Executive Summary

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If you have not yet read Part I of Winning A Few Battles, But Losing the War Against Deflation in the 21st Century, available free to all readers, please click here to read it first.

The most recent US jobs report was a shocker, with its headline of just 74,000 jobs created. Ironically, the report was indeed disappointing, but not just because of the headline.

Over the past two years, the economy has reliably created about 150,000 jobs per month. Just enough to keep up with population growth, but alas, not enough to put the long-term unemployed back to work. So, the headline number will probably be revised higher in the next month or two.

No, the concerning data in the report came in the details of the jobs created: as usual, mostly in the lower wage sectors. A wrap-up tweet from Dan Alpert of Westwood Capital summed up the facts rather nicely:

#BLS 100% of the 87,000 private sector jobs created were in low wage sectors: Retail +55K; Admin/waste +31K; Leisure +9. HIGH WAGE DOWN 8K!

— Dan Alpert (@DanielAlpert) January 10, 2014

Other notable observations from the report included the fact that job creation in 2013 was no higher than in 2012. Not exactly an encouraging trend for those who would be looking for inflation risk, or strong growth in 2014.

But perhaps worst of all was the number of workers leaving the workforce. Part of this can be explained, of course, by demographic retirements. It's no secret that the US has an aging population, and there's a bulge of retiring workers that will admittedly create some gaps in the labor market over the next decade. But the large numbers of workers exiting the workforce is also explained by discouraged workers and that unemployment benefits for many have started running out.

What many in the public do not understand, is that workers taking unemployment checks are counted as active seekers of employment. They are added to the composition of the workforce, and when they continue to take unemployment checks but do not find work, they serve to keep the unemployment rate elevated. But when unemployment benefits expire, and workers leave the workforce, the unemployment rate may go down but the population of non-working labor soars.

That is exactly what happened in November: 347,000 people left the workforce, and the unemployment