Month: November 2014

Oil prices at a 4-year low: Decoding why Saudi Arabia won’t mind low prices for some time

oil

Vivek Kaul 

Oil prices have fallen to a four year low. As I write this the price of Brent crude oil stands at $82.82 per barrel, down 30% from June 2014.
The latest drop in price has come after Saudi Arabia, the biggest producer of oil within the Organisation of Petroleum Exporting Countries(OPEC), the global oil cartel, decided to cut the price at which it sold oil to the United States by roughly 45 cents to a barrel. At the same time it increased the price to customers in Europe and Asia, for the first time in five months.
The theory going around for sometime has been that Saudi Arabia needs the price of oil to be at least at $83-84 per barrel to balance its budget. Hence, it won’t allow the price of oil to fall below that level. But that as we have seen hasn’t turned out to be the case with the price of Brent crude now less than $83 per barrel.
So, the question is why is Saudi Arabia allowing the price of oil to fall and taking a hit on its income? On many past occasions, the country has cut production when the price of oil is falling. This has helped the country prevent a fall in the price of oil.
As analysts at Merrill Lynch write in a recent report titled Does Saudi Want $85 oil “Our analysis suggests that since 2008, on average, a 10% drop in oil prices has historically led to a 1.5% reduction in Saudi production 3 months later, rising to 2% after 6 months.” Nevertheless, it doesn’t seem to be doing that this time around.
So what has changed? In 2013, United States became the largest producer of oil in the world, displacing Saudi Arabia. The shale oil fields of the United States are producing a lot of oil, and this has helped the country to become the largest producer of oil in the world. This has led to American imports of oil from Saudi Arabia coming down. Data from the US Energy Information Administration tells us that the imports from Saudi Arabia comprised of around 4.6% of total US oil consumption in August 2014. This is down from 7% in August 2013.
In fact, over the last two months, American imports of oil from Saudi Arabia have fallen under one million barrels per day, against 1.4 million barrels earlier. If one looks at the data over a longer period the situation looks even more grim. Over a period of last six years, the production of oil in the United States has increased by 70%. This has led to the reduction of oil imports from OPEC by half. Saudi Arabia is the biggest producer of oil within OPEC.
Saudi Arabia is trying to set this situation right. Shale oil is expensive to produce. Given this, it is viable for companies to produce oil, only if the price of oil remains at a certain level. As the Merrill Lynch analysts point out “With production costs ranging from $50 to $75/bbl at the well head, a decline in Brent crude oil prices to $85 would likely be a major blow to US shale oil players and lead to a significant slowdown in investment.”
Hence, Saudi Arabia is trying to make the production of shale oil unviable for companies which produce shale oil, by driving down the price of oil. The question is how long can the Saudis keep driving the price of oil?
Loren Steffy writing for Forbes.com points out that “The Saudis appear willing to use the abundance of U.S. production to allow prices to keep sliding, enabling the kingdom, which can profit from oil at as little as $30 a barrel, to grab a larger share of the global market.”
While the cost of production of oil in Saudi Arabia maybe low, there are other costs that need to be taken into account. David Strahan in his book The Last Oil Shock explains that that over the years in Saudi Arabia is that as oil prices have gone up, the rulers have been able to run one of the most lavish welfare systems in the world. This has helped them buy political legitimacy and the support of its citizens. For a very long time, the citizens of Saudi Arabia paid no tax, yet had access to free healthcare and education. At the same time, housing, electricity, food and fuel were subsidized. All this was possible because of all the money that was being earned by selling oil. And that is why for Saudi Arabia to balance its budget (i.e. the expenditure of the government is equal to its income), it needs to sell oil at a price of $83-84 per barrel.
Given this, will the Saudis start cutting production and pushing the price of oil up? “Much has been written recently about the marginal costs of production of crude oil, and how much which nation will “hurt” if West Texas Intermediate oil prices fell below the US$ 80 mark,” says Vijay L Bhambwani, CEO of BSPLIndia.com. West Texas Intermediate is the American oil benchmark and is currently at $77.2 per barrel.
Nevertheless, as long as long as Ghawar, Safania, Shayba, Abqaiq, Berri, Manifa, Abu Safah, Faroozan oil fields are viable, Saudis can sustain even lower prices, feels Bhambwani. At the same time, the fact that Aramco (officially known as Saudi Arabian Oil Company) has deep pockets is a point worth remembering. “Saudis can produce low cost arab light sweet crude very cost efficiently and only the recent state welfare schemes implemented after the arab spring, have raised the marginal costs. Even a slight rollback / delayed released of the additional welfare payments (US $ 36 billion) can add sizeable cash flow into the Saudi national balance sheet and give it additional staying power,” adds Bhambwani.
Also, it is worth remembering that the Saudi central bank has reserves worth $734.7 billion. Further, as Edward Chow a senior fellow at the Center for Strategic & International Studies in Washington, recently told Bloomberg “The Saudis ran deficits from the mid-1980s until the late 1990s and may be prepared to do so again.”
What this tells us is that the Saudis can easily sustain low oil prices in the short-term, if they are looking to break the backs of the shale oil companies. At the same time low oil prices will hurt Iran, much to the delight of the Saudins.
To conclude, any fall in price of oil, will benefit India, and help the government further control its fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends. So, India should hope that Saudi Arabia continues with its current strategy of driving down the price of oil.

