Why is Charley Blaine Wrong about Unemployment?

A few weeks ago, I sent out a short e-mail to all of my readers saying, 10.2% unemployment, need I say more?” In response, one of my readers sent me an article by Charley Blaine explaining why this is not the end of the world. You can find the article at: http://articles.moneycentral.msn.com/Investing/Dispatch/market-dispatches.aspx?post=1356156.

The article clearly states 10% unemployment is no big deal because unemployment usually lags the economy. By the time that number is reached, the economy has already picked up or is picking up. He uses historical numbers from the 1982 recession as his guideline. However, he is missing one big point.

His article, in its key sentence states: “Then the economy began to surge in early 1983, fueled by tax cuts and, more importantly, substantial interest-rate cuts by the Federal Reserve.”

Unfortunately, this is not the case in 2009. The Federal Reserve cannot lower interest rates anymore. We are already at a target rate of approximately 0.25%. In fact, the actual rates may be closer to 0.0%. And, there are no Reagan era tax cuts right now. Most of what Congress is doing at the present time would be considered tax increases.

Hence it is my belief the 10% unemployment number will be far exceeded in the next two quarters or so before it finally starts to come down. I believe we might see 12-13% unemployment before this recession is over.

As stated above, the Reagan era policies are not being followed. In fact, they are being scoffed at. We are increasing taxes across the board. Many of our President’s followers will deny this, but even if they just let the Bush tax cuts expire, which is all but a done deal, there will be tax increases. Further, if this disastrous health care package passes, there will be tax increases even for the lower-middle class.

Secondly, the Fed’s policy is not to lower interest rates right now; it can’t, but instead to print money with nothing backing it up. We are building up mountains of debt. This President and the Democratic Congress has done nothing but spend money over the last 11 months. And, the President has done nothing to lower the deficit. He is even saying that the current rate of spending may create a prolonged recession. Accordingly, what we should have is mounting inflation, almost to the point of hyper inflation. But, that is not happening. In fact, we are teetering on deflation which is even worse than rampant inflation.

Based upon all of this, I do not believe that Charley Blaine is correct in his analysis. What I do believe is that we will see a double dip recession similarly to the Great Depression with the second phase being worse. The only thing that will get us out of this mess is decreased spending and lower taxes. Maybe then, the deficit will start to go away. After all, jobs must be created in the private sector and tax breaks tend to have the effect regardless of whatever the lefties dictate.

© 2009 by Frank T. DeMartini. Permission to copy will be freely granted upon request.