Government Has Taken Over

I was reading this weekend and I came across a chart that I couldn’t ignore. Sometimes I have a bunch of thoughts going through my head and it takes a chart to get my thoughts lined up in a manner that explains what I am seeing in the economy and the markets.

Here is the chart. Notice that the largest employer in California is Government. I looked through the data on a bunch of states and I could not find a state whose largest employer was the not Government.


http://www2.fdic.gov/recon/



In my line of work we have always believed that Management added nothing to profitability and were simply a structural cost to doing business. So we referred to them as “overhead”.

Government is “overhead”. It is a parasite to profits. It is a cost. In some cases it is obviously necessary, but to make it 17% of the economy is absurd.

Which gets me to my point – the government has taken over.

Manufacturing
The number of United States Manufacturing Jobs has fallen -26.3% since 1989. The US has lost Manufacturing Jobs every single year since 1999! The falling Manufacturing Jobs number is considered to be a result of efficiency gains and a falling Dollar.


Checkout this chart - Manufacturing and Construction jobs have flat-lined for 40 years, while the number of Government Jobs has doubled. I guess “efficiency gains” have not quite made their way into the Government Sector the last 40 years…


Over the past 10 years, the employment base has shrunk, but the size of the government has grown – by 7 million jobs!


We’ve lost the productive guts of our country and become a gigantic tenured, unionized blob of overhead. And that overhead is expensive. The average Government Job paid $73,203 in 2008, for a total cost (yes it is a COST to taxpayers) $184.4 billion.


If California is broke and needs to save $28 billion in 2010, then simply fire 382,000 average Government workers and presto – a Balanced Budget with zero entitlement cuts and no new taxes. That would make California’s Civilian Unemployment Rate 12.3% and its Government Worker Unemployment Rate 15%. Close enough for Government Work, don’t you think…

Now Arnold is begging for another $7 billion handout from Washington, so as not to have to stop spending money we don’t have.

“Stimulus 2009”
$53.6 billion went to saving Government Jobs –

“State Fiscal Stabilization Fund to avoid cutbacks and layoffs (82% must be used for education while 18% may be used for public safety and other government services. The latter part may be used for repairs and modernization of K-12 schools and college and university buildings).”

Our taxes spent to save union jobs.

Credit Contraction
With high unemployment and insolvent banks, the government is concerned that contracting Consumer Credit will cause Deflation. Therefore, the Government is expanding its borrowing as Consumer borrowing decreases for the first time ever!


What concerns me is that at some point Interest Rates will go vertical and the US Taxpayer will have to pony up a lot more money in Interest payments on all this newly-borrowed money. The Fed has even been so kind as to warn banks that higher interest rates are indeed coming.


Yet at the same time, the US Government has bought about $1 trillion in new mortgages maturing between 2037 and 2039. When rates go up, these bonds will lose a ton of money. Maybe that is why Geithner has uncapped the losses at Freddie and Fannie. BTW, most of these bond were either bought from place like the Central Banks of Asia, financial institutions like PIMCO and Banks or newly created as people refinanced at artificially low interest rates over the past year.


What’s Next?
At some point they will have to crash the value of the US Dollar. Venezuela just did it.

http://www.reuters.com/article/idUSN096521320100109

Unless we are willing as a country to restructure all of our promised entitlements, then Hyper Inflation is inevitable.

The Social Contract will get rewritten and there won’t be lobbyists in the room when it is done.