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Is This Recovery?

Econophile's picture




 

This article originally appeared on The Daily Capitalist.

There is a lot of good news to buoy the markets and give cheer to the public. We hear that new jobless claims are down another 15,000 to 358,000, the ninth week of declines out of the last ten, finally breaking below the 400,000 mark. A reduction in unemployment is a very positive sign and is politically significant. Also Gallup released its latest economic confidence poll and it is up to -20, the highest in 12 months, a very solid gain from the -54 score in August and September.  We heard as well that Greece may qualify for another round of funding to stay default (we are very skeptical of that). And, the S&P is very close to its 52-week high.

There is more. The official CPI was up 2.4% last year, a very modest and tolerable amount according to the Fed. Markit reports that the combined U.S. ISM manufacturing and non-manufacturing indices were up from 56.4 in December to 58.9 in January, hitting its highest level since March of last year. New orders in both surveys were up significantly. These data were backed up by reports of durable goods orders and factory orders. Data from many of the regional Feds confirm this.

Personal income increased 4.7% in 2011 versus an increase of 3.7% in 2010. Real disposable personal income (DPI) increased 0.9% compared with an increase of 1.8% in 2010. Real personal consumption expenditures (PCE) increased 2.2%, compared with an increase of 2.0% in 2010. State tax revenues increased 6.1% YoY according to the latest report.

What could possibly go wrong?

Are we in a recovery or not? This article will deal with this issue. I will briefly recap how we got here and the problems we need to overcome before we can call it a recovery. I will look at the reasons behind our current positive data. And then I will compare the current data to see where we are. 

What is holding back recovery?

Economic recovery is quite simple when you think about it: bad investments and their supporting debt need to be liquidated. These bad deals are called "malinvestment" and our recent housing boom left huge piles of them for us to clean up. Think of it as the detritus of bad economic policies that led to bad business decisions. Massive amounts of capital (consisting of real and fiat "paper" capital) were lost during the resulting bust and there is nothing anyone can do about it. Keeping bad deals alive only serves to trap valuable capital into unproductive assets and delays recovery. New capital must be created through real "organic" production to get the economy going again.

The biggest piles of detritus to clean up before the U.S. economy can recover are:

  • The asset and capital structure of our local and regional banks, mostly as related to real estate loans;
  • The debt of small business owners, especially in relation to commercial real estate holdings;
  • The debt of households in relation to home mortgages, student loans, and consumption-related debt.

All of the above have been important contributors to the stagnation of our economy. And all of the above, except student loans, have to do with real estate.

There certainly are other major issues this country needs to deal with that will also affect economic recovery. Those issues are political in nature and will depend in large part on the outcome of the 2012 elections. They are our budget deficit and huge national debt, tax policies, social welfare entitlement programs, and regulations which negatively impact capital formation and business expansion. These issues are not within the scope of this article but we have discussed them frequently here at The Daily Capitalist.

There is one further policy matter that is political in nature and that will impact the economy, and that is Fed policy which I will discuss.

Will consumer spending drive the economy? 

Most economists and analysts point to the lack of consumer demand as being the economy's greatest hurdle, but that is a symptom of a serious underlying problem rather than the cause. The cause is what Austrian theory economists call a lack of "real savings" (real capital). That lack occurs because, as noted above, the boom-bust business cycle, which we are still in the midst of, destroyed huge amounts of real capital/savings. (Household wealth declined by $10 trillion, for example.) We need real capital in order to have new production; without it, the economy stagnates.

To get production going manufacturers need to buy capital goods and commodities in order to make things. If they haven't been produced and you have a fistful of fiat dollars, then there is nothing to buy and nothing to produce. If we could print real savings we would already be in recovery which tells us that fiat money, the stuff that the Fed creates out of thin air, is not real wealth. Real savings can only come from the production of things that consumers, or the manufacturers of consumer goods, want. Profits saved from such production or from saved wages of workers employed to make such goods, is real capital/savings.

The bottom line is that if we had enough real capital/savings, we would have already recovered. The fact that we haven't recovered means that we don't have enough real capital/savings. Flogging the consumer to spend will only impoverish the consumer and destroy more capital. Consumers need to save, not spend.

Will manufacturing drive the economy?

Manufacturing is an important part of our economy, but not as important as it was. The production of goods represents only 24% of the economy (services are 47%). There is no question that recently manufacturing has been improving. It is being driven mainly by manufacturing exports and auto sales.

What is causing this?

There are two parallel functions occurring that are giving rise to the current good economic news. One is the natural forces that cause an economy to recover. The other is the Fed's policies to devalue the dollar and keep interest rates artificially low.

When I refer to "natural forces" causing a recovery, I am talking about market forces such as the liquidation of debt related to malinvestments, the devaluation of those malinvestments, and the formation of new real capital/savings. It is occurring naturally, often despite government policies, and is clearing the way for new production. But I believe it has been a very slow process and has not been sufficient to cause most of the positive economic news. I will discuss this in some detail in another article coming soon.

Much of the recent good economic news comes as a result of the Fed's cheap dollar policy. It does two things to stimulate manufacturing:

First, fiat money devalues a currency. This is obvious to us as we look at a constant positive inflation rate and the decline of the dollar in relation to most other currencies. That devaluation makes U.S. goods appear to be relatively cheaper on foreign markets and stimulates demand for them.  Thus a cheap dollar policy stimulates exports. 

Second, the Fed's zero interest rate policy (ZIRP) which has driven down interest rates, stimulates demand for certain big ticket goods such as autos. 

