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Is The Recession Over?
From The Daily Capitalist
This morning the National Bureau of Economic Research (NBER) came out with the conclusion that it is too early to tell if the recession is over.
The NBER defines a recession as:
A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months [minimum of two months] to more than a year. Similarly, during an expansion, economic activity rises substantially, spreads across the economy, and usually lasts for several years.
In both recessions and expansions, brief reversals in economic activity may occur—a recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth. The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction.
The NBER:
examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP).
One can argue about the proper data to measure but the point of their conclusion is not to forecast but to identify broad trends in the economy. So, to say that they should look at money supply, credit, or U-6 rather than U-3 is not significant in the sense that we all understand that these markers are guesses and approximations, dicta, if you will, rather than "truths."
Let's look at this recession in comparison to past cycles (courtesy of the Wall Street Journal).
Our recession is the red line and you will see it is at the bottom of all the others which says something about the breadth of it. The NBER pegs December, 2007 as the commencement date of the current recession. While it shows a bottoming out of GDP after 6 months, industrial output and employment has contracted far more than in the other measured cycles.
While there are many data to look at, and I do comment on this regularly, I think this is a pretty good snapshot of the economy.
In light of the data how does one assess it?
I look at things in light of the following economic assumptions:
- Fiscal stimulus never works as a generator of sustainable economic activity.
- Consumers will not return to their former high spending patterns.
- Credit and money supply continues to decline.
- Past history can be wrong when applied to today.
- We still have the most dynamic economy in the world.
1. Fiscal stimulus never works as a generator of sustainable economic activity.
If some kind Keynesian out there would care to inform me when they think fiscal stimulus ever worked to revive an economy, I would like to know. Don't try to explain Keynes and the liquidity trap, just show me when you think it worked. Until that happens, I shall stand on my premise.
When the government takes money from people through taxation it has a temporary positive effect on those businesses to whom the money is transferred. When the money runs out, the effect runs out because this transfer of money creates no organic economic growth. If the government gives me money to repair a road, I hire workers, repair the road, and then fire them because there's no more money. Since the money has to come from somewhere (unless the government just prints it), the person from whom it is taken must put his/her economic plans on hold, thus the economy loses somewhere else.
We are "repairing a lot of roads" right now through the American Recovery and Reinvestment Act, and that is having a temporary impact on the economy which to some extent is reflected in some of the positive GDP numbers. When that wears off, the economy will regress unless there has been real organic growth.
2. Consumers will not return to their former high spending patterns.
As I've explained in "Economic Megatrends That Will Drive Our Future," the consumption machine is broken. Our residences are no longer an ATM machine. And, Boomers are facing retirement and they haven't saved enough. This means that consumers will increase savings and reduce spending. The fact that we have 16.9% unemployment right now, and declining wages, says that consumer spending won't turn around soon. While spending has recently been growing, a substantial portion of that is from the mortgage default boom. David Rosenberg of Gluskin Sheff has estimated the effect to be $190 billion. This won't last long. Pair that with the fact the Robert Shiller, co-creator of the Case-Shiller housing index, says residential values still have another 10% downswing potential, and you may conclude that PCE is systemically weak.
3. Credit and money supply continues to decline.
Credit continues to decline, as does money supply. The M1 Mult index has collapsed in the past 9 months. M2 and MZM continue to decline. Worse is credit. Consumer credit continues to crash. Business lending is just as bad and it continues to decline. The Fed has tried to flood the banks with cash (Money Base) but bank reserves have stayed historically high. Businesses aren't borrowing and banks aren't lending.
It is difficult to have a recovery without credit improving, substantially. Right now, large corporations are flush with cash from streamlining their businesses in light of the recession (layoffs, production efficiencies, reduction of debt) and they are internally financing capital expenditures. They also have access to the credit markets. It is different for smaller businesses (50% of the business world) struggling to stay alive.
