[OPE] Reuters: economic rationality of parts and overall irrationality

From: Jurriaan Bendien <adsl675281@telfort.nl>
Date: Sun May 10 2009 - 17:22:51 EDT

(...) "I think the clear and present danger is the negative feedback loop
for the economy," said Greg Peters, head of global-fixed income and economic
research at Morgan Stanley in New York.

"If people are getting laid off and if capital expenditures are being pulled
back, then that has a cascading effect that is much more long-lasting on the

Analysts and investors argue that while job, capex and R&D cuts may shore up
individual profits temporarily, they are bad news in the aggregate. They
swell the ranks of the unemployed, reduce the wages of those who keep their
jobs, and hurt an already struggling economy by further crimping consumer
and corporate spending.

And that will only ricochet back on the companies themselves, reducing
demand for their products and services and putting additional pressure on
their sales and margins.

"As corporations cut payrolls and deleverage they are acting perfectly
rationally," said Robert Reich, the former U.S. Labor Secretary under
President Bill Clinton who now teaches at the University of California,

"But if that's what every corporation does, we're going to end up with far
more job losses and in a deeper economic hole. Who's going to be left to buy
all the goods and services these companies produce?"

The list of U.S. companies able to report better-than-expected results for
the most recent quarter because aggressive cost cuts offset falling sales is
a long one. (...)


Part of the answer to Reich's question I assume is the development of a dual
economy in the US - there's those that can buy stuff and those that cannot.
There's those who have permanent jobs and there are those who do not.
Production then re-orients to those who can buy stuff.

To understand how this works, just check out the FedEE news about Spain
where the unemployment rate has risen from 9.5% to 17.4%. (in the under-25
age group, EU unemployment affects 18.3% of the workforce, but in Spain it
is now running at 35.4%):

05/05/2009: Permanent workers rise by 70,200
Although the total number of wage earners with temporary contracts in Spain
declined by 1,044,600 over the year to Q1 2009, the number of workers with
permanent contracts increased by 70,200.
In Spain's two-tier labour market, employers have been reluctant to hire
workers on permanent contracts because of the prohibitively expensive level
of compensation that must be paid when terminating such workers. But
fixed-term workers who have been subject to two or more contracts with the
same company in the same job for more than 24 months (within any 30-month
period) may now claim permanent employment contracts. It is likely to be the
exercise of this right that has caused the increase in the total number of
permanent workers, in spite of the current economic downturn.

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