08/14/09 Ouzilly, France
How do you like this recovery? Pretty good, huh?
Except for the jobs, of course.
And except for the retail sales.
And except for the foreclosures…and house prices. And incomes. And consumer prices. And business profits.
It’s like a female impersonator…just like a real woman in every way, except for the essential ones.
At least stocks are doing well. The Dow rose another 36 points yesterday. In terms of time, it’s already beat the bounce of ’30…it’s in its sixth month. In terms of stock prices, it’s still a laggard, however. US stocks are up about 45% from their low of 6,547 on the Dow. By that measure, the current reading of 9,398 falls a little short of the 50% increase registered five months after the ’29 low.
Yesterday’s news was a big disappointment for mainstream economists. It’s ‘back to the drawing board,’ says The Wall Street Journal.
The dumbbells were already celebrating the end of the recession. Just yesterday, we reported on a survey of 53 of them. They figured the stimulus was working and the recession was coming to an end.
Even the Fed seemed to think so. The Washington Post headline: “Fed views recession as near end.”
But here at The Daily Reckoning summer headquarters we were doing some more painting yesterday…
…which means, we were doing more reckoning…
We don’t know when the recession will end…but we’re dead sure that those 53 economists interviewed by Bloomberg…and those at the Fed too…don’t know either. Few of them seem to have any idea what is really going on.
And now comes news that the economy is not recovering as planned.
“Even with Cash for Clunkers retail sales fall,” reports The New York Times. Retail sales were expected to go up in July. Instead, they went down.
Bummer.
Economists also expected unemployment numbers to go down. Instead, they went up in July…and last week, 558,000 people filed for unemployment benefits – up from the week before. That brings the total to 6.7 million jobs lost since the downturn began in December ’07.
Oh…and what’s this? Foreclosures hit another record high in July…making the third new record in the last five months.
This is a “recovery that only a statistician could love,” says another Washington Post headline.
You can prove anything if you torture the numbers enough. But if you need a job…or need to sell your house…or refinance your mortgage – good luck to you!
And here…in the spirit of summer…of warmth and camaraderie…we would like to offer the above-mentioned economists a little help: Pssst….it ain’t a recession; it’s a depression.
Since 1945, the US economy – and much of the rest of the world economy – has been carried on the backs of American consumers. First, they spent money they earned during the war years. Then, they spent money they earned in the big boom of the ’50s and ’60s. And then they spent money they hadn’t earned at all. They borrowed from future earnings…increasing total US debt from just 120% of GDP in the ’70s…to 370% of GDP in 2007.
In the last 15 years of that period, especially, each time the consumer showed a reluctance to continue spending, the feds rushed to give him more credit. And during the final five years – the Bubble Epoque – debt doubled.
Now, the consumer has dug in his heels. He’s not going a step further until he unloads his excess baggage of debt.
Once again, the feds are trying to stimulate him. The Fed’s key interest rate is practically at zero. The feds are pumping money into the economy as fast as they can. And they’ll give a fellow up to $4,500 if he’ll agree to kill his old car. The Cash for Clunkers programs seem cruel to us auto enthusiasts, but they have been popular, all over the world (more below.) But what good do they do?
Even with the stimulus spending…and the stimulating low interest rates…he’s still not willing to add debt. Of course, this is just what happened in Japan. The public sector spent; the private sector saved. Net result: an on-again, off-again recession that has lasted almost 20 years.
That’s a depression. It’s a point where the model no longer works. Look, how could the US economy recover? It’s a consumer-led economy, so the consumer would have to spend more money. But he’s not earning more money. He has no prospects of earning more – not with 10% unemployment and a punky economy. So, the only way he can spend more is by borrowing. Ergo, the only way the consumer economy can grow is by adding more consumer debt. Is that possible? Could the ratio of debt-to-GDP go to 400%…500%…to the moon?
Well, we’ve weren’t born yesterday. We’ve been around long enough to know that almost anything is possible.
This morning’s news tells us that the federal deficit through July comes to $1.27 trillion. We didn’t think that was possible. And despite this inferno of new debt…the 10-year Treasury bond yields barely 3.6%. We never thought that was possible either.
So, anything could happen. But generally, government stimulus only works when it is not needed. That is, it only works when it goes in the same direction as the underlying trend…not against it. Just like you can make a sailboat go faster by unfurling the sails, you can speed up an expansion by offering more and easier credit.
But now, the underlying trend has reversed. It’s no longer a credit expansion; it’s a credit contraction. The consumer has had his fill of debt. He’s cutting back on his spending and paying off debt. That’s what the July figures show. That’s been the history of entire downturn. That’s why it’s a depression, not a recession. It’s a major change of direction that will take years to accomplish. Now, stimulus is not only useless – since it is against the major trend – its counterproductive. It delays and contradicts the adjustments that need to be made.
But wait. We know what you’re thinking – that the Cash for Clunkers program is a success, because it encourages consumers to buy. See. Sometimes central planning really works, right? Yes, and if you look no further than the auto sales figures for proof, who can argue? Alas, a centrally planned economy is a perverse thing…where every positive statistic has the crumpled up bodies of tortured numbers buried beneath it. Take away the ‘free money’ from the feds and there’s nothing left. No real increase in demand…just a temporary demand based on a temporary and unsustainable stimulus.
Encouraging people to buy too much was what caused the problem in the first place. Encouraging them to buy more now is not a solution; it’s just a continuation of the same flawed policy of stimulating consumer demand…a policy that has been in place for decades.
But now the wind is blowing in the other direction. The government may not like it, but they can’t stop it.
