This page has been archived and commenting is disabled.

Guest Post: Is This Recovery "Self-Sustaining" Or Merely A Mind Trick?

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Perhaps the "recovery" is a Mind Trick played on the weak-minded.

 
Those with vested interests in the Status Quo tout data that supports the claim the "recovery" is now "self-sustaining," meaning that the economy is now expanding fast enough to fuel new growth. In this view, the Federal Reserve's extraordinary policy interventions (zero interest rate policy, $23 trillion in support provided to the global banking system, 3.4% mortgage rates, etc.) and the Federal government's unprecedented fiscal stimulus (borrow and blow $1.3 trillion a year) have done their job; the economy is now "self-sustaining," meaning that it can continue growing as Federal deficits shrink and the Fed trims its quantitative easing policies.
 
The data favored by the Status Quo interests are GDP (which rises when the government borrows and blows trillions of dollars), housing sales (still low compared to 2006, but better than 2011) and consumer confidence, which is hitting multi-year highs. Consumer confidence is a quasi-quantitative measure of the critical "animal spirits" that Keynesians look for to drive more borrowing and spending: if you feel wealthier for whatever reason, that confidence arouses your "animal spirits" to rush out and buy something, preferably a house and a car.
 
Those looking at fundamentals such as household income/debt and sales see more of a Mind Trick being played on the weak-minded. If you can convince me the economy is expanding and inflation is rising, I will be more likely to risk borrowing and spending more than I can afford. The "real" economy might be sputtering, but my belief in the "recovery" will support my confidence in the wisdom of leveraging more of my (shrinking) income into debt-based consumption.
 
This debt-based consumption (according to the Keynesian Cargo Cult) will spark so much "growth" that the expansion will become self-sustaining. Corporations will see the rise in sales and become confident enough to make capital investments and hire more workers, who will then spend their paychecks consuming more stuff, and so on.
 
So the task of the Status Quo shifts from actually expanding the economy to persuading us the economy is expanding. If the Mind Trick works, then maybe the unleashed "animal spirits" will actually spur real-economy growth.
 
It appears a certain number of buyers are convinced housing has bottomed, and this confidence (misplaced or not, no one yet knows) has persuaded them to buy real estate. This has indeed fueled a self-sustaining growth cycle in some areas, as people waiting for the bottom are jumping in, pushing prices higher and drawing in more converts.
 
On the other hand, if household incomes continue weakening, then the confidence of all those real estate investors in rising rents and 100% occupancy might not align with reality as well as they anticipate.
 
All debt and consumption is based on income. Consider these charts:
 
 
Notice that the only age bracket with rising incomes is the 65 and over cohort; everyone younger than 65 has seen their income slashed.
 
As I have observed many times before, the middle class filled this gap between rising costs and stagnating wages with debt.
 
 
Income for every age group other than 65+ seniors has declined sharply:
 
 
The income of those in their peak earning years 45-54 have been slammed:
 
 
With debt levels still high and income sagging, where is the higher income needed to support higher debt and spending? Lowering the interest rate has enabled higher debt, but now that interest rates are negative (below the rate of inflation),they can't go any lower: the Status Quo has run out of "stimulus" and now must rely on manipulation and artifice--Mind Tricks--to persuade people a stumbling, stagnant economy is growing robustly enough that they should risk their future prosperity on debt-based consumption in the present.
 
Self-sustaining recovery or Mind Trick? We may not know for some time if the Mind Trick worked or not, but the real economy could rise up and shatter the illusion at any time. 
 


My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions--10% to 20% discounts.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 11/27/2012 - 00:19 | 3013501 CunnyFunt
CunnyFunt's picture

depressing charts

Tue, 11/27/2012 - 00:29 | 3013517 flacon
flacon's picture

The government's idea is this: "As long as the over 65's get their promised social security and pensions/401(k) retirement money that's all that matters. Screw the rest of the population."

