Friday, November 06, 2009

The Rising Fiscal Cost of Unemployment

Paraphrasing the old frat house saying about the party only getting started when something breaks- a financial crisis only truly gets going when the bond market starts to crash.

Sometimes a picture really is worth 1000 words.

click for bigger graph

The graph above depicts the 12 month moving average of the Federal Fiscal Deficit (in blue, left axis) and Non-Farm Payrolls (in red, right axis) since 1981. As you can see unemployment is becoming increasingly expensive.

When I first glanced at the data I was quite surprised. I wondered if the problem was more a function of expenditures, particularly War and Financial Bail-Out costs. While these play a significant part, the graph below shows that Federal Tax Receipts (in blue, left axis) are increasingly sensitive to changes in employment.

click for bigger graph

I'll be a very interested observer of the US Bond market in the coming months (who knows, things could get exciting today) to see if the normal "weak economy equals strong bond market" relationship doesn't shift into a "weak economy equals lower tax receipts, higher deficits, more bond supply and thus weaker bond market" relationship.

Paraphrasing the old frat house saying about the party only getting started when something breaks- a financial crisis only truly gets going when the bond market starts to crash.  After all it isn't much of a crisis if your lenders are willing to lend to you at lower rates then before the crisis, is it?

Full Disclosure: No position in US Bonds (but I'm thinking about it)

1 comments:

Unknown said...

Dave,

Did u see

http://www.npr.org/templates/story/story.php?storyId=121610159

The Dude Abides: The Gospel According to the Coen Brothers
By Cathleen Falsani
Paperback, 240 pages
Zondervan
List price:$14.99