The column appeared on www.FirstBiz.com on Nov 6, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Mr Mahindra and Mittal, low interest rates do not always lead to faster economic growth

indian rupeesVivek Kaul

The Reserve Bank of India releases sectoral deployment of bank credit data every month. The latest data shows that loan growth of banks for the one year period between September 20, 2013 and September 19, 2014, slowed down to 8.7%.
Interestingly, in the one year period between September 21, 2012 and September 2013 it had stood at 17.9%. What is worrying is that the bank loan growth in this financial year has almost come to a standstill. Between March 21, 2014 and September 19, 2014, the bank loan growth stood at a very low 1.8%. The growth between March 22,2013 and September 20, 2013 had stood at 6.7%.
Not surprisingly, calls for a repo rate cut by the Reserve Bank of India (RBI) have become very fashionable these days. Repo rate is the rate at which the RBI lends to banks. A PTI report quotes industrialist Anand Mahindra as saying “It might be time for the RBI to think of a rate cut.” “The need of the hour has changed and its time to start to look to support growth,” Mahindra added. Sunil Mittal, chief of Bharti Airtel, also suggested the same when he told CNBC TV 18 that the finance minister Arun Jaitley “had spoken for the nation,” when had asked for an interest rate cut. In a recent interview to The Times of India Jaitley had said “Currently, interest rates are a disincentive. Now that inflation seems to be stabilizing somewhat, the time seems to have come to moderate the interest rates.”
The logic is that if the RBI cuts the repo rate, banks will also cut interest rates, and this in turn will lead to people borrowing and spending more. Companies will also borrow more and expand and invest in new projects. And this will lead to faster economic growth.
Nevertheless, the thing is that economic theory and practice don’t always go together. So, a cut in interest rates doesn’t always lead to an increase in investment by the corporate sector. As Crisil Research points out in a report titled Will a rate cut spur investments? Not really “the monetary policy tool of cutting the interest rate is conventionally used to energise a flagging economy. But this does not hold true under all circumstances.”
Crisil Research comes to this conclusion after comparing the last two financial years with the pre-crisis years of 2004-2008. During 2004-2008, private corporate investment increased despite high interest rates. The same has not been true during the last two years. As the report points out “Investment growth, particularly private corporate investment, plummeted in the fiscals 2013 and 2014, despite low real interest rates. During this time, the policy rate in real terms – repo rate minus retail inflation – has been negative, and real lending rates averaged 2.4%. This is significantly lower than the 7.4% seen in the pre-crisis years (2004-2008). Yet investment growth dropped to 0.3%, down from an average 16.2% seen in the pre-crisis years.”
The question to ask why has that been the case? Most corporates while making a decision to increase their investment take a look at the expected return. “Investments are undertaken when the expected returns on them are more than the real lending rate (real borrowing cost for corporates). The average rate of return on corporate investment (non-financial firms) – as proxied by return on assets – fell sharply to 2.8% in fiscal 2013 and 2014 from nearly 6% in the pre-global financial crisis years,”Crisil Research points out.
