08 December 2010

Unemployment and interest rates

Some comments on the relationship, from Stephen King, managing director of economics at HSBC:
On Friday, we learnt that the US unemployment rate had, unexpectedly, jumped to 9.8 per cent in November ... Despite a massive policy stimulus, not enough people are managing to get back to work...

...last year's 10.1 per cent peak was not, historically, America's highest unemployment rate. Post-war, that dubious honour belongs to November 1982, when unemployment rose to 10.8 per cent following a couple of years of savage monetary aggression from a newly-emboldened Federal Reserve led by Paul Volcker. At one point, short-term interest rates threatened to rise beyond 20 per cent. The cost of successfully squeezing the inflation of the 1970s out of the economic system was a huge increase in unemployment.

Today, there are no such excuses. Interest rates are down at zero. Far from being too high, inflation is remarkably low. Yet the labour market continues to misbehave.... Finally, reality has caught up with the US economy...

More recently, rapid rebounds in US corporate profits and business confidence have been wrongly interpreted as signs that the US economy's wounds are quickly healing. They're doing nothing of the sort. Corporate profits are high because companies have slashed domestic costs. Meanwhile, their investments increasingly are taking place in other parts of the world where labour costs are that much lower.

How should US policymakers react to these difficulties? They should start by injecting a much-needed note of realism, admitting that their macroeconomic box of tricks cannot fix all problems. The US needs to wean itself off its debt dependency.

1 comment:

  1. I couldn't agree more. The debt-to-asset ratio is unbelievable. You would think that their accountants would be able to make the best of decisions, seeing as how they're working for the national government.

    Mark White, CFO of SAP North America says, "We need some breakthrough innovation to stimulate the economy. Otherwise, we’re going to be stuck with unemployment in the 9% to 10% range. In a strong economy, it may dip below 8% but the days of 5.5% to 6% unemployment are behind us.” I'm willing to accept 10.1% as the new norm, but we have to be able to work with it and strive for improvement elsewhere.

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