Tue, 11/27/2012 - 00:52 | 3013553 ACP
ACP's picture

As long as Caesar and Biggus Dickus and cronies get theirs, that's all that matters:

http://www.youtube.com/watch?v=lcXcFGhdLig

Tue, 11/27/2012 - 01:03 | 3013564 economics9698
economics9698's picture

Kill the central bankers, it will change.

Tue, 11/27/2012 - 01:31 | 3013594 knukles
knukles's picture

Stop it.
Everything is gonna be A OK.
Remember, Plugs Biden was put in charge of The Department of Green Shoots and with the cabinet reshuffling will go to head up the Department of Interior Decorating

What the fuck could go wrong?

Tue, 11/27/2012 - 02:39 | 3013641 Ahmeexnal
Ahmeexnal's picture

CME declares indefinite force majeure as the exchange will fail to deliver physical gold to contract holders standing for delivery:

http://www.nasdaq.com/article/cme-declares-force-majeure-at-manhattan-go...

CME blames hurricane Sandy for the convenient inconvenience.

Tue, 11/27/2012 - 06:58 | 3013737 Gunga
Gunga's picture

That seems like a big deal to me,.

Tue, 11/27/2012 - 09:19 | 3013914 LawsofPhysics
LawsofPhysics's picture

It is.  Watch the physical market.  If you can't touch "it", you don't own whatever "it" is.

Tue, 11/27/2012 - 09:19 | 3013912 StychoKiller
StychoKiller's picture

[quote] What the fuck could go wrong? [/quote]

He could be a color-blind decorator!

Tue, 11/27/2012 - 01:18 | 3013581 three chord sloth
three chord sloth's picture

Paying the salaries/bennies of government workers and meeting pension/medicare promises of the commoners are the two essential, last-line-of-defense positions of the government. A lot of other things can be downsized and degraded, but if it ever become apparent to all that either one of those two obligations cannot be met... well, that's when the government falls.

Most people live in fear of old age, and will put up with a lot of crap in their life as long as they know they won't be cold, hungry and alone at the end. And when they realize they swallowed shit for decades with no pay-out at the end... they will freak.

Tue, 11/27/2012 - 05:10 | 3013689 Offthebeach
Offthebeach's picture

Cold hungry alone.
Your not familiar with nursing home death at 3 AM.
Old people never freak. Ifpeople who have subsumed their wealth, desperate paltry savings, year over year for decades are called peasants. Muppets. Slaves. Dependents. They'll take shite and thank-you.

Tue, 11/27/2012 - 12:31 | 3014427 daxtonbrown
daxtonbrown's picture

If old people are te only ones with rising disposable income, and their need for housing generally declines with age, then the whole housing mini boom is oomed to crash.

Tue, 11/27/2012 - 00:21 | 3013505 Aziz
Aziz's picture

There can be no real recovery if the unsustainable junk (debt/corporations/banks) is not liquidated. There is still far too much debt in the system relative to income. 

Tue, 11/27/2012 - 04:01 | 3013667 zhandax
zhandax's picture

Bingo!, and that is a point the status quo is loathe to hear.  May I add that the recovery will not be felt on Main street until the state-supported , as well as tolerated, monopolies are dismembered.

Tue, 11/27/2012 - 07:05 | 3013742 Peter Pan
Peter Pan's picture

For the time being the recovery is a self sustaining mind trick.

Tue, 11/27/2012 - 00:25 | 3013515 Jim in MN
Jim in MN's picture

Fuck it, I am going to borrow assloads of money for a series of increasingly bizarre and sophisticated backyard concrete statues.

Whew!  Capitulation at last....such a relief.....now for the family suicide note for when the bills come due.

 

/sarc off FUCK YOU BERNANKE and all you GOLDMAN SLUTS FUCK OFF LEAVE US ALONE

Tue, 11/27/2012 - 01:33 | 3013596 knukles
knukles's picture

Love your Patriotism, Jim.

