Update on the 2014 Economy

You may remember I predicted a good year for jobs in 2014.

Right. So far, so good. The BLS released a decent May Jobs Report. Major highlight: another decline in the unemployment rate, with 288,000 jobs added to the economy. The labor force is not growing (with people dropping out of the labor force and not a whole lot more added), but we are at least adding SOME jobs into the economy, and boosting the employment rate a little bit.

Unfortunately, momentum isn't really picking up. A dynamic economy really should reabsorb all the people left behind in the economic bust. People aren't coming back in droves. Hell, we aren't even seeing part-time workers become full-time. So we do not have a booming engine of recovery.

Fortunately, certain macro-economic indicators are looking up, and I am actually going to revise my priors upwards.

The two big stories?
Housing Starts are making a come-back.

This is huge development. Housing Starts represent new family units, that require new housing. For example, I moved out of my parent's house, and my fiancé moved out of her parent's, and we started our own household.

Obviously, our household needs a roof and four walls and....you know the drill.

Housing Starts have remained enormously depressed for years. But those have trended upwards for quite a while. This means that the housing market should start to pick up, which represents a huge boon to the economy, both in wealth effects (my house is worth more), and in actual GDP (we build more houses).

We're obviously still at a low level, but we're at a pretty low unemployment for this low level. A big upswing in construction should mean reabsorbing some people into the economy and some gradually rising wages.

Right now we're still, after all these years, in a weakened housing market....this really is something that should turn around in the next year or two, in my opinion.

The other story? Business are getting aggressive, too.
For background, capital expenditures are the dollars businesses spend on new things like factories or software or anything that's designed to grow their business. CAP-EX is uniquely important, as the balance between savings and investment is a critical link in the economy. A decline in business investment has disproportionate effects on the economy, and a recovery in business investment is the same in the other direction.
So this is an extremely positive sign that businesses are looking to expand and put dollars to work.

Financiers are getting bold, too. Despite the extremely poor conditions in the European Union right now, investors are sending tons of money to Europe and bidding down interest rates, in an effort to get some more yield. If the two primary emotions are greed and fear, this is definitely greed. Sick of getting 1% interest rates at home, investors will chance the default of Portugal for a 3.5% return.

Kind of sickening when you think about it.

All of this aggression, to me, indicates growth in the near future. I am really hoping for a solid second half of 2014.

Jenga Foreign Policy

Why do we keep following Fukuyama’s advice on how to End History?

Russia steam-rolled into Crimea not too long ago, and the US responded by cutting a lot of ties. Even NASA won’t cooperate anymore, which I suppose would have made Sandra Bullock’s Gravity performance a lot more difficult.

My first question: Why? Why impose all these sanctions?

That should be simple enough to answer. It’s 21st century combat. We think we can expel Russia from the community of nations, and control its impact on the world. Maybe we cannot force Russia out of Crimea this way, but we can impoverish Russia. Economically, politically, technologically, socially, we hold the cards, and will punish Russia severely for acting in a manner unbecoming a 21st century Great Power.

Sanctions are not a new idea, but Fukuyama highlighted this process and thought it would end in Market Capitalism throughout the world. The so-called “Democratic Core” hold all the cards, and can force other nations to play by Western rules. This will usher end in an era of peace, democracy, and wealth.

For example, after 1989, in Tiananmen Square….

Oh, right. Wasn’t too long before this

Led to this

The failure of Chinese sanctions is hardly an isolated incident. India’s Smiling Buddha was met by a series of sanctions, only to end in a nuclear trade agreement under Bush . Obama’s pivot allowed India access to Australian uranium supplies.

Meanwhile India has deployed its first generation of Submarine-launched ballistic missiles.

Maintaining coalitions, including sanctions, requires tiresome work, for little political gain. You can’t even keep US Senators from defecting sometimes, and the incentive to cheat compounds when national interests are at stake. The post WWII Western order met numerous disputes, including Algeria, Egypt, Skybolt, etc.  These are the kind of issues that multiplied until France left the unified NATO command.

Just think about that. France faced an incredibly powerful Soviet Union that controlled Poland and put down Czech rebellions with tanks. They still did not want to be part of our stupid coalition. Now you’re expecting us to enforce global isolation on Russia, for taking back territory that is 60% Russian, in a part of the world no one has cared about since the 1850s?

In the end, the old That 70s Show advice applies:

What bothers me is what I call a Jenga foreign policy strategy. We intend on building a set of carefully placed blocks and expect that to remain an indefinite foundation. Only over time, shocks occur that undermine those foundations.

An example of such a shock would be the fall of the Shah. An essential building block to our Middle East strategy, the collapse of the Shah led to a huge recalibration of US affairs. An equivalent USSR event would be the Sino-Soviet split, which forced Moscow to consider a billion new enemies in every political calculation.

The US should not build foreign policies according to its Best Laid Plan, and that includes sanctions that take months to implement and can be undone in a matter of minutes. Nor should we be backing ourselves into a corner and restrict our responses. The US needs a certain level of Grand Strategy, but that needs to include flexibility and open-minds. Open minds that can, for instance, see China as an essential ally against the Soviet Union, or be willing to re-engage a nation that detonated nuclear weapons against our wishes.

What would that mean here?

There will only be cheerful faces at this table, gentlemen.  I understand the popular narrative states there are no good options. Russia remains a weak nation with vulnerabilities. We will exploit these vulnerabilities.

Understood?

Good.

The first: understand that Russia reacted to a strategic FAILURE. The Euro-Maidan protests obliterated the Russian-friendly puppet in Kiev. Russia and its vassals lack the capacity to respond to the aggressive social movements that define Color Revolutions. They cannot shut down Social Media and lack the will to keep solidarity.

Since these Color Revolutions can quickly become armed revolutions, Russia remains in a position of weakness and flux.

The second: Russia cannot inspire trans-national unity and does not even understand the concept. Gentlemen, this is a huge opportunity and a blind-spot in our enemy. Our post-WWII European world has developed a certain degree of fraternity which protects the general peace. Large-scale like the European Union define our era, but these are institutions that Russia fundamentally does not understand, expect as a means of domination (as through the Warsaw Pact).

The third: we know Russia’s play-book, which is to sow domestic strife and then have an excuse to roll in.

The fourth: Russia will rely on military force and military threats to gets its way, but it damn well knows it cannot handle another Afghanistan or Chechnya and the mere thought scares the shit out of them.

We know Russia also relies on its extensive natural resources to generate economic growth. It remains corrupt, and has not benefitted from the massive growth in the Global Value Chain.

Gentlemen,

This is an opportunity. I leave the above facts in your hands. How should we respond to this aggression?