A very good example of this is the road construction sector where investments are made by looking at the internal rate of return on the project. The internal rate of return on road projects during the period 2008-2009 was between 16-18%. It has since fallen to 8-14%. And the major reason for this is cost overrun for which corporates are themselves responsible to a large extent and delays in projects clearances by the government. These projects have also found it difficult to acquire land. Interest rates have had almost no role to play here.
This is basic economics at work. And our politicians and businessmen need to be aware of this. Further, what our politicians and businessmen do not talk about is the fact that many large business groups are heavily indebted and this has led to their interest costs shooting up. One sector where companies are heavily indebted is infrastructure. As Crisil Research points out “The ratio of interest cost to operating income for infrastructure companies has increased sharply in recent years from 4.7% in fiscal 2010 to 13.2% in 2014. However, the analysis suggests that this worsening had more to do with high indebtedness of infrastructure companies than elevated interest rate.”
Also, India has fallen constantly in the global competitiveness rankings. India’s position in the Global Competitiveness Index fell to 71 in 2014. It was at 60 in 2013 and 49 in 2009. The RBI was not responsible for any of this. This was a mess made the politicians of the Congress led UPA which ruled the country for a decade and the businessmen who went on a borrowing spree and underestimated costs of setting up projects.
Also, the Indian consumer is not ready to get his shopping bags out as yet though he flattered to deceive briefly, after Narendra Modi was elected as the prime minister. This is reflected in a variety of numbers from low manufacturing inflation to low index of industrial production and car sales.
The reason for this is that inflationary expectations ((or the expectations that consumers have of what future inflation is likely to be) continue to remain high. Hence, the Indian consumer is still not convinced that the high inflation that he has had to deal with over the last few years has finally been killed.
The Reserve Bank of India’s Inflation Expectations Survey of Households: September – 2014 which was a survey of 4,933 urban households across 16 cities, and which captures the inflation expectations for the next three-month and the next one-year period. The median inflation expectations over the next three months and one year are at 14.6 percent and 16 percent. In March 2014, the numbers were at 12.9 percent and 15.3 percent. Hence, inflationary expectations have risen since the beginning of this financial year.
lnflationary expectations be reined in once inflation remains low for an extended period of time. And consumer demand is likely to pick up only after this happens.
To conclude it has become fashionable for the government and the businessmen to blame RBI for slow economic activity in the country. Nevertheless, it is time they started to get their own act right. The RBI can only do so much.

The piece originally appeared on www.FirstBiz.com on Nov 5, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