The Q4 GDP expansion (now revised down to 5.6%) was impressive but I see this as a one-time phenomenon as a result of cyclical business factors. When consumer spending collapses, retailers and wholesalers are stuck with unsold inventory. The reduction of inventory by wholesalers and retailers ended by mid-2009.
But, it is not as if the entire economy is on hold. People still buy things, just not at level they did before. At some point retailers have to restock and they did, but cautiously. This is what drove the Q4 numbers (about two-thirds of the GDP number). As inventory and sales achieve equilibrium, as it seems to have done, the impetus from restocking will fade in H2.
4. Past history can't be applied to today
It is not especially useful to predict future events based on prior cycles. Each cycle is different as to asset class, as to the government's response to the recession, and as to the worldwide impact. Economists always predict tomorrow based on what happened yesterday. While comparison of past cycles is useful to put this cycle into perspective, it doesn't help us analyze where this one is going.
The key is to follow what the government's response is to this cycle.
The government seem to be doing everything they can to prevent the economy from recovering. Bailing out banks, buying up bad MBS, Cash for Clunkers, extend and pretend, suspension of mark-to-market, subsidizing housing with FHA, Freddie and Fannie subsidies, the Recovery Act spending and resulting debt, deficits, higher taxation, the specter of tariff and trade wars, all delay a recovery. Add to this corporate debt refinancing, CRE debt refinancing, the high level of homeowners behind on payments, public and private pension deficits, state and municipal bankruptcies, and the need for 12 million jobs. All this leads to results that are quite different from past cycles, as the above charts show.
5. We still have the most dynamic economy in the world.
This is the part I have the most trouble with. I believe that as the most entrepreneurial economy in the world, we still have the ability to generate growth that will drive us out of our recession. By that I mean there is sufficient economic incentive to drive business and growth. At some point, perhaps when debt is equal to GDP (as Reinhart and Rogoff say) or when the government's share of the economy exceeds 40%, then growth stagnates. Since we are close to both of these scenarios now, it is hard to analyze the impact on private enterprise.
Here are some things I think about in trying to evaluate this.
- Will all the debt financing needs of federal and state governments "crowd out" (i.e., make money more expensive) business borrowing?
- Will increased government spending, including the new Obamacare programs, and future programs (such as cap and tax) put a significant drag on the economy through higher taxation?
- Will increased regulation hamper the creation of new capital?
- Will inflation distort future economic growth leading to a new boom-bust cycle?
- Is sufficient real capital being generated to support new growth?
I would have to answer yes to items 1 through 4.
What I don't know is item 5. This is hard to measure. Real savings are earnings saved and not consumed. If such "earnings" are generated in an inflationary environment, it isn't real savings, it is just an accumulation of inflated currency created by the Fed. If current growth in manufacturing is being supported by real savings, then we could have the basis for sustainable, organic new growth. In light of all of the government's distortions of the economy, I would have to doubt that.
I think we will see a softening of economic activity in H2.
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For me, this is the quote that chills me more than anything. Especially because I've long believed it to be true: "And, Boomers are facing retirement and they haven't saved enough. This means that consumers will increase savings and reduce spending."
The "logic" of these two sentences will, IMO, have an effect upon this country beyond most everything else.
I have tried to call the NBER and ask if they have any experience in calling a "Depression." Are they allowed to issue the D word?...I mean I think its pretty obvious by now.
According to Murray Rothbard, all down cycles were referred to as "depressions" until the collapse in 1937 when FDR's advisors coined the term "recession" because they didn't want the sheeple to think they were still in a depression.
Its whatever they say it is. They own the media, control the data, and control the money supply. Of course this is reliant on confidence. As long as big money continues to invest in the facade it will continue barring an uprising of the masses.
Who was that clown who called Econophile depressed the other day for a complaint about the massive lies coming from MSM?
