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The Problem With Deleveraging


What happens when a debt-happy nation starts to save?

In general, we consider saving money a good thing. But what happens when a debt-happy society wakes up and decides that saving is a good for everybody? What happens when banks and hedge funds decide (or are forced) to reduce their debt? What happens when businesses of all sizes find it harder to get loans to operate?

Let's find out.

1.2 Million Jobs and Counting

The unemployment numbers came out last week and they were ugly. October showed a loss of 240,000 jobs. But the really bad news was the negative revision to August and September numbers by a further loss of 179,000. Unemployment estimates are largely based on recent past performance. There is no way the models can catch a change in the overall trend.

The data shows that the economy has lost 1.2 million jobs since December, with over half of those losses in the last 3 months. While two-thirds of the losses are in manufacturing and goods production, the service economy is also starting to show signs of strain. 1 in 5 lost jobs are from the retail sector.

Philippa Dunne of The Liscio Report writes:

"A stunning fact: yearly job losses in private services, 0.4%, now match the worst of the 1982 recession and exceed the worst of 1975; once upon a time, the service sector wasn't very cyclical. Now it is."

Equally disturbing is the jump in the unemployment rate. It leaped to 6.5%, far above even the most dismal expectations. It's likely we'll see another 1 million jobs lost over the next year, with the unemployment rate headed up as high as 8%. There are now 10 million unemployed Americans. You have to go back to 1982 and a double-dip recession to find an 8% unemployment rate. Very few people under 50 remember what that's like.

Look at the chart below. Notice how swiftly unemployment rises both during and after a recession. Since I don't think the current recession will be over until the 3rd quarter of next year, we could see unemployment continue to rise for the next 8-10 months.

Click to enlarge.

Be Careful of Geeks Bearing Recovery Data

Going forward, you are going to hear all sorts of analysts (including sometimes even this humble analyst!) quote statistics that in general sound something like: "Since the end of WWII, average recessions have lasted X months, and thus we are almost through the current one, so buy what I am selling." Or the ever popular "Stocks tend to find the bottom in the middle of a recession, so now is the time to buy."
No positions in stocks mentioned.

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