There’s one simple solution to solve India’s coal woes: Shut down Coal India

coal

Vivek Kaul

The government owned Coal India which produces a major portion of India’s coal, releases production numbers every month.
In October 2014, the company met its production target for the first time during this financial year. The company produced 40.20 million tonnes of coal during the course of the month. The target was at 39.74 million tonnes.
Nevertheless, this is where the good news ends. Between April and October 2014, the company was supposed to produce 259.85 million tonnes of coal, but managed to produce only 250.96 million tonnes or around 97% of its target.
Coal India produces more than four fifth of the coal produced in the country. Hence, India is more or less totally dependent on the company to produce the coal that is needed. And the fact of the matter is that Coal India has not been able to increase coal production at the same pace as coal demand has increased. This despite the fact that India has close to 301.56 billion tonnes of coal reserves as per estimates of the Geological Survey of India.
Coal India produced 323.58 million tonnes of coal in 2004-2005. Since then the company has managed to boost production to 462.42 billion tonnes of coal in 2013-2014, at an average annual rate of 4.05%. During the period coal imports have shot up from 28.95 million tonnes to 171 million tonnes, at an average annual rate of 21.8%. This clearly shows the disconnect between coal production and coal demand.
The production of coal by Coal India has not been able to keep pace with the rate at which demand for coal has grown in the last decade. And this explains to a large extent why 61 out of India’s 103 power plants had a coal inventory of less than four days as on last Thursday.
The basic reason for this lies in the fact that Coal India’s productivity is very low. The number to look at here is the output per man shift. In 2013-2014, this number had stood at 5.62 tonnes. For underground mines this had was at 0.76 million tonnes, whereas for open cast mines it was at 12.18 tonnes.
The number has seen some improvement over the last decade. In 2004-2005, it had stood at 3.05 tonnes for open cast mines. For underground mines the number was at 0.69 tonnes.
While on the face of it there has been an improvement in the productivity of Coal India, but this increase falls flat when we compare it to the output per man shift number at the international level.
Let’s take the case of Australia. In 1986, the output per man shift of an open cast mine in Australia was at 35 tonnes. For underground mines it was at 12 tonnes. In the Indian case the numbers stood 12.18 tonnes and 0.76 tonnes in 2013-2014. Hence, the productivity of Coal India is not even near the level where it was in Australia nearly 30 years back.
How does the latest output per shift number from Australia look?  As Swaminathan Aiyar pointed out in a recent column in The Economic Times “In Australia, collieries produce 75 tonnes per manshift (of eight hours) in open-cast mines and 40 tonnes per manshift in underground mines.”
There are several reasons for this low productivity of Coal India. As Suyash Rai and Ajay Shah point out in a recent people titled India needs more coal “A monopoly [like Coal India] does not face the competitive pressure that punishes inefficiency…The relationship with labour in Coal India appears to be lopsided, even by the standards of public sector firms. Junior staff at Coal India are paid rather well when compared with other employment with the similar skill and hardship. This may be attributed to powerful trade unions. The strength of trade unions may explain the low productivity at Coal India.”
Given these reasons there are a few things that need to be done urgently if India is to produce more coal. First and foremost the monopoly of Coal India needs to be ended. A simple way is to allow foreign as well as Indian private investment into commercial mining of coal.
There is another way the monopoly of Coal India could be ended. Coal India currently operates through eight subsidiaries which produce coal. Another subsidiary the Central Mine Planning and Design Institute (CMPDI) essentially does all the planning for Coal India and does not produce any coal.
The time has come to dismantle Coal India and let the eight coal producing subsidiaries operate on their own. This will get some competition going in the sector. It will also unleash the real potential of companies like Mahanadi Coalfields Ltd and Northern Coalfields Ltd, which are the companies which have been driving the performance of Coal India. There operating margins are better than the best private companies in India.
Also, other companies like Eastern Coalfields and Bharat Coking Coal which bring down the overall performance of Coal India will have to fend for their own.
Having said that both proposals are a political minefield and it remains to be seen whether the government is willing to push them through.

The article originally appeared on www.FirstBiz.com on Nov 4, 2014 

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Sensex hits record high: Now Japan takes over the easy money party from the US

