Unemployment Predictions for 2010

The San Francisco Fed recently published a dreary outlook. The unemployment commentary was particularly negative (for the Fed, at least). But if the past is any sort of guide, in a few years these Fed “worst cast scenarios” will look like rosy pipe-dreams. More on that later. Here are some excerpts from the FRBSF:

The long and gradual return to pre-recession unemployment levels implied by the Blue Chip consensus forecast is consistent with a labor market recovery that is slightly weaker than that experienced in 1983 and slightly stronger than that experienced in 1992. However, should labor market conditions instead proceed along the path taken in the 1992 recovery, the unemployment rate could peak close to 11% in mid-2010 and remain above 9% through the end of 2011.

They also provide this handy alternative unemployment chart, which includes involuntary part-time workers (people who want to be full-time, but can only get PT):

Not Pessimistic Enough

As dire as these predictions seem, they all assume growth is right around the corner. Look at the graphs, they all assume a few more months of recession at most. What if we’re in the modern equivalent of 1930? A rebound in consumer spending is always just a few months away, according to most analysts/economists. But spending and revenue are staying down, for the first time in a long time. And I don’t think it’s temporary shift, nor is it enough to turn the tide. While saving is up from negative territory, to 6%+ last month, it’s still not nearly enough to pay off our tremendous debts (public and private).

If the spending-bubble does stop here, we still have a lot more pain coming. The traditional Keynesian solution is more debt and unsustainable bailouts. That worked for a long time, but our decades-long debt spree is finally catching up with us. We may be at the breaking point. Discretionary spending has never seen a pullback like the current one.

Gov intervention is the only thing preventing a total collapse. Such a collapse would arguably be preferable in the long-run, as it would solve the horrendous moral hazards and “reverse darwinism” we face, as Peter Schiff says. But that doesn’t change the fact that a collapse is highly unlikely, as I argue in this piece. The Gov will fight it tooth and nail, using whatever means necessary. So even bigger deficits are in the cards, and sustained inflation is very likely.

Those who think the Fed will start sopping up liquidity from the system are delusional. That would just pull the rug out from under the “recovery”, causing another crash and resulting in more bailouts and Keynesian magic (unless there were somehow a huge shift in philosophy among the economic powers that be).

There are just too many negative catalysts near-term. State governments going broke (or getting bailed out), pensions doing the same, CRE’s awe-inspiring collapse, dwindling tax revenue at both the Federal and State level. When unemployment benefits start to run out, consumer spending will plummet further.

And with Summers, Bernanke, and Geithner as top-dogs in the administration, the most likely outcome is inflation. Those who doubt their ability to encourage inflation ignore history. They’ll find a way. Unless they let a collapse happen, wiping out debt via devaluation of the dollar will be the only option at some point. If that’s the “growth” green-shooters are harping about, count me out. Omnisan Investment posed an excellent question to those who advocate an inflationary outcome: