There wasn’t anything particularly new or earthshaking about the Aug. 2 jobs report. The unemployment rate clicked up a bit, as it was destined to do given the underlying decay that had been unbearably obvious for at least two years. The increase did trigger the so-called Sahm rule and hence forecast a recession.
But there was more going on here. Some voices have been saying for years that the seeming economic boom was not real. It was a result of monetary pumping, government spending, and tremendous data fakery. For anyone paying close attention, the bubble was obvious all along.
People can’t stand rising prices for groceries, cars, gas, and rent. But they like rising prices for financials and stock portfolios. The issue is that in our times, without serious fundamentals in place, both stem from the same underlying causal agent, namely the manipulation of money and credit.
What’s crucial is that the Aug. 2 unemployment number snapped market psychology and interrupted the dream state that has been present for the better part of four years. The dream was induced by history’s largest, most sustained, and fully globalized expansion of paper money.
It was all designed to boost industrial production following the panic lockdowns of March 2020. It was distributed as if by helicopter, creating hot money on the street, not just in the United States but all over the world.
It all seemed to work, until it did not. Just like the lockdowns were global, so too will be the inflationary depression. It’s a global crisis. Because the dollar is the world’s reserve currency, the U.S. economy is watched extremely carefully.
There is a reason that the headline number of unemployment was the straw that broke the camel’s back. Since the 1930s, this number has been seen as a key indicator to follow to understand economic health. There were two declining quarters of real gross domestic product in 2022, and yet a recession was not declared because the unemployment numbers were not high.
So when this flipped, it appeared that the recession was on its way or here already. That also provoked people to look more carefully at the U-6 numbers, which includes discouraged workers and part-timers who are suffering. Here is where we saw truly dramatic movement, taking us to 7.8 percent. That got Wall Street’s attention.
It’s usually best not to panic about such market corrections, even large ones. That said, there are features of this one that do not lend themselves to a fully recumbent posture. The sell-off has been broad, affecting everything. The volatility index is up by 114 percent as I write, besting panics of the past. The impact is global, as everything is these days. Crypto has not been spared. The dollar on the international exchange also took a hit.
The most immediate question is whether and to what extent the trading will be permitted without market closures. Some platforms have already shut for business, which puts securities holders in an awkward place. They can sell but only see their trades go through after 24 hours, if then. These little tricks only postpone the inevitable and sometimes even induce more panic.
The Federal Reserve will try to ride this one out a bit. But if matters dramatically worsen, they will bow to pressure to intervene, buying up more securities to dump into its already overstuffed portfolio, essentially taking them off the market. They call in plunge protection, but it is a bit like sweeping all the roaches into a closet. It doesn’t make the problem go away; it only delays the full takeover a bit.
There is also the possibility of an emergency meeting to cut rates. Will that be enough to re-induce a dream-like state? At this point, it is not clear. It’s possible that we are past the point at which yet another injection of quantitative easing is going to be enough to put off the inevitable crash. It’s beyond obvious that the Fed only needs to make things look the least bad until after November.
There is another grave danger about which you should be aware. The Fed has, for two years, been working to sponge up the excess liquidity it created from 2020 to 2021 in the biggest single expansion of the money stock in American history.
That’s what created the inflation that officially has been about 20 percent over four years but is more likely 30 to 50 percent or higher, depending on what you buy. Intervening now to save financials could very quickly reignite the inflation beast and entrench a second wave. That is the truly dangerous possibility, which now seems on the verge of being inevitable.
Please remember: None of this has happened in a vacuum. It traces to a series of disastrous policy decisions: spending explosions and money creation in 2020, a continuation of stimulus in 2021, green energy conversions in 2022–2023, huge increases in interest rates costing business and government trillions of dollars, and a prolongation of broken supply chains from lockdown fallout, plus general discouragement, demoralization, ill-health, and rising illiteracy. All these combine to create a very bearish environment.
The only reason it has not happened yet was the continued state of stupor induced by easy money policies and government expansion. The dam had to break at some point. The only question right now is whether the interventions can stop the flow or if the decay is already too extensive to fix.
A wise investor never chases a panic. A wise investor never goes along with the crowd to begin with. At some point in the future—and maybe that future is now—fundamentals will reassert themselves with ferocity and a level of austerity that this generation has never faced will be upon us.
Are we strong enough to make it through? I’m not sure. But in the end, and it will end, we will all be stronger as a result. A new stoicism awaits us all.