japanVivek Kaul

Two days after the Federal Reserve of the United States brought to an end its money printing programme, the Bank of Japan decided to do exactly the opposite. In a surprise move the Japanese central bank on Friday (October 30, 2014) decided to increase the amount of money it has been printing to get the Japanese economy up and running again.
The Bank of Japan will now print 80 trillion yen (or around $727 billion) per year. The central bank has been printing money since April 2013 and was earlier targeting around 60-70 trillion per year. It pumped this money into the financial market by buying Japanese bonds.
In fact, the Bank of Japan entered the money printing party rather late. The money printing efforts of the Japanese central bank in the aftermath of the financial crisis were rather subdued and it had expanded its balance sheet (by printing yen and buying bonds) by only 30% up to December 2012. And then things changed.
This was after Shinzo Abe took over as the Prime Minister of the country on December 26, 2012. He promised to end Japan’s more than two decades old recession through some old-fashioned economics, which has since been termed as Abenomics.
Abenomics is nothing but money printing in the hope of creating some inflation. Abe’s plan was to get the Bank of Japan to go in for money printing and use the newly created “yen” to buy Japanese bonds.
By buying bonds, the central bank ended up pumping the printed money into the Japanese financial system. The hope was that all this extra money in the financial system would lead to lower interest rates. At lower interest rates people would borrow and spend more, and in the process the government would manage to create some inflation, as more money would chase the same amount of goods and services.
The Bank of Japan, the Japanese central bank, went with the government on this and is targeting an inflation of 2 percent. It wants to reach the goal at the earliest possible date, by printing as much money as maybe required.
And how will that help? In December 2012, Japan had an inflation rate of –0.1 percent. For 2012, on the whole, inflation was at 0 percent, which meant that prices did not rise at all. In fact, for each of the years in the period 2009–2011, prices had fallen in Japan.
When prices are flat, or are falling, or are expected to fall, consumers generally tend to postpone consumption (i.e., buying goods and services) in the hope that they will get a better deal in the future. This impacts businesses, as their earnings either remain flat or fall. This slows down economic growth.
On the other hand, if people see prices going up or expect prices to go up, they generally tend to start purchasing things. This helps businesses as well as the overall economy. So, by trying to create some inflation the idea is to get consumption going again in Japan and help it come out of a more than two decades old recession.
In fact, when it started to print money, the Bank of Japan had planned to inject $1.4 trillion into the Japanese financial system by April 2015. This was pretty big, given that the size of the Japanese economy is around $5 trillion. Now it will end up printing even more yen. The size of the balance sheet of the Bank of Japan has gone up rapidly since March 2013, a month before it actually started to print money.
Back then the size of the balance sheet of the Bank of Japan had stood at 164.8 trillion yen. Since then it has jumped to 276.2 trillion yen as of September 2014. This has happened because the Bank of Japan has printed money and pumped it into the financial system by buying bonds.
The question is why has the Bank of Japan decided to increase the quantum of money printing now. The answer lies in the fact that even with all the money printing it hasn’t managed to create the desired 2% inflation even though the inflation in Japan is at 3.4%. But how is that possible? As investment letter writer John Mauldin explains in a recent column “What you find is that inflation magically appeared in March of this year when a 3% hike in the consumption tax was introduced. When government decrees that prices will go up 3%, then voilà, like magic, you get 3% inflation. Take out the 3% tax, and inflation is running about 1%.”
Given this, the real inflation is at 1%. The Bank of Japan wants to increase it to 2% and hence, has decided to print more money than it did before.
The irony is that Bank of Japan like other central banks in the developed-world before it have, is trying more of a policy which hasn’t worked for it. James Rickards explains this dilemma beautifully in The Death of Money: “the great dilemma for the Federal Reserve and all central banks that seek to direct their economies out of the new depression [is that] … the more these institutions intervene in markets, the less they know about real economic conditions, and the greater the need to intervene.”
This move by the Bank of Japan also means that the era of “easy money” will continue. More money will now be borrowed in yen and make its way into financial markets all over the world. In fact, the Indian stock market has already started partying with the Sensex rallying by 519.5 points or 1.9% and closing at 27,865.83 points on Friday.
And this is the irony of our times. The stock markets treat bad economic news as good news because the investors know that this will lead to central banks printing more money as they try and get economic growth going again.
As Gary Dorsch, Editor, Global Money Trends newsletter, wrote in a recent column “Bad economic news is treated as Bullish news for the stock market, because it lead to expectation of more “quantitative easing.” Quantitative easing is the term economists use for central banks printing money and pumping it into the financial system by buying bonds. This is precisely what is happening in Japan.
As Dorsch further points out “And the easy money flows that are injected by central banks go right past goods and services (ie; the real economy) and are whisked into the financial markets, where it pushes up the prices of stocks and bonds. In simple terms, what matters most to the stock markets are the easy money injections from the central banks, and to a lesser extent, the profits of the companies whose stocks they are buying and selling.”
To conclude, this is not the last that we have seen of a developed-world central bank deciding to print more money to create some inflation. There is more to come.
Stay tuned.