Some of us CAN HANDLE THE TRUTH. Truth is that it is all a lie. Let's move on to the next chapter which is what are we going to do about it? Nothing will change until we remove this crop of perps from the power structure of the US. Sure there will be more. But if we can get our foot in the door long enough to make it near impossible for this to happen again for at least several decades then consider it a victory.
Otherwise stop having children. Unless proferring slaves to the beast is your cup of tea.
if marginal productivity of debt can be relied upon - and i believe that it can - then growth prospects are non-existent....the decline in money supply / credit is another harbinger of ill winds blowing...
on the other hand, the consequent deflation should be welcomed with open arms as it is a sign of repair....this will take a looong time since the banks are insolvent and there is insufficient capital - for many reasons - to fuel substantive growth....
unfortunately our politburo will undermine the salubrious events and suffocate the baby in its bassinet....
fuck the fed....
here's a couple:
given that fiat currencies crash and burn 100% of the time how much longer will our currency be worth anything?
http://dailyreckoning.com/fiat-currency/
even if the govt confiscated all the wealth of its citizens it would still not be enough to pay the debt so when do you see the govt defaulting?
http://www.321gold.com/editorials/dougherty/dougherty012210.html
Tomorrow at 11:00 AM the President of the Federal Reserve Bank of Richmond is speaking at West Virginia University and taking the students "tough" questions.
I, as a student at WVU and religious reader of Zerohedge, would like to ask the Zerohedge community for a list of "tough" questions for Mr. Jeffery Lacker.
I will be given the opportunity to ask any and all questions. What should I ask him?
Any questions would be greatly appreciated.
Thanks ahead of time. Let's come up with some good stuff.
Are the Banksters clinically psychopathic?
Perhaps not what you were looking for hammer but it's what I want to know.
Rhammer1:
Ask him the following (actually ask them as leading sequential questions):
1) What does he think the actual government multiplier is (i.e., the 'Keynesian multiplier')? Then ask him to give an example where it was clearly greater than one for a long period (he needs to give a precise period/range of years and number).
2) Ask if he thinks that his academic training and research has prepared him for his current position, or whether he would have been better off ignoring economic theory? Then ask him more specifically what theory or theories guide his current decisions, if any? Finally, ask him if he considers macroeconomics a science, or more akin to a religion (that is a serious question)? If he answers a science, ask for a Type I and Type II type predictive error as to its accuracy (i.e., ask for proof of the predictive accuracy of specific macroeconomic 'models' that he uses to make decisions).
3) Ask what percentage of the U.S. finance community is Jewish (I saw a number of about 50% of the heads of major U.S. firms are; and he is, by the way)? Then ask him if he thinks it has anything to with Wall Street campaign contributions, TARP, bailouts in general, etc. (that is relevant because U.S. Jews vote disproportionally Democrat as well as disproportionally contribute to socialist causes at home and abroad, e.g., Soros)? If he doesn't see a connection, ask him if he think it just a coincidence (they are around 2% of the population, yet control at least about half of finance, what are the random odds of that?)?
4) Finally, ask him if the Feds' current policies don't work whether he would be willing to appologize formally to the American people (we could use a per capita real wage rate combined with Shadow Stats real unemployment estimate as a measure of success)? Follow that up with asking whether he enjoys the power and just doesn't consider the consequences of his actions?
Anyways, good luck, and that is my kind of five minute wish list that I think you might just get away with asking, but I doubt he will provide much in the way of real answers to. Anyways, I feel better.
There are many questions to ask but I won't waste your time listing them to ask because he won't tell you the truth to any of them.
Why not just ask him:
"Why don't you just go shit in your hat, because any question that's genuinely important to us, you will only lie about, or jawbone to death"?
Upon further thought, scratch my first suggestion. It will merely get you branded as "crazy" or something worse.
See if you can get close enough to vomit on him. He deserves it and, upon questioning, you can claim feeling ill for at least the last 24 hours but didn't want to miss the opportunity to hear Lacker speak. It will soothe his/their egos and make your puking easier to dismiss by them as innocent.