Exports

 Exports represent about 14% of GDP and of that manufacturing exports is about 5% of GDP: a substantial factor. So when the dollar declines it stimulates exports and this is going a long way to revive manufacturing in the U.S. 

The following chart shows the decline of the dollar (blue), the level of exports (red). I have inserted the two incidents of quantitative easing as shown in the salmon and light green bars. It is easy to see the mirror image inverse relationship of rising exports and a declining dollar. 

  The recent strengthening of the dollar, a result of the eurozone crisis driving the dollar up, and declining world economies do not point to continued strong export growth. This is already starting to show up in the numbers as this chart shows more clearly (gray bars):

The below chart of leading indicators, just out from the OECD, shows that the world is not cooperating with exporters—these are their major markets:

 

Autos

Auto production is about 2.5% of GDP, a substantial part of manufacturing. Recent sales improvement is being driven by cheap credit (ZIRP). This chart shows new car sales (blue), expanding nonrevolving credit (red), and auto loan interest rates (black):

The first thing you should notice is the high level of sales pre-Crash and its rapid decline in 2008 (blue). Note the spike in 2009 which was the ill-conceived Cash for Clunkers program. Nonrevolving credit is used mainly for financing autos and this chart shows the post-Crash rise of such credit growing in lock-step with auto sales. It also shows a significant spike in sales beginning in 2010 as auto loan interest rates decline (black) to historic lows. While recent sales growth is also a function of pent-up demand as consumers replace worn out vehicles, in an economy where consumer debt is still very high and where consumer income has been flat, most of these auto sales are being spurred on by low ZIRP-driven financing costs, not just organic demand.

Industrial production

The other thing is that industrial production is not growing strongly as the headlines would have you believe. If it was strong, it would be a good indicator of positive growth and the presence of real capital/saving driving growth. While factory orders and industrial production have improved, they have been essentially flat-to-declining for the past 12 months:

 

Improvements in manufacturing and industrial output are largely being driven by Fed policy, QE and ZIRP. I don't believe it will last because it appears that monetary growth and the rate of change of such growth, are declining as the effects of QE wear off. 

The role of money supply

If much of our positive economic data, especially manufacturing, employment, and price inflation is tied to monetary policy, then that begs the questions of where is money supply (MS) now, where is it heading, and what will the Fed do?

The Fed has been trying to stimulate the economy by making credit available to banks, by keeping interest rates (Fed Funds) at near zero (ZIRP), and by direct injections of money into the economy (QE, quantitative easing). Those policies as anticipated by the Fed have largely failed. In a truly recovering economy, credit would be expanding because businesses would be borrowing in order to expand and hire. Interest rates would be so attractive to borrowers, they couldn't resist expanding through borrowing. The problem is that it hasn't worked.

What is happening instead is that economic gains are coming largely from quantitative easing, a once-in-a-lifetime policy of last resort. While Chairman Bernanke denies it, creating money out of thin air (QE) has the same effect as printing new currency and throwing it out of the Chairman's proverbial helicopter.

Look at how QE has expanded the Fed's balance sheet from securities purchased on the open market, which  is how the Fed creates new money:

As you can see, its balance sheet exploded during the Crash (QE1) and has continued to grow (QE2). The Fed has injected about $2 trillion into the economy since 2008.  One can't deny that such injections have impacted the economy. It has rewarded the financial markets (S&P500: 3/6/09=666; 2/14/12=1,350), it has rewarded the multinationals and exporters, and it has caused a positive CPI despite massive deflationary forces.

MS itself has been on a rocky track, but it has expanded in response to QE. Bank credit expansion (loans) is the easiest way to cause MS to grow. While the Fed has made massive amounts of credit available to banks, without loan demand lenders are satisfied to keep it locked up at the Fed (excess reserves). Without landing activity, in order to make MS grow, the Fed has found it must inject new money directly into the economy via QE . 

To measure MS, I use the Austrian concepts of money supply, what is called "Austrian" or "True" money supply. Specifically I use what I consider to be the most accurate "Austrian" data which is from Michael Pollaro's The Contrarian Take (with his kind permission), which looks like this:

As you can see the percentage YoY change of TMS2 (bright blue line), the data which I think is most accurate, is actually declining. What does this mean?

Let me try to explain this with a more detailed, and unfortunately, a more complicated chart. This is the same chart as above with an addition of the QE events (vertical salmon and blue bars), the addition of GDP data (black line), and the addition of the NBER's dates for the Great Recession as a vertical gray bar. The scale on the inside of the chart on the left shows quarterly changes in GDP from 2006 to Q4 2011, and it is shown on the black line. I have exaggerated GDP by showing percentage changes of GDP on a quarterly basis to make it fit to Pollaro's chart and to make my point clearer. Another chart below shows GDP alone.

 What I believe this chart shows is that, after a delay, quantitative easing has caused much of the "recovery" by increasing MS which in turn has increased GDP .

In terms of measuring money supply, I use the bright blue line (TMS2) which shows annualized changes. If you are a believer in M2, Pollaro shows that as well (dark blue line). QE1, starting in November 2007 and ending in March 2008, brought a huge infusion of new money into the economy, about $1.3 trillion in only 3 months. The Fed, as you recall, went on a massive buying campaign which including a lot of "bad" assets (GSE debt, etc.). GDP is a lagging indicator, but as you can see it was well on its way down by Q1 2007 as real estate values collapsed and Lehman went under. By Q4 2009 GDP started to pick up which was a 6-month lag from the end of QE1. 

