Liquidity does not work, jobs are the answer

Posted Oct 7th 2008 4:40PM by Douglas McIntyre
Filed under: Employees, Housing, Federal Reserve, Recession, Financial Crisis

The federal government has done virtually everything it can to solve the current credit and liquidity crisis. But even today's decision by the Federal Reserve to buy commercial paper did not get much reaction.

Going through the list, the Treasury is providing the FDIC capital for covering deposits in failing banks. It has set up its $700 billion "Paulson" fund. Bernanke has opened the emergency loan systems for banks and brokerage to the extent of making as much as $900 billion available. It may also cut rates.

Since the Dow is off 1,500 points in a month, it is safe to say that nothing done so far is cause for celebration.

What has been neglected over the last several months is the simple fact that Americans can still work. Burdened with debt, unable to make car payments and buy gas, and facing mortgages, they can still work. But if the economy snuffs out jobs in record numbers, the last wall defending the economy will have broken.

The amazing fact in all this is that unemployment is at 6.1% up from 5.1% in March. With the economic world collapsing around out ears, if people can manage to keep their jobs, the recession could be relatively shallow.

Companies may decide that they can keep most of their workers -- if, that is, they see credit become available. At that point the issues of meeting payroll and capital expenses will not be so acute. At least the consumer would have a job, and hope that he can go shopping again at some point.

Douglas A. McIntyre is an editor at 247wallst.com.

Tags: employment, recession, unemployment

Print this

Reader Comments (Page 1 of 1)

10-07-2008 @ 6:16PM

Iridium said...

when 3/4 of the economy is consumer spending and 3/4 of the jobs are service jobs a pullback in consumer spending means a pullback in service jobs.

The answer is manufacturing. Not a single government policy helped us get out of the depression. What got us out was a huge industrial boom to produce for WWII.

If you pay people to produce goods they will have money to buy what they produced feeding the economy. If you do not produce anything you have no base to create income.

The problem is that we have sent the majority of our production overseas and created a price structure where it is impossible to produce the same items in the USA and pay people enough to buy them.

Retail chains have become used to purchasing items at 60% margin, many times with items that cost only a few dollars. Products built on pennies a day labor, manufactured for pennies, but sold for $5-10.

Take a pair of running shoes for example. A $120 pair of running shoes can cost as little as $12 a pair to produce and ship to the US from China. The retail account buys the shoes for $60. The salesperson in the store sees $60 profit go to the company that in return pays him $7.50 an hour.

Tied up within the the $48 distributor profit margin of the shoe is hundreds of millions in advertising and professional athlete endorsements. The shoe could sell for less but then the company would have to reduce overhead that it doesn't want to cut out.

While a shoe could be produced in the USA to retail for $120, the production cost would be closer to $24. The retail account would still demand a keystone margin. However the distributor would never take a $12 hit just to produce a product in the USA.

Either we are going to have to deal with rampant inflation to produce in the USA again. Or companies will have to reduce profit margins heavily, this will not make Wall Street happy.

10-07-2008 @ 8:23PM

Uhohchongo said...

Yeah, it's pretty scary when the backbone of our economy is: networking.

10-07-2008 @ 8:26PM

alberto giacoma said...

I just read the comment of "Iridium". This is the best explanation (so far) of the causes of the present economical crisis that we are having. Very smart person this "Iridiun",