Ask Lacker to list the names of private individuals who own capital stock in the Federal Reserve Banks (the 12 regionals). Ask him this right before you are promptly escorted out of the auditorium/lecture hall.
FYI, the fact that young people/students are "catching on" is the one thing that gives me some hope that TPTB will not get their way.
Cold facts econophile. Thanks for the graphs.
Who knows? With the level of government intervention and data manipulation.....
Right! While millions will soon be starving in the streets, leading to mass riots and looting, the governmedia can just divert its cameras away from that and focus on the gubmint manipulation and intervention decimal point shifting, quarter by quarter kicking the can down the road in the banana republic USSA. Hell what could possibly go wrong? Sounds like a great economic system to me.
YES! The recession IS over! Plunge into Great Depression 2.0.
Anton LaVey & AnAnonymous:
It is largely 'useless petty controversy between economist priests' if their 'definition of a 'recession'' is largely a tautological hand job for those making it. Way back in the day the definition was more objective and meant something more than the current one that Econophile has kindly described for us. For example, two or more continuous quarters of negative real economic group as measured by XXXX (e.g., real GDP which is defined as XXXX) is defined as a recession. Now they can debate then after the fact identify what they call a recession. I may seem at times a one trick pony, but for me anything that doesn't factor in real unemployment and underemployment is oxymoronic. In short, if it doesn't serve us humans, it is largely useless (or one could say a 'petty controversy'). Therefore, for me as long as more and more citizens who would like to work are out of work and underemployed, we are not in a growth phase. Also, ask yourself the following basic Reagan type question: Are we (i.e., Americans as a group) better off now than at the peak of the last up cycle (which the NBER is saying was around December 2007, give or take one or two months)? No way in hell.
Just remember that the way you define (and present) reality is 90% of your reality.
What we have is - obviously - an attempt by the rich, TPTB, the Goldman squid or whatever your scapegoat-du-jour is, to re-define recession as something a lot more palatable for the masses that watch TV instead of educating themselves - hence my snarky comment.
And, by the way, my dear "verum quod lies", anyone who cites Ronald Reagan without (at least) a trace of irony needs to have a short sharp dose of reality re-definition applied to his/her upper cerebrae (even though I agree with pretty much everything you said).
I will leave you with some food for thought:
With our concept making apparatus called "mind" we look at reality through the ideas-about-reality which our cultures give us. The ideas-about- reality are mistakenly labeled "reality" and unenlightened people are forever perplexed by the fact that other people, especially other cultures, see "reality" differently. It is only the ideas-about-reality which differ. Real (capital-T True) reality is a level deeper that is the level of concept. [...]
We look at the world through windows on which have been drawn grids (concepts). Different philosophies use different grids. A culture is a group of people with rather similar grids. Through a window we view chaos, and relate it to the points on our grid, and thereby understand it. The ORDER is in the GRID. [...]
Western philosophy is traditionally concerned with contrasting one grid with another grid, and amending grids in hopes of finding a perfect one that will account for all reality and will, hence, (say unenlightened westerners) be True. This is illusory [...]
Some grids can be more useful than others, some more beautiful than others, some more pleasant than others, etc., but none can be more True than any other. DISORDER is simply unrelated information viewed through some particular grid. But, like "relation", no-relation is a concept.
Male, like female, is an idea about sex. To say that male-ness is "absence of female-ness", or vice versa, is a matter of definition and metaphysically arbitrary. The point is that (little-t) truth is a matter of definition relative to the grid one is using at the moment, and that (capital-T) Truth, metaphysical reality, is irrelevant to grids entirely. Pick a grid, and through it some chaos appears ordered and some appears disordered. Pick another grid, and the same chaos will appear differently ordered and disordered.
Reality is the original Rorschach.
