Obama’s Unemployment Analysis – A Bubble-Pipe Dream?

Frame By Frame

Frame by frame, death by drowning
in your own in your own
Step by step, die by numbers
in your own in your own
King Crimson

Below is a chart from CalculatedRisk, one of my favorite spaces. It depicts the expectations Obama’s team is using when they created this year’s budget. You can read the team’s “Economic and Budget Analysis” by clicking that link (64 pages pdf). The blue line is the historical unemployment and the red line is the Obama projection. (Click the chart to see the original – it’s much clearer.)

Obama 2010 Budget Unemployment Forecast
Obama 2010 Budget Unemployment Forecast

The beauty of this is the way it’s presented. The forecast is for an average over the year. So for 2010, the unemployment rate can keep increasing for the next 5 months before anyone can say the estimates are off. And even then, the point could be argued all the way into December.

Bubble Bubble, Toil and Trouble

Looking back over the peaks in that chart I see and remember the things that ‘turned it around’ – In 2003 the housing boom was just getting really fueled up after the tech crash, in 1992 the Tech boom was just powering up after the S&L crisis was cleaned up. In 1982 the Reagan team had just remodeled the financial markets, aka, “Reaganomics”. In 1975 we had just come off the gold standard for our currency, allowing the Federal Reserve to print as much cash as they wanted.

You can argue the particulars of each instance, but I think I’ve got it down to its simplest form. Each time there was a crisis, our government turned to some form of credit inflation to produce employment. In each of the times I described it worked. The numbers are right there on that chart.

So why am I so certain it won’t work this time? Because each of those times, jobs were created by easy money in the form of cheap loans. For the last 4 decades, that’s what they’ve been doing – blowing bubbles made of different kinds of credit. They were using debt to create a false appearance of prosperity, a bubble. Each time the bubble burst, a new one was formed somewhere else.

This last bubble was a real doozy, too. To actually get it to work, they had to create loans (they like to call them ‘Financial Instruments’) which were literally impossible to pay off, then present them to the public as cheap cheap cheap (my brother steals it and I sell it), somehow forgetting to mention the suicidal nature of actually signing one of these things. I’m not condemning them (at the moment) for that, it’s just a fact and I’m stating it because it leads to the next thought…

They had to create those liar loans to get the less wealthy in a debt because the more wealthy middle class and rich were already tapped out on their credit.

With that in the front of my mind I have to ask: What kind of credit bubble do they think is possible to inflate that will create jobs this time?