As the effects of QE1 wore off, as one would expect it to do in the face of massive deflationary forces, GDP began to stall out and unemployment continued to climb. By October, 2009 unemployment reached 10%, and people were talking about a jobless recovery. GDP peaked in Q4 2009 and started declining again in Q1 2010. The Fed took action starting in November 2009 through June, 2010, and QE2 brought another $600 billion of new fiat money into the economy over a four month period. GDP bottomed out in Q1 2011 and since then it has been expanding but at a snail's pace. On a YoY basis GDP is stagnating, but not declining. Again, there was about a 6-month lag between the end of QE2 and GDP turnaround.

Here is a chart that makes it easier to see real GDP:

To those out there who see this as an exercise in curve fitting, faulty logic (post hoc ergo propter hoc), or Monetarist theory, these data are consistent with Austrian Business Cycle Theory (ABCT) and one would expect to see these results after flooding the economy with fiat money. I believe that the gains, such as they are, are not "real" in the sense that they are not based on real savings, but on fiat money which always redirects capital into projects that eventually will become malinvestments.

When money is injected in the QE fashion, it takes longer for the money to get into the farther reaches of the economy. When you think about it, the cash initially goes to the Fed's Prime Dealers and they use it to make investments, which indirectly leads to productive activities, but takes time to expand beyond, say, New York City. Bank credit expansion through loans is a more direct transmission into productive activities rather than investment activities (businesses borrow to expand business, consumers borrow to buy homes and cars).

The thing about GDP is that it is not necessarily a very good measure of economic activity in the sense that it measures what we spend. If you inject more fiat money into the economy it means there will be more spending and a higher GDP. More spending doesn't always mean that those activities will be productive and lasting. That is especially the case with QE. But, for whatever it's worth, the world pays attention to GDP and so will we; it's just very tricky footing for forecasters.

It appears that TMS2 MS growth is declining. One look at the above chart will confirm this. This has to do with a lot of factors, but mainly it is occurring because QE2 is wearing off. This is occurring despite the fact that we are finally seeing modest increases in bank lending activity:

The above chart shows total loan activity (blue line) and the components that are business loans (red line) and consumer loans (green line). Ignore the straight line increase in Q2 2010; that is a recalculation based on a change of the government's methodology. While it shows recent modest improvement, loans have not grown since April, 2010. The latest Fed data (H8) shows that consumer loans actually declined 0.7% YoY in 2011 and business loans only grew 1.7% YoY. The commercial and industrial (C&I) portion of business loans were up a very positive 9.6%. The problem is that there are fewer potential borrowers, and the value of C&I business loans has actually declined (blue line):

Another MS factor to consider is what is happening in Europe. The European Central Bank and the Bank of England are inflating: the ECB with purchases of sovereign bonds and LTRO (Long-term Refinancing Operations), and from QE with the Bank of England. According to Michael Pollaro, some of this money is finding its way back to U.S. Treasurys.

That being the case, declining MS growth is likely a stronger trend than is apparent.

Where are we?

QE has finally given the economy a bit of a ride, but it appears that it is running its course, otherwise, we would see healthier bank credit expansion, and an increasing MS without Fed money steroids, and that isn't happening yet. 

Exports are the other thing to be watched as the EU, China, and the rest of the world slow down. Whatever one thinks of the role of U.S. exports, this is a serious negative factor. Recall that exports are about 10% of our economy and are seen by most analysts as an important driver of our economy.

Based on these data, it is likely that the U.S. will start to see more weakness in the economy during Q2-Q3 2012. The timing is based on the fact that this "recovery" is fragile in the sense that it has been supported more by fiat money stimulus rather than real capital/savings. The data show that as MS declines, the economy, at least as represented by GDP, reacts rather quickly and negatively.

The issue really comes down to whether or not bank credit will take off again. If we consider the present state of deleveraging and liquidation of malinvestments, we are about half-way to the end zone. (This will be the subject of my next article.) Also, while C&I loans are growing, modestly, real estate loans and consumer loans are still weak. The NFIB reports that small business credit demand is still tepid, relatively unchanged for 2011. Small businesses represent about one-half of the U.S. economy. Thus it is unlikely that MS will expand from an orgy of borrowing.

That leaves the Fed with only one effective tool in their proverbial toolbox. That is, of course, QE3. 

What other tools do they have? They could pay no interest on excess reserves, or even charge interest on reserves, but I don't think it will force banks to lend because there isn't enough demand to drain reserves. As Michael Pollaro pointed out, it is more likely that banks will run into loan limits because of capital ratio constraints before they tap into excess reserves. As well, while there is some easing of credit terms, it is unlikely that consumers will go on a spending/borrowing binge for the reasons mentioned above. More Operation Twist? Unlikely. Low interest rates aren't the problem, ZIRP has seen to that.

Conclusion

Quantitative easing has only been used once before in U.S. history, and that was during the Great Depression. You might wish to ponder that bit of information. What that is telling us is that we cannot compare what is occurring now to our experience in prior recessions.

With all due respect to Rogoff and Reinhart, this time is different for the U.S., at least in terms of our modern experience. Fed policies employed in previous recessions which were then thought to work, have failed in our current cycle. Those policies were mainly forms of lowering the Fed Funds rate, reducing bank reserve requirements, and discount window operations. We now have ZIRP and that has done nothing to stimulate the economy as the Fed had hoped it would. 