Tue, 11/27/2012 - 00:32 | 3013525 Future Jim
Future Jim's picture

Based on the civilian employment to population ratio, there has been no recovery

Tue, 11/27/2012 - 08:05 | 3013766 Dr. Sandi
Dr. Sandi's picture

While Mr. Hugh-Smith's 'points' are often rounded at the free end, I think that's what he was moving toward.

Here's my simple summary:

While the Status Quoters tell us that the recovery continues, somebody has cut the lips off the pig out of a desperate attempt at an all pork meal. Now, some poor schmuck in MSM has to put lipstick on a pig that no longer has lips.

Our new battle cry should be, "PORK LIPS NOW!"

Tue, 11/27/2012 - 09:12 | 3013894 Ljoot
Ljoot's picture

It's an aporkalypse!

Tue, 11/27/2012 - 01:05 | 3013565 Stuck on Zero
Stuck on Zero's picture

Interest rates have been negative for many Americans for decades.  These are the lucky people who are getting much more out of the system than they ever put in.  And there are lots of them. 47% to be sure.

 

Tue, 11/27/2012 - 01:07 | 3013568 nick howdy
nick howdy's picture

It's a self sustaining Mind trick, it works as long as you believe it..

Tue, 11/27/2012 - 01:12 | 3013571 Kali
Kali's picture

The George Costanza theory- "it's not a lie if you believe it."

Tue, 11/27/2012 - 01:29 | 3013591 nick howdy
nick howdy's picture

You have to believe the lie..That's what my daddy taught me..If you want sell something...

Tue, 11/27/2012 - 06:16 | 3013721 Winston Churchill
Winston Churchill's picture

Only when you can fake sinceritity can you succeed in politics.

Tue, 11/27/2012 - 01:12 | 3013573 blunderdog
blunderdog's picture

Old folks go out and vote, tho.  They're not exactly clamoring for big change.

Tue, 11/27/2012 - 01:38 | 3013603 knukles
knukles's picture

Just looking for the Polident sale.

Tue, 11/27/2012 - 01:15 | 3013575 Supernova Born
Supernova Born's picture

Anecdotally, the RE market in the areas I follow is going down in flames.

I didn't even know there was any "appreciation" left to burn.

Tue, 11/27/2012 - 01:16 | 3013576 Sabibaby
Sabibaby's picture

Are you saying I missed the recovery?

Tue, 11/27/2012 - 01:24 | 3013587 three chord sloth
three chord sloth's picture

I don't know if you missed the recovery, but I know it missed me. And pretty much everyone else I know.

Tue, 11/27/2012 - 01:25 | 3013589 adr
adr's picture

I guess Bernanke is some kind of animal. With the Fed as the source of the "Animal Spirits". However, I've never seen his species in a zoo. I thought I saw a Krugman once, turned out to be some kind of sloth. Really hard to spot the difference though. The sloth is far more interesting, so that's the tell.

You know, Cramer told me I am wealthier so I looked in my wallet, nope same amount of cash. Checked my paycheck, still the same. I guess I need to adopt a Bernanke from the pound, maybe then.

Tue, 11/27/2012 - 01:36 | 3013599 knukles
knukles's picture

When one finally contemplates the end game between the East and West, it ultimately boils down to the difference between White and Wong.

Biden/Robot Chicken 2016

Tue, 11/27/2012 - 08:05 | 3013767 Dr. Sandi
Dr. Sandi's picture

hissssssssssssssssssssssssssss

Tue, 11/27/2012 - 01:38 | 3013604 Supernova Born
Supernova Born's picture

Yeah, but off the lows of American history. However, there are signs the economy may be about to break below the 236 year moving average.

Tue, 11/27/2012 - 01:44 | 3013613 Jim in MN
Jim in MN's picture

Recovery = what you do after you lift the sheet in the Morgue.

Tue, 11/27/2012 - 01:57 | 3013614 TomGa
TomGa's picture

Those with vested interests in the Status Quo tout data that supports the claim the "recovery" is now "self-sustaining,..." [LOL!]

