sector--it was the speculative sector. When you consistently reward an activity, you get more of it. At the same time, the productive sector suffered real damage, and contracted to the point where the US economy is now dominated by rent-seeking behaviour.

In an economy of speculation, lowering interest rates does nothing but reward further speculation (near bottom). If you can borrow ever-increasing amounts of money at near-zero interest, and make progressively larger bets on the global casino until it pays out, then why would you do something risky like build a factory to make refrigerators?

Since the lower interest rates aren't creating employment, the BLS has no choice but to keep removing discouraged workers from the list. It's the only way to reduce unemployment.

Well, keep pushing boys--eventually you'll get that unemployment "rate" down to 6% and you can claim mission accomplished--no matter what the real state of the economy.

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