This time we have persistent high unemployment, economic stagnation, a "liquidity trap", high civilian and government debt, low savings, flat to declining wages, and substantial asset devaluation. This has been going on since 2008, a full four years. If it all sounds familiar, these same things happened in the 1930s

This time is far worse than any other modern recession. What we are seeing now is a depression, despite what the NBER would have you believe. If you are still looking for the "Big One" to happen, you are too late. It happened here and it is still happening here and in Europe. They, like us, have tried to paper over most of the effects of the boom-bust business cycle malinvestment, and they have failed and the piper is at their door.

Within that context, let me sum up my thinking:

1. The economic "good news" is largely based on fiat money steroids and will not last without continuous injections of new fiat money into the economy.

2. The last injection of fiat money (QE2) is already wearing out and money supply is most likely declining.

3. A declining MS will result in further economic weakness (stagnation) and flattening-to-increasing unemployment.

4. This is likely to occur in Q2-Q3 2012.

5. As soon as unemployment goes up again, the Fed will announce QE3.

6. The dollar will continue to be weak.

7. It is likely that price inflation will continue to be "modest" (as the Fed sees it) in light of ongoing real estate related asset devaluation. This depends on the amount of QE.

 

Thanks to DoctoRx and Michael Pollaro for their help with this article. 

 

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bags's picture

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Fri, 02/17/2012 - 12:05 | 2169771 Jumbotron
Jumbotron's picture

Within that context, let me sum up my thinking:

1. The economic "good news" is largely based on fiat money steroids and will not last without continuous injections of new fiat money into the economy.

2. The last injection of fiat money (QE2) is already wearing out and money supply is most likely declining.

3. A declining MS will result in further economic weakness (stagnation) and flattening-to-increasing unemployment.

4. This is likely to occur in Q2-Q3 2012.

5. As soon as unemployment goes up again, the Fed will announce QE3.

6. The dollar will continue to be weak.

7. It is likely that price inflation will continue to be "modest" (as the Fed sees it) in light of ongoing real estate related asset devaluation. This depends on the amount of QE.

 

Shampoo....Rinse....Repeat......until collapse and the great re-ordering to a much lower equilibrium.  The only thing is that the Masters of the Universe will burn it all down trying to save it.

Financial napalm coming........

Fri, 02/17/2012 - 10:40 | 2169271 Shizzmoney
Shizzmoney's picture

Rumor going around in MASS that fake $1000 are being passed around based off of bleached $10 bills.  The bills, when bleached, keep the ink, and even pass the acid pen test.

Looks like people are resorting to their own CTRL-P!

Sat, 02/18/2012 - 13:25 | 2172991 the grateful un...
the grateful unemployed's picture

the only way to detect the fake is to match the face in the watermark to the face on the bill, which few clerks do. they bleach smaller denoms because a 1000 is going to get some attention, but maybe in mass thats what it takes for a starbucks and a bagel?

Fri, 02/17/2012 - 10:14 | 2169187 Shizzmoney
Shizzmoney's picture

As I have said many times,there are two economies.  This article below describes them in categories: the "Plutonomy" and the "Realonomy" (the one we actually live in).

http://www.truth-out.org/plutonomy-powers-ahead-realonomy-remains-recession/1328219553

That's why I laugh at uber-liberals who just tow the party line like a conveyor belt trying to defend that the economy is doing better, and that its because of Obama.  It isn't.  The POTUS office has as much to do about the economy as I my involvement in the "killing" of Osama Bin Laden.

The Federal Reserve, and the FOMC, controls the policies that effect the economy. And their policy is "keep the boat afloat", not "plug the hole that will eventually sink the ship".

Set sail for fail, gentlemen!

Fri, 02/17/2012 - 08:53 | 2168944 f16hoser
f16hoser's picture

Ron Paul has them by the BALL's (Moral High Ground).

Fri, 02/17/2012 - 08:30 | 2168902 falak pema
falak pema's picture

Economic recovery and Okun's law of job creation from GDP growth :


OH CRAP: Is This A Bad Sign For Jobs? Sam Ro | 1 hour ago


Read more: http://www.businessinsider.com/philly-fed-jobs-jack-ablin-2012-2#ixzz1mdogmrSK

If this article sees right behind the job creation report, then this recovery is like the job creation statistical scam. Graphics or no graphics we can make statistics say what we want.

Fri, 02/17/2012 - 07:33 | 2168858 DevilsPrinciple
DevilsPrinciple's picture

Could any argument to save our great nation have more meaning than this one ?

 "God forbid we should ever be twenty years without such a rebellion.
The people cannot be all, and always, well informed. The part which is
wrong will be discontented, in proportion to the importance of the facts
they misconceive. If they remain quiet under such misconceptions,
it is lethargy, the forerunner of death to the public liberty. ...
And what country can preserve its liberties, if its rulers are not
warned from time to time, that this people preserve the spirit of
resistance? Let them take arms. The remedy is to set them right as
to the facts, pardon and pacify them. What signify a few lives lost
in a century or two? The tree of liberty must be refreshed from
time to time, with the blood of patriots and tyrants.
It is its natural manure."

 

~ Thomas Jefferson ~

 

Fri, 02/17/2012 - 08:32 | 2168907 falak pema
falak pema's picture

only problem :the bigger the rot the more the pain...now, the rot is enormous...

Fri, 02/17/2012 - 07:15 | 2168850 disabledvet
disabledvet's picture

HEY HYMAN MINSKY...SAY HELLO TO HYMAN RICKOVER...

Fri, 02/17/2012 - 05:36 | 2168791 blueridgeviews
blueridgeviews's picture

Where did all the money go? Are you telling me that $4.5 trillion more debt in the last 3 years along with $16 trillion in Fed Funds pumped into banks across the planet all disappeared from the face of the earth?

