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Unemployment Numbers Leading, Not Lagging, Indicator


The big issue now isn't the financial crisis, but the economic one.

Friday's Financial Times article by Mohamed El-Erian, "American Jobs Data Are Worse Than We Think," demonstrates that more and more people are starting to understand the nature of the economic crisis.

In it, El-Erian notes that, "there are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviors and outlooks."

Naturally, the reason why we have such a problem creating jobs is because the country spent 10-12 years engulfed in bubbles. These created the misallocation of capital and the appearance of health, when in fact we were only creating more risk. Now we've got a broken economy, and we'll have serious difficulty creating real jobs.

One of the shocking developments, El-Erian points out, is the speed with which jobs have been lost: "The unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system." (This puts me in mind of my own ballgame analogy, as detailed in Economic Ballgame: Crisis Still in Early Innings and The Market's Misplaced Optimism.)

That's his way of saying: The big issue now isn't the financial crisis, but the economic one.

Slowly but surely, as green shoots come and go but fail to yield much, a growing number of people will begin to understand the nature of the problem. El-Erian echoes my own oft-stated view regarding employment when he says: "It takes time to restructure an economy that became over-dependent on finance and leverage [i.e., bubble-driven]."

Folks will only realize that we have a real hole to dig out of when they grasp the fact that the Federal Reserve's money printing, aided and abetted by greed on both Wall Street and Main Street, created the bubbles. These, combined with the authorities' abdication of responsibility, caused us to experience more than a decade of "bubblenomics."

Until this sinks in, we're not liable to see any significant popular call for policy makers to address the consequences of the problems caused by the bubble years.

In the meantime, money continues to be thrown at the housing market, driven by the mistaken notion that if we're somehow able to prop up housing prices, everything will work out okay.

As I've said since the bubble burst, housing prices need to trade down to where they're in line with workers' earnings power -- which is complicated by the fact that legions of people aren't working.
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