In other word "recession" is just like another word, just like the word "change" can seem threatening or a source of opportunity.
At this point, with the constant market manipulation going on, recession will be redefined. Because perception (and/or miscommunication/disinformation) is what "they" (The Man, the Government, the Squid) are after.
There you go. Have fun, and you are welcome.
Snark away.
I think this time even "they" believed the Grand Lie to the extent that "they" let it mushroom. My guess is that this Grand Lie is over. Meltdown. The mushroom cloud is above us all and we await for the mass of malfeasance to reach the altitude where it is no longer sustainable.
Not if but when -as we say - it disperses is when we discover if we see a rebirth or a complete failure of our nation.
The US has one last chance to get it right. God be with her.
my wife has a recession every day.... or was it a depression?.... or just a crisis...
whatever, getting a booty call isn't just the same anymore these days...
She works for me !!!
Econophile,
The real problem is in the definition of a 'recession' of course. I am sure the NBER will soon come to its senses and re-define 'recession' as something that the USA just got out of.
When fiscal stimulus revived an economy?
WWII
Duck, have you ever thought that it was not government spending on war that finally brought us out of the Great Depression... but rather we were the only major economy left functioning, so we were put in the perfect position for growth? That's kind of like saying, Hong Kong has a great economy due to their economic policies, while their economic policies are certainly better than most, I would not credit this with their economic health so much as the location they are and the trade nexus they've been forever.
Good luck with these points. For centuries, these points were obvious to people who fought wars over them. Currently, it is all the reverse. Generally, they are totally denied and if HK is in such a shape, it is not because of these strategical assets but because of culture of hard work, economical policies etc alone.
Me guess that the strategical assets is what enables the economical policies and gives a concrete ground to culture of hard word/education etc...
Whatever, it is a big gap between telling these assets have a part and claiming they have absolutely none.
No. All that happened is that 8.5 million men were drafted and taken out of the economy and production was directed by the government into war related production. As you know the Dow didn't hit pre-'29 highs until 1954.
Depending on which side of the fence you are on, you may argue that WWII was not, in fact fiscal stimulus, but creative destruction or some such.
Job creation typically signals the end of a recession, but a protracted period of subpar growth is in the offing. All that public debt will choke private investment, ensuring subpar growth.
The recession is temporarily over for the elites and huge mega corporations because they and their gov't shills have decided it is over, thanks to QE. The regular guy on the street whether he has a job or not, is in a depression. Credit is hard to get,and keeping up with the Joneses is getting is also getting much harder. The big pie in the sky American Dream is done, finito. Problem is Mr and Mrs. Public are so brainwashed by the media and so exhausted from working themselves to death that they don't have time to understand that they have just been rapped by a homicidal sperm whale ie Goldman Sachs .
Americans will eventually riot, but by than they'll be 9 months pregnant , and totally impoverished . Needless to say, they'll be less than scarey at that point.
The inbred capitalist mind set will have these same blaoted behemouths thinking how they can rent out their new half human, half whale baby to Sea World.
In the great words of my Uncle Vito, Fogetaboutit.
Just wondering, in this useless petty controversy between economist priests, if the current recession is about to be over, would it mean that the socalled Keynesians have an example case to claim their system works or would something be rised up by their opponents to keep maintaining their system does not work, like what has been done is not Keynesianism or stuff like that?
Just wondering, just to know on what grounds all these guys are arguing...
Have you ever checked the graph for the percentage of Americans in jail and how that number has grown since 1971 (when the Fed went away from the gold standard) ? Check these graphs. ITS TRAGIC.
http://en.wikipedia.org/wiki/File:US_incarceration_timeline-clean.svg
http://en.wikipedia.org/wiki/File:Incarceration_rate_of_inmates_incarcerated_under_state_and_federal_jurisdiction_per_100,000_population_1925-2008.png
DUDE... stop posting this. This is STUPID... that is exactly when Nixon started the War on Drugs dummy!