Fri, 02/17/2012 - 10:45 | 2169286 therearetoomany...
therearetoomanyidiots's picture

Well, there's the three trillion that went to foreign banks from the fed from 2007-1010 per B. Sanders fed audit. 

http://www.sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-...

You know this audit, the one the media covered for months on end due to the outright criminality of it all.   You remember that on Brian Williams and Brett Baer shows, right? 

 

 

Fri, 02/17/2012 - 04:15 | 2168725 TruthWave
TruthWave's picture

I'm thinking that financial Obamageddon will take place this year, or next at the latest.

Fri, 02/17/2012 - 03:12 | 2168680 YesWeKahn
YesWeKahn's picture

phu ck you Ben!

Fri, 02/17/2012 - 01:08 | 2168555 batterycharged
batterycharged's picture

Recovery...LMAO.

The problem is that they use to many averages in all these stats. For instance, you take Mitt Romney and 41 unemployed people and you get an average yearly salary over $1 million per person.

Low initial job claims? Is it possible that all those temp workers and contractors can't claim unemployment? Or all the people working the black market can't?

You conveniently left off the explosion in credit in December. Could that explain the new surge in spending? The new surge in autos? Another debt bubble to pop?

 

My wonder is this. What happens when real inflation kicks in. The median wage is $26K. Money losing value may hurt the billionaires, but imagine more than 50% of AMericans with next to zero wealth. The ones with dollars in the bank. Imagine that small wealth getting wiped out thanks to the Bernank. Can you say civil war?

Imagine the austerity folks saying the poor need to pay more taxes.Or the bottom 50% making less than $26K being told they have no benefits from gov't but need to pony up more for wars in Afghanistan and Iran.

Recovery? Yeah right. Maybe for Mitt ROmney, not the other 41 unemployed guys.

 

Fri, 02/17/2012 - 10:58 | 2169365 Shizzmoney
Shizzmoney's picture

Is it possible that all those temp workers and contractors can't claim unemployment?

This is State Dependent, methinks.  I know in MA, you can.....but you don't get much in compensation (the most weekly is $673; I had a friend who got $57 lol).

My wonder is this. What happens when real inflation kicks in. The median wage is $26K.

And that's BEFORE TAXES!  Unless you live in NV/FL/NH, you probably see around $21K of that (and I notice *my* return from the IRS isn't as generous as it used to)!

On top of that, that wage is above the poverty line (aroud $18K).  Just enough.  Just like America; we only do just enough to scrape.  SO much for "American Exceptionalism"!

Fri, 02/17/2012 - 10:46 | 2169291 therearetoomany...
therearetoomanyidiots's picture

Real inflation won't kick in until November 7th.  I'm pretty sure on this.

Fri, 02/17/2012 - 11:10 | 2169460 Shizzmoney
Shizzmoney's picture

Very true....just like how I didn't really think things would start to crash until after the Super Bowl.

 

Fri, 02/17/2012 - 00:08 | 2168396 sodbuster
sodbuster's picture

Half way to the goal line on deleveraging? What an optimist!

Thu, 02/16/2012 - 23:20 | 2168279 Spacemoose
Spacemoose's picture

the most accurate description of reality i have read on ZH.

Fri, 02/17/2012 - 02:35 | 2168648 fourchan
fourchan's picture

i agree, absolutly outstanding.

Thu, 02/16/2012 - 22:00 | 2168037 Westcoastliberal
Westcoastliberal's picture

Charles Hugh Smith slams one out of the park today.  This article should be widely dispersed:

The Grand Game of Perception Management

February 16, 2012

The economy will expand if you believe it is expanding--because you'll be "animal spirited" into buying a lot of stuff on credit that you can't afford.

He proves "real" employment is at 2009 levels, only with an extra 6 million in the workforce.  How can we have 8.3% unemployment when it was 10% then?  The numbers don't work at all.

http://www.oftwominds.com/blog.html

 

Thu, 02/16/2012 - 21:38 | 2167967 engineertheeconomy
engineertheeconomy's picture

All ponzi schemes benefit everyone. No one ever loses or has their homes taken away from them. Banks don't steal all the wealth. Politicians never lie. The military is installing democracy. Those children didn't need their limbs anyways

Thu, 02/16/2012 - 23:32 | 2168301 the grateful un...
the grateful unemployed's picture

we can buy them new bionic limbs which are better than the original, using the ponzi funds we attract. knowing that, that your investment in PONZI america helps foreign children buy new prosthetic limbs BETTER than the ones we destroyed, how could you say NO??

Thu, 02/16/2012 - 21:20 | 2167921 GeezerGeek
GeezerGeek's picture

At the outset the author lists several "piles of detritus to clean up before the U.S. economy can recover". I'm not certain if I'd call it a pile of detrius, but the one big thing holding back the U.S. economy is the U.S. central government.To a lesser extent one could include state and local governments.

Banks of all sizes are in trouble because of government meddling and regulation. To the extent the problem revolves around bad real estate loans, we need look no farther than the insistence of the government that poor people be allowed to participate in the home-as-ATM experiment. It got worse when the small banks were merged into bigger banks.

Households are in trouble because the government encouraged unwise financial behavior. Student loans are a great drag on young graduates, and only exist in quantity because of government policies. Home purchases were encouraged with the instigation of the housing bubble, which burst - surprise, surprise - and left many mortgages underwater.

Exporting jobs and technology to other countries was also a result of government policies. Labor costs here were forced to extreme hights, relative to the rest of the world, by things like minimum wage laws and other subterfuges.

