The highly contagious 'economic recovery' meme

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machinehead's picture
machinehead
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The highly contagious 'economic recovery' meme

It started a week or two ago as the S&P index approached 1,000; now the buzz is ubiquitous: We're in recovery! And we didn't even have to complete a 12-step program. YAY!

I don't necessarily dismiss the possibility. But I do have some caveats.

For one thing, as during the preceding boom times, the statistical authorities tend to underestimate inflation, even when it recedes into deflation. When they subtract a lowball inflation (or deflation) figure from nominal GDP, it gives a fictitiously high 'real GDP' number -- the one which is reported as 'economic growth.' GDP has been systematically overstated by about one percent during the past decade.

A second point concerns recession dating by the NBER. No objective criteria for recovery have been established. The NBER lists the data series they review in making their determinations. But ultimately, the recession will have ended 'because we said so.'  This has no more repeatable, scientific validity than a technical analyst declaring that we have entered an 'uptrend.' There is no agreed-upon definition of what this means.

As Keynesians, the authorities know that 'animal spirits' are not merely the stuff of fiction. I see it locally. A successful restaurateur has been building his third branch down the street from our house. For three years, he's been dinking away at it part time, bringing in minor subcontractors when he had the cash, in between long idle periods. But now that the 'economic recovery' meme has taken hold, he's got full crews working 7 days a week to get the place open.

From a business perspective, one needs to lead a recovery. By establishing product image and market share in advance, one can actually ride the economic curve back upward, just like surfing a wave. Mass sentiment (despite being hard to measure) has effects on the ground that are very real. Similarly, some property buyers have concluded that it's time to move.

Those who disbelieve in the recovery must feel that the profound financial damage exceeds the scope of the trillions of dollars of stimulus thrown at it by the authorities. In the long run, this is surely true. Fifty trillion dollars of negative net worth in social benefit plans cannot be generated by any conceivable combination of tax policy and future economic growth. Like Bernie Madoff's Ponzi scheme, the US fedgov's benefits Ponzi scheme will inexorably crack up over the next two decades, as the vast swarm of Baby Boomer locusts shifts from dutifully paying taxes to voraciously devouring benefits. FEED ME, FEED ME!

In the short term, my own indicator of government financial stress is the yield on the 10-year T-note -- currently a low, low 3.72 percent. Creditors, so far, are not on strike. If $10 trillion hasn't been enough to pop the economy, well, they can borrow $10 trillion more. In the short term, the planning horizon is the next election -- Nov. 2010. We're gonna be poppin' by then. Oh yeah, we gonna rock 'n roll.

Long term, TANSTAAFL -- they ain't no such thing as a free lunch. The fiat-currency Ponzi economy has been front-running future consumption for nearly four decades now. When interest rates on Treasurys go to double digits, then we can declare 'game over.'

'Recovery' does not mean a return to the good old days, though. Ever since the fiat currency era started, each subsequent economic recovery has been weaker than the last. After decades of malinvestment, this one could be almost imperceptible. Chronic high unemployment, as in the 'Eurosclerosis' of the 1970s, could be a permanent unwelcome visitor.

Ironically, the one change which really might bring a surge in productive investment -- a collapse of the dollar's external value -- hasn't happened yet. As a busted, quasi-Third World regime, the best the former superpower can aspire to is being a low-cost manufacturing platform for the large North American market. When it happens, it won't automatically catapult the U.S. back into the rich countries club. Because unlike the second half of the 20th century, when the U.S. collected dividends from the world on its foreign investments, in the 21st century the dividends will be flowing OUT to our new foreign owners.

Them who has the gold makes the rules. Please be nice to us, even if our 'money' is only green paper and 'sandwich' coins.

Davos's picture
Davos
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Re: The highly contagious 'economic recovery' meme

And I thought David Sadaris could write!

One word: Wow!

 

machinehead's picture
machinehead
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Re: The highly contagious 'economic recovery' meme

If I had a nickel for every word I've written -- I'd be a thousandaire!

Seriously, though, the EU statistics office just reported that French and German GDP both grew 0.3 percent in the second quarter, which is 1.2 percent on the annualized basis customarily used in reporting GDP in the U.S.

Overall, the EU economy shrank only 0.1 percent in the second quarter, as compared to minus 2.5 percent in the first quarter (minus 0.4 percent compared to minus 9.6 percent, in U.S. annualized terms).

Euro stocks are cranking skyward, and the S&P is going to put some distance between itself and the 1,000 round number at the open.

Despite some irreversible damage having been done to the prevailing fiat-currency paradigm, it should not surprise us that by borrowing purchasing power from the future, governments can generate a temporary recovery. Spend funds -- even borrowed or printed funds -- and GDP ... GOES UP! 

But obviously, fiscal deficits in the realm of 10 percent of GDP aren't sustainable. Withdraw the stimulus too fast, and economies will slide right back into recession. If the central planners luck out (it's skill, they will tell us) and a self-sustaining recovery ensues, debt service will still be higher and more unsustainable when the next recession occurs down the road.

What I strongly suspect is that all the global monetary expansion will, within a couple of years, move most markets into a higher interest rate regime. When the next crisis comes along, it won't be so easy to jauntily borrow $10 trillion for bailouts, when the prevailing yield on Treasurys is 8 percent instead of 4 percent.

A general rise in interest rates during the twenty-teens, along with the crack-up of social benefits Ponzi schemes, will provoke chronic fiscal deficits worldwide. That's the ultimate end game of the misbegotten fiat currency regime. The case of Zimbabwe illustrates this denouement in slam-bang-flash cartoon fashion. Lots of mini-Mugabes are out there, folks, running our central banks. Onward to Bulawayo!

DrKrbyLuv's picture
DrKrbyLuv
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Posts: 1995
Re: The highly contagious 'economic recovery' meme

Thanks for another well written article, I agree the recovery is short lived at best.  I had a couple questions regarding your comments:

machinehead said:

The fiat-currency Ponzi economy has been front-running future consumption for nearly four decades now. When interest rates on Treasurys go to double digits, then we can declare 'game over.'

Despite some irreversible damage having been done to the prevailing fiat-currency paradigm, it should not surprise us that by borrowing purchasing power from the future, governments can generate a temporary recovery.

  1. What is the "fiat-currency Ponzi" economy?  Can you give some more details?
  2. What is the "prevailing fiat-currency paradigm"?

The reason why I ask is that it appears as if you are attributing our problems to a fiat currency.  If so, what would be the solution?

Larry

SagerXX's picture
SagerXX
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Posts: 2237
Re: The highly contagious 'economic recovery' meme

 Thanks for this post, MachineHead -- you certainly have a way of cutting through the extraneous and getting to the heart of the matter[s] in question.

Viva -- Sager

Thomas Hedin's picture
Thomas Hedin
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Posts: 815
Re: The highly contagious 'economic recovery' meme

Machine Head,

If you think fiat currency is our problem what about the 97% of our money supply that is not fiat (checking account money)?

How do the paper bills and coins which only represent 3% of our money supply and they do not incure interest cause any problems?

 

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