US Jobs Data Disappoints

The US today released data on non-farm payrolls that had been delayed due to the Government shut down.  The anticipated figure was 180,000, but the actual figure came in as a disappointing 148,000.  In fact, the jobs data has been disappointing for the last quarter, and gives ammunition for those on the Federal Reserve who want to hold off tapering QE.

More recent survey data has suggested that employment figures for October have continued this weaker trend, and the uncertainty created by the political crisis will have added to that.  The Government shut down is itself  expected to reduce GDP by 0.2%.  As a result of the shut down and the political crisis over the debt ceiling, as well as with Janet Yellen taking over from Bernanke, in January next year, the expectation is now that there will be no tapering until at least March, with some arguing it could be as late as June, and some even saying that, because any tapering will lead to a financial crisis, the Federal Reserve will never reduce QE.  The latter seems unlikely, because already some members of the Federal Reserve are already worried that the size of its balance sheet has ballooned to such a level as to itself cause instability.

The Federal Reserve, like the Bank of England certainly does have a problem.  QE has done nothing to stimulate economic activity.  It wasn't intended to.  Its intention was to protect the banks by keeping asset price bubbles inflated, or at least prevent them from bursting.  In the US, QE has, over the last year, once again prompted speculation in the property market.  Prices have increased by double digits.  To be fair that may have had some economic impact as latest data shows that construction activity and employment has risen.  But, as interest rates have risen in the last few months, demand for houses has fallen sharply.

In the UK, QE has been kept at the same level as inflation has remained at 50% more than the Bank of England target, but the Government has got round that by introducing "Credit Easing", and special programmes to provide cheap credit via "Funding For Lending" and "Help to Buy".  In fact, not much of this has gone to promote business spending, but it has gone to keep the property bubble inflated, and in London to inflate it to even higher levels.  Last month alone, prices in central London rose 10%, which if that isn't a bubble, nothing is.

But, therein lies the problem.  Prices, in Central London, have now risen so far that rental yields are now less than 3%, which is no more than can be obtained from cash deposits, which do not have the risk of capital loss, when the bubble bursts.  Speculators have begun, therefore, to look for cheaper properties further outside Central London.  The problem there is that with every bubble from the Tulipomania through to the Tech Wreck, when speculators see prices stop rising, they soon go to panic mode and start selling.  If speculators stop buying in Central London and move elsewhere, Central London prices will stop rising.  If that's followed by sharp falls, that is likely to cascade.

In the next village to me, I've just seen three properties valued at near £2 million each come up for sale together.  One of them at least is owned by a banker, which makes you wonder what they know about how long the current bubble may remain inflated.  The UK Government has been forced to introduce Help To Buy, because of falling house prices outside London, which threatened the banks as defaults rise.  But, although it seems to have stopped that, it has caused the already massive bubble in London to inflate even more, creating an even more dangerous and unstable situation.

The same problem faces the Federal Reserve.  The Financial Meltdown in 2008 was the result of 30 years of debt creation and money printing.  The actions since have not resolved that problem, but only saved the banks by pumping even more liquidity into the economy.  Now, any suggestion that money printing might just be reduced, causes the financial markets to go into panic mode.  The real financial meltdown has only been deferred, and thereby made more catastrophic.