What would really get the economy moving would be returning the government's scope to that experienced under Calvin Coolidge, or maybe even Grover Cleveland. Right now the government - all levels, really - is strangling the economy with excessive taxation and regulation.

Thu, 02/16/2012 - 21:18 | 2167918 adr
adr's picture

At this point in time I firmly believe that anyone that calls themselves an economist is not actually qualified to discuss or rate the economy. Because their existence depends on evaluating the economy from the standpoint of statistics, not actual on the ground working conditions, they can only evaluate from a set of numbers so distorted and manipulated that they can not be trusted.

The economic distortion caused by unprecedented amounts of monetary stimulus into the hands of an absolute minority, has given us the current situation where the bulk of the population has never been worse off, while the few have never profited so immensely. Bankrupt corporations and individuals were saved, not because they were truly important to the grand scheme, but important to the pocketbooks of those in power.

Is a corporation that posts record profit on the back of forcing dealers to accept more inventory than they can ever sell really breaking profit records? If that same corporation uses a finance arm to sell cars to people, when they know the buyer will most likely default on the loan within a year really healthy?

Can you really call government spending economic growth when the bulk of the money is spent on products and services that aren't actually needed?

What happens when a number of small businesses are bankrupted by stimulus program road construction that cuts off access to the stores? This has happened repeatedly over the past few years.

Is sacrificing millions of jobs to save one corrupt corporation really sound economic policy?

Contrary to popular Wall Street opinion, retail is not doing well at all. Consumer retail stocks are flying to all time highs, yet actual on the ground reports say the stores are doing less real business than anyone can remember. If you talk to store managers they will all tell you sales are down massively. The only inventory moving is that priced below half of the original retail. JC Penney would not voluntarily sacrifice 40-60% margin across the board if retail was doing fine. Stores are empty, inventory levels have never been lower. Demand for new products is at the lowest level I can remember. iCrap doesn't count. One company can not create a sustainable economy as much as Wall Street wishes it to.

Stocks like Autozone, Advanced Auto Parts, and others should no way be hitting all time highs when miles traveled is collapsing. Ask yourself, How many people do you know that change their own oil, let alone do any mechanical work? Who would have thought selling wiper blades and spinner hubcaps would ramp a share of stock up to hundreds of dollars. MECHANICS AND GARAGES DON'T BUY PARTS FROM AUTOZONE!!! How the fuck can they report sales that high? It isn't possible.

The reported numbers aren't real folks. US GDP is probably overstated by $7-10 trillion. The majority of GDP is reported in services. Services??? How do you actually quantify the value of trillions in services???

Public corporations are under such pressure to show revenue growth, they will resort to anything to show it. If that means creating shadow corporations to funnel fake sales to generate millions in profit, so be it. If that means building 250 new stores when there are already enough stores to service a population two times are large, so be it. New stores are actually opened and stocked by separate corporations that allow all inventory to be booked as sold before a customer ever walks through the door.

If I had the cash I would offer $1 million to any accountant of a massive publicly traded company who could come before me and prove the reported sales are true based on receipts of actual sold merchandise. Even though I don't have the money it would be a safe bet because there isn't a single corporation that can do so. When a buyer tells me the reported numbers his department sold was greater than the sum total of the retail value of what his department bought, I believe him 100%. Unless thousands of customers decided to overpay on every item, the books are cooked. Considering the average loss rate to theft at any retailer is 14%, even selling 100% of the value of purchased inventory is impossible.

I know there is no recovery because I live in a real midwest middle class town, and it is hurting bad. I know there is no real recovery because more and more of my $60k a year goes to pay for base expenses. My water bill is up 15% from the start of 2012. Everything else has followed suit. I depend on selling real products to real buyer who put them in real stores. The buyers all say demand for real products is tanking.

Do I accept the reality I know or do I substitute the reality of an economist, who probably has never held a real job in his life, as my own???

Fri, 02/17/2012 - 09:28 | 2169040 Gordon Freeman
Gordon Freeman's picture

Excellent post--thank you.

Fri, 02/17/2012 - 09:24 | 2169029 dontgoforit
dontgoforit's picture

The company I worked for did a similar thing, plus valued the inventory (some so old Moses could have used it) at 100 times it's -worthless- value.  The company doesn't exist anymore after over 110 years in business.  Cheap Chinese imports contributed to the demise, but it was bonus time for the CEO & others at the top... When all the smoke & mirrors fell apart, the jobs went away.  Mine was one of them.  I was a mid-ranker, but worked my ass off to help turn a profit.  Anyway, a year after I and many others were out, the FBI showed up, took hard drives, books, etc.  Nothing ever came of it.  All 1800+ of us in 8 states were out of a job.  CEO owns a business and I understand is doing fine....  You pick the moral of the story.  Get an education, work hard, be honest and get screwed.  Great.  But I'm still trying to do the same as I always did.  The world doesn't owe me anything.  I'll work as I always have.  God bless all you folks who 'keep on truckin'.

Fri, 02/17/2012 - 07:02 | 2168843 disabledvet
disabledvet's picture

ABSOLUTELY TRUE! And this entire farce of an article can be summed up with the term and the truth towards what you have spoken can be summed up with the term "uneven recovery." (I use the term "now you know why they built the Interstate Highway system.) But it IS a recovery...and may be far more powerful than people understand...perhaps in all the wrong ways as well. "We can hide the inflation" as so called "economists"--but you can't hide the result of it. GOOD LUCK WITH THE WAR IN SYRIA! ROCK ON CNN!!!!