The article originally appeared on www.FirstBiz.com on Nov 1, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Federal Reserve ends money printing, but the easy money party will continue

yellen_janet_040512_8x10Vivek Kaul

The Federal Open Market Committee(FOMC) which decides on the monetary policy of the United States in a statement released yesterday said “the Committee [has] decided to conclude its asset purchase program this month.”
What the Federal Reserve calls “asset purchase program” is referred to as “quantitative easing” by the economists. In simple English this is just the good old money printing with a twist. Since the start of the financial crisis, the Federal Reserve has printed around $3.6 trillion of new money.
This month the Federal Reserve has printed around around $15 billion. It has pumped this money into the financial system by buying government bonds and mortgage backed securities. From November 2014, the Federal Reserve will no longer print money to buy government and private bonds.
So why is the Federal Reserve bringing money printing to an end? The simple reason is that with so much money being printed and pumped into the financial system, there is always the threat of too much money chasing too few goods, and leading to a massive price rise in the process. Even though something like that has not happened the threat remains.
As John Lanchester writes in How to Speak Money “More generally QE[quantitative easing] taps into the fear that governments printing money always leads to dangerous levels of inflation, and that inflation, like a peat-bog fire, is all the more dangerous when it’s cooking up underground.”
There have been too many instances of money printing by the government leading to massive inflation in the past. And the Federal Reserve couldn’t have kept ignoring it.
Lanchester perhaps describes quantitative easing(QE) in the simplest possible way and what it really stands for by cutting out all the jargon in his new book How to Speak Money. As he writes “QE involves a government buying its own bonds using money which doesn’t actually exist. It’s like borrowing money from somebody and then paying them back with a piece of paper on which you’ve written the word ‘Money’ – and then, magically, it turns out that the piece of paper with ‘Money’ [written] on it is actually real money.”
Lanchester describes QE in another way as well. He compares it to a situation where an individual while looking at his “bank balance online” also has “the additional ability to add to it just by typing numbers on [his] keyboard.” “Ordinary punters can’t do this, obviously, but governments can; then they use this newly created magic money to buy back their own debt. That’s what quantitative easing is,” writes Lanchester.
This has been done in the hope that with all the newly money created being pumped into the financial system, there would be enough money going around and interest rates would continue to remain low. At lower interest rates the hope was people would borrow and spend more, and this in turn would lead to economic growth.
This did not turn out to be the case. What happened instead was that financial institutions borrowed money at very low interest rates and invested that money in financial markets all over the world. This explains to a large extent why stock markets have rallied all over the world in the recent past despite slow economic growth in large parts of the world.
So with the Federal Reserve deciding to stop money printing, will the era of easy money come to an end as well? The answer is no. For “easy money” junkies the party will continue. The Federal Reserve stated yesterday that “The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial condition.”
What does this mean in simple English? The Federal Reserve has printed and pumped money into the financial system by buying bonds. It currently holds around more than $4 trillion worth of bonds. Bloomberg points out that this makes up for around 20% of all the bonds issued by the American government as well as mortgage backed securities outstanding. The Federal Reserve holds around $2.46 trillion of US government bonds.
In the days to come as these bonds mature, the Federal Reserve plans to use the money that comes back to it to buy more bonds. In this way it plans to ensure that the money that it has printed and pumped into the financial system, stays in the financial system.
Hence, Federal Reserve will not start sucking out all the money it has printed and pumped into the financial any time soon. And this means that the era of “easy money” will continue for the time being. The Federal Reserve also stated that fit plans keep interest rates low “for a considerable time following the end of its asset purchase program this month.”