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Bill, I have to agree with you here, the logic is undeniable. When will those in power ever figure it out though….that’s the real question.
Bill,
The government may not be able to stop it, but, they will not let this unprecedented opportunity slip by either. The power grab is on, gobbling up failed businesses with fiat currency is just too easy. And, it’s all being done under the guise of protecting/securing/creating jobs that otherwise would/should go away. You have to look no further then Amtrak to see how this will turn out, just on a much grander scale. It’s breathtaking, it’s so pure and evil.
Next quarter, when the GDP goes positive, they will be heralding the recession is over. You and I both know better, statistics are being manipulated to a false conclusion. Hunker down, there is only one direction this is going to head.
Where will you be when the dust settles?
Lets face it, there is a lot of fluff in the consumer world. By this, I mean goods and services that people really can live without. Unfortunately, a lot of people make their living selling fluff to other people. What will happen to them when the consumer dig in their heels? This concerns me. The Government is stepping in and trying to create fake work for its` citizens. Something similar to digging holes and filling them in, ie: bridges to nowhere.
Initiatives to promote Green Industries could in my view, add value to the economy by limiting U.S exposure to expensive foreign oil (Boone Pickens` ideal) and at the same time easing the burden on Mother Nature. It will be a bold move. But going back to the way things were, is no longer sustainable.
John, flashing news to you:
those in power have figured it out allright…
“It’s like a female impersonator…just like a real woman in every way, except for the essential ones.”
_________________________________________
Well, their legs are almost always better than the RG’s but the hands give them all away. You can shave the Adam’s apple, fake the boobs, even fake the hips, but the hands you can do nothing about.
Not to put too fine a point on it, but you have trannies, flamers, closet queens and the simply curious.
So far, at least in my NTBHO, the powers that be have tried every permutation as metaphor.
Still, there’s naught they can do with the hands.
Hey, JMR bayou bobby, and I always thought,”show me your hand”, originated from card games.
Truth is with this weekends bank failures we are seeing differences from the 30’s crash. No lines outside waiting to see if there is any money left. FDIC insures that no due diligence is necessary to make your deposits secure. So…no bank runs, a good thing? I’m not so sure, what happens when the people wise up and say “This hot off the presses money does not spend like it use to.” Add to this the hot off the presses Social Security checks, growing government payroll, unempolyment bailouts, corporate bailouts, financial bailouts, medical debts, etc. Looks to me like a run on gold is in the future, not a run on the banks.
Bill
Don’t focus on the DOW, but on the S&P.
The rally in the S&P since March has been more impresive than the one in 1930.
I think the ultimate decline will be as “impressive” or more than in 30s…
The “system” is totally kaput. It will inevitably self-destruct.
I just hope their won’t be major wars…
Very sad .
Very sad .
I wept and cried .
But I shot the diamond and realized
‘ We can print more money ! ‘ .
We don’t know about everyone else. We were running scared in 1984. Income was at peak, and so was debt. We stopped borrowing and paying things back. We owed two years gross pay. It took six years, until 1990, to get completely out of debt. It has been a pleasure ever since. But what will those who owe three or four years gross income (like the US Government) do? Borrowing obviously still looks more appealing than the alternatives.
gotta love the fake woman analogy…
It holds up in more ways than you indicate: If you think you’re gonna get ’something’ after the dinner date, not gonna happen – it can’t. In fact, more than likely, you’ll get something quite different from the other direction if you bend over to pick up that penny on the floor.
(trying to keep it clean… :^)
tnx,
–ikk
I must say, this is one of your best articles.
At this point we have the biggest structural problem in our economy that no one has any idea or the means to correct it. The solution is we must produce what we consume, as was the case in 1950s and 60s. There is no short term solution. It took us 30 years to bring the economy where it is today. All they want is to delay the inevitable.
By the way, I always wandered about these so called economists. I would say they are a disgrace to an already disgraced profession. Too bad, we shipped the wrong jobs to China.
Think about how a female impersonator is going to reproduce. That will lead you to what is coming.
Hey, Bill,
When are you going to put your TERRIFIC ECONOMIC ANALYSIS COLUMN on my Facebook page.
You have information here that ALL of my Friends need to know!
SO far, you have been right on.
My facebook name is Joe Anthony Ocho Jr.
I have tried to find you there so I could send you an invitation but Was unable to do so.
Bill Spot on as ever! I have been reading your free stuff for close on a decade. But you must have gotten tired telling us that other commentators are lying to us. Because that is the only was they know how to make money. And if they did not, their employer would find someone who did. I’d be very interested in your take on Australia where the depression is very slow to show itself. Weird. Have fun en France!
I like the female impersonator simile, but these guys running the economy are good ol’ confidence tricksters. Yep, been doing it since the West was won and they used to sell snake oil…same shysters, same trick…just exaggerated for a bigger market. Dig in and dig deep….this one is going to run and run..
What they DO realise, but don’t let on, is that material wealth means jack nowadays. The thing that is way off the agenda for economists is resource depletion and food security..any admission of those issues by economists = game over.
Our main concern now should be ensuring social cohesion and community building…Unfortunately, the Big Guys with their still HUGE bonuses are pulling up the ladder so no one else can get in to their (fiscally) gated communitty..
Isn’t the latest klunker news interesting… GM and Chrysler are advancing money to their dealers to cover their outstanding deals… And since the government owns a large portion of both companies, it will create an odd government transaction… the treasury klunker department will be writing checks to the treasury department in charge of advancing money to GM and Chrysler… The government is now in the business of SELF STIMULATON!!!