Fri, 02/17/2012 - 00:43 | 2168498 Pike Bishop
Pike Bishop's picture

Stocks like Autozone, Advanced Auto Parts, and others should no way be hitting all time highs when miles traveled is collapsing. Ask yourself, How many people do you know that change their own oil, let alone do any mechanical work?

Me and the other 100 fuckin' guys at the Advanced Auto store at 8AM Sat morning.

Ya only buy the filter at AA, ya buy the oil at WallyWorldAA is at a 52 wk high because they charge $7 more than anybody for the 5 Qt size.

If everything you say is true, I suggest you learn which end of the wrench to hold. The same guys who were telling me it was embarrassing to see me under my car in the driveway 4 years ago, are now asking me if brakes are hard to do. Most everybody in this McMansion shithole who had 3 cars, now has 2 cars running and one parked funny for months somewhere in the drive. They're scared to death to take their car in, because they have never owned a car which wasn't under warranty.

This sonofabitch is eating its way up the foodchain like nothing I've ever seen. One month they're taking their kids to ballet lessons and Soccer Camp, the next month they're selling the kids to medical experiments for cash.

You know that Retail money that came out of the Mutual Funds, then to bonds, then to their mattresses? It ain't coming off of the sidelines this time. They're spending it.

The reason you know the Economists are full of shit, is because the green sprouts of 3+ years ago should be hedges and trees by now. I'm not seeing any. Even that ugly bitch during the '70s flashed her tits at ya occasionally, to give ya a thrill and remind you it'll be over soon.

This thing is more like Hillary Clinton throwing ya a gap shot. And just like her ass, it seems to go on forever, and is just as frightening.

I'm stayin' off of margin and will continue to enjoy the trip courtesy of the Central Banks... with a Mobile  EJECT button always in-hand,.. and digging a moat around the house. Because i think it's the only thing paid for in this development. The Economists can go on holding their breath  for that inflection point of a truly cleansing flood of 4yr-old pent up Consumer demand. From what I see, We're looking at a whole new unanticipated round of Household Debt decline. Except it ain't gonna be because it got paid-off.

I see the guy across the street hasn't found another job yet. His wife cut him off till he gets another corner-office job. The lights are out in the bedroom, she's probably tired from all the BJs she has to spread around work, to keep her pathetic job. Meanwhile, he's outside watching porn on his iPad, and molesting the family Collie in the back of his Lexus GX, which hasn't moved for 3 months because the busted fuel pump and line is going to cost him $2K.

So that's the lesson, teach yourself how to work on your own cars. or you'll end up fuckin' a dog in your driveway, while the neighbors watch.

Fri, 02/17/2012 - 21:55 | 2172078 Obadiah
Obadiah's picture

That there is some of the best commentary I've heard all week.  Rock on Piker!  Your close was..... well perfect.  ; )

Fri, 02/17/2012 - 03:30 | 2168695 ebworthen
ebworthen's picture

Ha-ha-ha-ha-hah!

You speak the truth; may it spread.

Thu, 02/16/2012 - 23:18 | 2168271 battlestargalactica
battlestargalactica's picture

Updated for 2012:

Beale: I don't have to tell you things are bad. Everybody knows things are bad. It's a depression, it's QE to infinity. Everybody's out of work or scared of losing their job. The dollar buys a nickel's worth; banks are going to burst with Helicopter Ben's counterfeited liquidity, but meanwhile hometown shopkeepers keep a gun under the counter; Ivy League punks are running wild on K Street and Wall Street, and there's nobody anywhere who seems to know what to do, and there's no end to it.

We know twelve months of Fukushima poisoned air is unfit to breathe and our GMO food is unfit to eat. And we sit watching our TVs while some CNBC pressitute in a mini-skirt tells us that today we have nothing but prime buying opportunities and that MFGobal hasn't committed any crimes, as if that's the way it's supposed to be!

We all know things are bad -- worse than bad -- they're crazy.

It's like everything everywhere is going crazy, so we don't go out any more. We sit in the house, and slowly the world we're living in is getting smaller, and all we say is, "Please, at least leave us alone in our living rooms. Let me have my iPad and my 60" hi-def plasma tv and my over-prescribed antidepressants, and I won't say anything. Just leave us alone."

Well, I'm not going to leave you alone.

I want you to get mad!

Fri, 02/17/2012 - 11:06 | 2169418 therearetoomany...
therearetoomanyidiots's picture

Pitch forks for all!

Thu, 02/16/2012 - 22:43 | 2168168 ISEEIT
ISEEIT's picture

Be careful adr; You may have just blew more than a few regime trip wires.

Wouldn't want to be a terrorist now would you?

Fri, 02/17/2012 - 07:09 | 2168845 disabledvet
disabledvet's picture

Already am. Never felt so phucking liberated in my life. "Now let's watch these nutjobs make it work." I've picked my winners. I recommend you do the same. STAND AND DELIVER WASHINGTON! AMERICA AWAITS WITH BATED BREATH!

Thu, 02/16/2012 - 21:14 | 2167908 GernB
GernB's picture

Something this article said has sort of been in the back of my mind for a while. if you chart the stock market in terms of gold rather than dollars what you see looks very much like the great depression, a huge drop in value. Could it be that when the author says "if you're still looking for The Big One to happen you are too late, that he is right. What if we have been seeing massive deflation in real terms, but it is being covered over by massive price inflation. You'd have many of the nasty effects of reduced consumption, reduced production, lower GDP, and widespread unemployment, but with the illusion that things are OK because prices are holding up. But, then what do I know, I'm not an economist.

Thu, 02/16/2012 - 20:46 | 2167851 rsnoble
rsnoble's picture

Holly crap try reading this entire artical after 12 beers my head hurts better drink another.