"So the task of the Status Quo shifts from actually expanding the economy to persuading us the economy is expanding. "

 

Jeez, Charles. Do ya' think?  Do you think it might be the "growth and recovery" narrative Washington has been repeating for how many years now with the collusion of the MSM? 

Tue, 11/27/2012 - 02:00 | 3013625 Lord Of Finance
Lord Of Finance's picture

In 2008, the free market emerged from being buried under piles of paper being dumped by Greenspan and Bernanke. It took the form of a sledge hammer, and began to smash to pieces each and every mistake made over the last decade. Seeing this intolerable sight, Bernanke loaded up his chopper with newly printed paper and commenced operation dump. Piles of paper burried the hammer yet again. But they can't beat a sledge hammer with piles of paper. Yes indeed, paper does cover rock, but that is only a game that kids play. The free market reality, indeed the true life reality, is that the paper covering the rock will only last so long. Eventually a hard rain will come and tear it apart. A hard wind will gust and blow it away. The rock will emerge and endure.

    The sledge hammer will commence its destruction of all the toxic paper when interests rates rise. The politicians who approved of this paper dumping will be the ones who will bring that hard rain and wind to blow all that paper away. The hammer will be freed to do what it has to do and what it will eventually do.

Something is being overlooked by many when it comes to the "cliff" fiasco. In his first term, Obama tried and nearly succeded in getting enough republicans on board to end the tax advantages of municiple bonds. I believe he will succeed this time around. Cutting the tax advantage of municiple bonds will be the blow by which the hammer cracks the bond market. The only reason investors are in this "safe haven" is only because of the tax advantages it brings. Once a deal is reached, and I do believe there will be a last hour "deal", it will include not so much tax increases, but an end to certain tax deductions. If municiple bonds are a part of them then get out of the way, because there will be a stamped the likes of which has never been seen. Then and only then will the hammer emerge from its burial to resume what it started some 5 years ago. It has been what seems to be a very long time of waiting, but these scoundrels can only inflate another bubble for so long. It's nearly 5 years and the time has about come. Be patient my friends. Get ready to duck. The hammer is about to take a mighty swing. I know you are ready, but the central planners are not. Their backs are turned towards that pile of paper. They think they buried it for good this time. They better have eyes in the back of their heads!!!

Tue, 11/27/2012 - 08:46 | 3013818 Dr.Engineer
Dr.Engineer's picture

God bless Zero Hedge for the insight of this community. 

Excellent point.

Now, that is the 144th black swan that is circling.  Wonder what the 145th one will be?

Tue, 11/27/2012 - 10:19 | 3014045 ElvisDog
ElvisDog's picture

when interests rates rise

Well, there is the flaw in your argument. The government and central banks, the very people who benefit from the status quo, are in complete control of interest rates. They have a vested interest (pardon the pun) of keeping them historically low, so what exactly is going to cause them to raise them?

Wed, 11/28/2012 - 03:30 | 3016566 Lord Of Finance
Lord Of Finance's picture

If people flee the municiple bond market absent the tax haven they are attracting, then how else will municiple bonds be purchased? Rates will be forced up to attract buyers. Municipalities will be exposed as the broke entities that they are. Of course the fed will step in to sop up the catestrophic lag in new bond purchases. If you think money printing gone mad is a problem now, wait until the fed steps in to bail out municiple, city and state governments. The initial thrust of the purchases will lower rates of course, but not inflation. Eventually the fed will have to address the out of control inflation these unbelievable massive bond purchases will cause. After the housing bubble burst in 2007 it was revealed that the fed was secretly purchasing 100's of billions of dollars worth of toxic paper from 2003-2006. This is what caused the out of control inflation back then. It wasn't just growth from the housing bubble. The economy was in need of a correction which should have been deflationary, but the fed started buying toxic paper way back then. The money velocity skyrocketed and Greenspan had to raise rates.