By doing this, the Federal Reserve is essentially buying time. Currently, it is very difficult to predict how exactly the financial markets will react if the Fed decides to start sucking out all the money that it has printed and pumped into the financial system.
As Lanchester writes “Nobody quite knows what’s going to happen once QE stops. In fact, the ‘unwinding’ of the QE is on many people’s list as the possible trigger for the next global meltdown.” Further, even though the American economy is doing much better than it was in the past, the recovery at best has been fragile. The US economy grew by 4.6% during the period between July and September 2014, after having contracted by 2.1% during April to June, earlier this year.
The rate of unemployment in the US has been coming down for quite a while now. In September 2014, it stood at 5.9% against 6.1% in August. This rate of unemployment is around the average rate of unemployment of 5.83% between 1948 and 2014. It is also below the 6.5% rate of unemployment that the Federal Reserve is comfortable with.
Nevertheless, even with these reasons, the Federal Reserve is unlikely to start sucking out money and raising interest rates any time soon. This is because the US has become what Lanchester calls a “two-speed economy”. Lanchester defines this as “an economy in which different sectors are performing differently at the same time”. In the American context, it is a matter of Texas and the rest of the country.
The state of Texas has been creating more jobs than any other state in the United States. As Sam Rhines an economist at Chilton Capital Management points out in a recent article in The National Interest “From its peak in January 2008 through today, the United States has created only 750,000 jobs. Texas created over a million jobs during that same period—meaning that the rest of the country (RotC) is still short 300,000 jobs. During the recovery, job creation has been all Texas or—at the very least—disproportionately Texas.”
This has meant that the contribution that Texas has been making to the US economy has increased over the last few years, from 7.7% in 2006, it now stands at 9%. So, if one takes Texas out of the equation, the United States still hasn’t recovered all the jobs it lost since the start of the financial crisis in September 2008. Further, if one takes out the Texas growth out of the equation, the GDP growth also falls considerably. As Rhines writes “From 2007 through the end of 2013, the U.S. economy grew by $702 billion, and Texas grew by $220.5 billion.”
Other than this the broad unemployment numbers hide the fact that the labour force participation rate has been falling over the years. Labour force participation rate is essentially the proportion of population older than 15 years that is economically active. The number for September 2014 stood at 62.7%. This is the lowest number since 1978. The number had stood at more than 65% before the start of the financial crisis. Hence, more and more people are now not looking for jobs and they are no longer counted as unemployed.
Further, a lot of jobs being created are part-time jobs. Also, with jobs being difficult to come by many people looking for full-time jobs have had to take on part time jobs. In August 2014, nearly 7.3 million Americans were involuntarily working part time, compared to 4.6 million in December 2007, before the financial crisis had started. In September 2014, this number dropped to 7.1 million. Even after this fall, the number remains disproportionately high. This underemployment is not reflected in the rate of unemployment number.
Janet Yellen obviously understands this. As she had said in a press conference in September 2014 “There are still too many people who want jobs but cannot find them, too many who are working part-time but would prefer full-time work.”
Taking all these factors into account the Federal Reserve is unlikely to start sucking out all the money it has printed and pumped into the financial system any time soon. Nevertheless, whenever it gets around to doing that there will be trouble ahead.
Lanchester perhaps summarises the situation well when he says: “If a medicine is guaranteed to make you very sick when you stop taking it, and you know that one day you’ll have to stop taking it, then maybe you shouldn’t start taking it in the first place.”
But that at best is a benefit of hindsight. The horse, as they say, has already bolted by now. Alan Greenspan, the former Chairman of the Federal Reserve, recently said that the next phase of Fed’s retreat would not be so smooth and the Fed would not able to avoid turmoil. “I don’t think it’s possible,” Greenspan said.

The column is an updated version of a column that appeared on October 29, 2014. You can read it here.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)