Depression? But I keep reading we're in a massive economic recovery? Funny thing is all the people that haven't been affected believe that too.

Thu, 02/16/2012 - 20:24 | 2167804 Zero Govt
Zero Govt's picture

"Is This Recovery?"

Who cares. Chairman Bumma says it is so so if you don't want to be branded a terrorist by the Google listening stations hum the mantra "recovery, recovery" or the FBI thought-Police will have you and your family in Stalag Gitmo 

Thu, 02/16/2012 - 21:29 | 2167943 The Navigator
The Navigator's picture

I took the Red pill so long ago, I've forgotten the Sheeple dialect.

I was reminded by DoChenRollingBearing that one should never forget the Sheeple dialect - when Homeland Security shows up, you must be able to Baaaaaa Baaaaaa with the correct accent, otherwise you will be on the next flight to Stalag Gitmo.

 

Thu, 02/16/2012 - 19:56 | 2167726 Westcoastliberal
Westcoastliberal's picture

As long as food prices continue to escalate (or quantities continue to shrink; think 11 oz bag of chips vs 16 oz-for the same price) and with gasoline prices now topping $4 for unleaded regular, we're not seeing ANY RECOVERY.

I disagree that we've not seen "The Big One" yet; it's lurking on the not-too-distant horizon in the form of the European meltdown, Iran invasion (maybe triggering WWIII), or a host of other nasty possiblities we're overdue for, including a huge CME (or EMP related to the WWIII scenario), Pole shift, Volcanic eruption, or Fukushima-size EQ's. Speaking of which, Fukushima is still smoldering, releasing radioactivity into both the ocean and winds.

Not to be too pessimistic, but seems to me we're seeing lots of fudged "happy-talk" numbers from the gov.

Thu, 02/16/2012 - 20:48 | 2167854 rsnoble
rsnoble's picture

Once gas crosses $4 watch out. Could you imagine $5gallon?  Doesn't work real well for guys like me that live in a rural area.  At one time online selling was a cure. But now shipping costs keep rising etc etc etc you're just screwed no matter what.

Fri, 02/17/2012 - 11:09 | 2169450 therearetoomany...
therearetoomanyidiots's picture

imagine NO gas...where we going to get it when we go to war with Iran, or Syria or wherever it is they determine this thing will take place.

Fri, 02/17/2012 - 07:14 | 2168847 disabledvet
disabledvet's picture

imagine it? I'VE SEEN IT. (And come up with a market based solution i might add. Don't worry--after a few more trillion in the hole even DC might figure it out...On the other hand...HAHAHAHAHAHAHAHAHA....

Thu, 02/16/2012 - 20:03 | 2167745 spekulatn
spekulatn's picture

Well said, Westcoastliberal. 

Thu, 02/16/2012 - 19:48 | 2167688 kaiserhoff
kaiserhoff's picture

We are all newbies to these conditions.  China and India are world class pirates of patents.  Beyond that, I defer to the techies.

Historically, any market lacking depth, either in number of buyers or number of stocks participating, was regarded as dangerous and

toppy. 

You won't get much argument with that here.

 

reply to Merlot - and I'm not even trinkin yet;)

Thu, 02/16/2012 - 19:34 | 2167668 duo
duo's picture

The capital that created the semiconductor business, the PC era, and the internet was saved during the high interest rates of the '80s.

Imagine saving for years to put $50K down on a house (with $8K gov incentive) then having all the equity evaporate in two years.  That is destruction of capital.

Fri, 02/17/2012 - 09:46 | 2169085 Widowmaker
Widowmaker's picture

Nope, thats record bonuses for not seeing it coming. Destruction doesnt exist in fraud money.

Thu, 02/16/2012 - 19:28 | 2167649 Boxed Merlot
Boxed Merlot's picture

Whatever one thinks of the role of U.S. exports, this is a serious negative factor. Recall that exports are about 10% of our economy and are seen by most analysts as an important driver of our economy...

 

I apologize for my ignorance on this matter, but if Apple accounts for such a large percentage of US stock market "improvement / success / recovery", how does this play into this?  What is the role of patents and their recognized application across multi-national jurisdictional relevance?

 

Just wondering out loud.

Thu, 02/16/2012 - 21:35 | 2167962 adr
adr's picture

I can prove prior art on just about anything Apple created over the past 13 years. I've even hold a few design patents Apple could be found to infringe upon but I can't afford a layer that would even try to go up against Apple. Apple can patent a dog shitting and be awarded the rights. Then sue every dog owner for breaching their intellectual property.

Our patent system favors the massive publicly traded corporation over anyone else. Patents that would never be granted do to common use or prior art are granted to Apple every single day. Every patent judge probably gets a big fat check from some phantom Apple corp every year.

Fucking Apple has been suing Samsung for violating an interface that has its roots in an interface I designed for Samsung as a corporate sponsored student project in 1999. If Apple thinks their App screen is an original idea of theirs, I have a whole bunch of computer files from 1999 that say otherwise. Patents for using images as phone number icons, I designed that interface in 1998. Coverflow, I presented an MP3 player design to IBM in 1998 with a screen that showed album art in a rolodex form. That idea isn;t even original because I got the idea from a juke box. Somehow Apple gets patents awarded for all this stuff, regradless if they designed it.

Steve BlowJobs never believed a designers work belonged to them. The only intellectual property right Jobs believed in is what he got to sign his name to. That sack of human garbage never designed a single product. Talk to any designer who worked for Apple. They made, he stole.

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