The Coming Unemployment Tsunami
People who are interested in the stock market will be familiar with technical analysis of stock charts, the reason this analysis works is the stochastic element in the stock charts-the results of the interaction between a large number of actors-the reason the analysis ultimately fails is that stock indices are not stochastic processes.
Leaving aside the question of why the technical analysis works or fails let us apply such analysis to a different kind of a chart, we examine the chart of employment-population ratio for the US for the last sixty years.
We can clearly see a head & shoulders pattern starting from the middle of the eighties-a head & shoulders pattern is a central triangle between two smaller triangles, resembling a head between two shoulders-and presently going through the downward side of the right (second) shoulder.
The pattern is based on a support at 62% rising in the shoulders to 63% and in the head to 64.5%. Once the ratio goes under the support we expect to see rapid decline; if the decline goes down to the resistance of the previous top it will reach 60%, but if it goes all the way down to the support then it will reach 57%. So we can expect a rapid decline from the current 63% of 4.5 points to 58.5% (the average of support and resistance).
Four and a half percent of three hundred 250 million people equals 13.5 11.5 million workers who should lose their jobs in about sixty months (five years). This decline would then mirror (see graph) the rise in the employment-population ratio that took place in the eighties. The rise was fairly uninterrupted and the decline will also be as straight as the rise.
Less people working would mean trouble even in households were both husband and wife work, because such households depend on the second income to survive. It will mean trouble for those who will keep their job because there will be a great pressure on wages, which will decline enormously. It will mean trouble for Latin America as remittances decline and migration to the north stops. It will mean trouble for Germany and Japan as their most important export market declines. It will be a disaster for the Chinese, and rightly so, as their export sector collapses and their dollar reserves becomes worthless.
The coming unemployment tsunami is going to be a mighty challenge, but the US, and the world, has only pygmies to face it.
People might ask: is it really coming? The technical analysis is not the reason I think it is coming, it only gives us quantitative limits, instead I think its coming because of historical-economic analysis that I’ve been reading since the start of the current financial crises. The economic analysis is predicting conditions worse than the Great Depression, which means unemployment might sink even further that what is estimated here.
