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Thursday, August 13, 2009

Unemployment Duration, Baby Boomers: The System is Broken

FN: The economy has been weak for far longer than you might think. Things went wrong a quite a long time ago and nobody really noticed. The Average Duration of Unemployment (UEMPMEAN) was a quiet, unseen warning beacon that all was not well.

From the 1950's through to the 1970's, it could take you as little as 7.5 weeks to find a new job during the 'boom' periods of an economic cycle. Then something snapped somewhere in the system. From the 1970's onwards it began to take longer and longer to find a new job and a new rising trend was put in place. From recession to recession (grey bars) life became quite a bit tougher.

Between the first (1) and second (2) recessions in the 1970's the time it took to find a job increased a serious 33% from 7.5 weeks to 10 weeks during the BEST OF TIMES. By the time the first recession in the 1980's (3) hit, the average duration of unemployment had jumped about 10% from 10 weeks to about 11 weeks. Here the amplitude of each cycle high and low exploded, maxing out at an astonishing 20 weeks. Almost 10 years later, just prior to the 1990's recession (4) it took about 12 weeks to find a job, a 9% increase. Then by the time the Tech Bubble finally burst in early 2000, it took over 12.5 weeks to find a job.

However, the worst was yet to come.

During the credit and real estate bubble years that followed it took about 17.5 weeks to find a job during the best of times (6), a massive increase of 40%.

When the easy credit bubble finally burst the 20 week average duration that had held for 30 years was breached and a new record high was set of at least 25 weeks.

Now in a jobless world expecting a jobless recovery, new records in unemployment duration will be set even from these levels.

The economy was structurally unsound long before the financial crisis hit. The warning signs were papered over with easy money by the Federal Reserve Bank under Alan "The Maestro" Greenspan and a complicit Wallstreet that extended cheap credit in amounts that grew exponentially.

The credit bubble has irrevocably burst and that is bad enough. Worse still is the timing. A veritable demographic tsunami is rapidly approaching the economic shore. Over leveraged and aging Baby Boomers are just about to realize they've gambled away their entire retirements in a high stakes game of consumer consumption and real estate leverage.

Each crisis on its own is a serious enough challenge to the system. Together, simultaneously like this, there is no feasible solution but time... and a long long time it will be. Almost certainly several lost decades.

I've argued this before in Age Wave Theory: Expect a Long Economic Winter.

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