The hunt to avoid the Red October

Last week, the US Department of Labour released a monthly snapshot figures that the US economy lost bled 263,000 jobs, raising the unemployment rate to 9.8 per cent. The figures were higher than forecasts made by Wall Street and the government. To make matters worse, a more exhaustive measure that includes those who have stopped looking or work part-time is called the U-6. This figure stands are 17 per cent!

All this comes, despite rising equity markets (the Dow is up 45 per cent since March). In 1991, when recession ended, it took 15 months before unemployment dropped; in 2001, the lag was 19 months. In contrast, in 1960, it took two months. This divergence between a growing-to-stable economy and a stagnating labour market is called 'jobless recoveries'. We aren't "stable" today, and far from a "growing" economy.

Since July, however, there is an emerging relief that perhaps the worst is over. The surviving firms have begun rehiring. Add to it a psychological relief that massive, unprecedented scale of governmental intervention has created. From lowered interests, direct stimulus, thawing commercial paper market that had frozen up - it seems natural to believe that the worst is over. Further, even in the US, liquidity (despite continued reluctance by banks to lend) is on the rise with Treasury auctions unabated. All of this gives a sense that things are headed to normalcy.

Yet, as Marx would have it, a spectre is haunting the US - a spectre of jobless recoveries. Ends to recession, as measured by National Bureau of Economic Research, are predicated on measures of GDP (gross domestic product) growth. For the last four quarters, the US economy has contracted and shed jobs. However, since 1990, jobless recoveries have become the norm.

Yet, when recessions end, the effects are typically uneven. Typically, non-tradable services (plumbers, construction workers etc) and the upper echelons of tradable services (commodities brokers, high-end research etc) go on to do well. However, the intermediate ranks of American labour - ones amenable to value-driven outsourcing and likely to be replaced by technology - are likely to suffer the paroxysms of a frozen credit market more viciously this time. A good, if unpredictable, portion of the 15 million job losses since 2007 are unlikely to return in any recognisable form, manner or in the same geographical area.

To complicate things, the idea of America, since the California Gold Rush or Steinbeck, has been synonymous with labour mobility. Yet today, fragmented health care insurance markets with fierce coverage restrictions and an ageing demographic with non-transferable human capital skills has produced a bigger sliver of an increasingly immobile population than ever before. With these factors in mind, it is perhaps none too surprising when the ratings agency Moody's estimates that the economy is unlikely to return to a pre-credit crises jobless figures till 2014. The government's stimulus plans are fraught with danger. With financial markets in China and US starting to price in inflation, it is unlikely the US government can get away any further beyond this December by monetary stimulation or outright debt-monetisation of the economy.

In the Greek epic, the Odyssey, the hero Odysseus must choose between two monsters on his voyage home - Scylla or Charybdis. The Obama administration is caught between two monsters: the Scylla of painful structural readjustment and the Charybdis of rising inflation. Odysseus, Homer wrote, chose to bypass Charybdis and sacrificed some of his sailors to Scylla. These myths might teach us a thing or two about decision making under crises.

Only if we read carefully.

- The columnist works for a major European investment bank in New York City. Views expressed here are the author's own and do not necessarily reflect the views of his company or of Gulf News.