The fed wanted to do everything it could to keep interests rates low and their toxic financial paper purchases secret, but they couldn't do it! Greenspan had to tick up the interest rate and it started a snowball effect, or as I analogized, a 'sledge hammer' effect. If we were still using 1980 standards to measure inflation, that dickhead would have had to raise them much sooner. We have high inflation now. But the feds new inflation metric is lagging and so it will take some more time for the fed to recognize that inflation is a serious problem, but that is precisely the problem. They can and will keep rates down, but at some point they WILL  raise rates. They hope that when the times comes when they have to raise rates the economy will be strong enough to handle it. Will it be? All you have to do is look at the historicle record of when the fed held interests rates down for many years only to be forced to raise them. Look at what happened in 1937 and 1978. What do you think happened after that? It was devastating to say the least. It is what made the "great deppresion" so "great" and the late 70's/early 80's a nightmare. But there is a new even more dangerous difference between then and now. The difference between then and now is; 1) we do not have record trade surpluses as we did in the 1930's, 2) We do not "owe the debt to ourselves" as we did in the late 70's. We also had huge surpluses then as well. We were able to buy our way out of those major problems. Another question is, "how will we buy our way out this time around?"

   

  Just like the fed was forced to recognize the out of control inflation when it was forced to raise interests rates several years ago, which was the pin that pricked the housing bubble- so too will these central planners have to raise them again. They cannot print indefinitely. Inflation will be a problem and the fed will have to address it. As in the late 70's, there will be a stampede out of the bond market as well as the stock market. The only place to go after that is of course, precious metals. When the bond market ceases to be a safe haven and the equities market is just as toxic in a rising interest rate environment the new safe haven will be in metals. Just as it was in 1979-1980. This time around will be quite a doosy because of the aforementioned 2 differences I stated at the end of the last paragraph.

 

 

Wed, 11/28/2012 - 03:33 | 3016659 TruthInSunshine
TruthInSunshine's picture

If they do void the tax-exempt status of municipal bonds, there will be a revision to The Federal Reserve's charter/legal authority allowing it to swallow up said municipal bonds.

You can guaran-damn tee that.

The Fed will just become an even larger repository/infested-engorged pustule of toxic waste. After all, whether they choke and die on 3 trillion or 30 trillion of septic sludge, what's the practical difference? (/sarc)

Tue, 11/27/2012 - 11:42 | 3014292 Bicycle Repairman
Bicycle Repairman's picture

The USSR lasted 70+ years.

Tue, 11/27/2012 - 02:03 | 3013627 Orly
Orly's picture

Tyler, is the site being hacked by someone called Hadsaloms?  Sends you to a page that says wedding dresses are here and it is all gibberish with links.  Looks to be an outside site?

Tue, 11/27/2012 - 03:05 | 3013651 BlackholeDivestment
BlackholeDivestment's picture

...hmmm, the Vote 2 Party 666 Whore aborted labor, like a first born Chinese girl. Now I get the whole ''I'm the President of the United States Drag Queen Bride of Christ. It's a Flametrick Sub (Black Swan/Hole) Song. http://www.youtube.com/watch?v=8EDL6IaAHk0

Tue, 11/27/2012 - 03:07 | 3013653 ebworthen
ebworthen's picture

Average hourly earnings is astounding; what a drop.

Recovery?  No.  The mind trick is the MSM and Government rabbit in the hat and endless handkerchief.

Tue, 11/27/2012 - 07:10 | 3013697 Dre4dwolf
Dre4dwolf's picture

What recovery? I don't even, how can we determine if a "recovery is self sustaining" if we are not even in a.... uhh did I miss something in my Advanced Eco class 0o ? 

Tue, 11/27/2012 - 06:41 | 3013730 Pool Shark
Pool Shark's picture

 

 

Recovery?  Really?  Is that what we're calling this?

To paraphrase Tip O'neill:

"Let me write $6,000,000,000,000.00 in hot checks; and I'll show you a good time too..."

 

 

Wed, 11/28/2012 - 03:51 | 3016666 TruthInSunshine
TruthInSunshine's picture

June to September of 2013 will the 4th "recovery summer."

Some say the 3rd time is a charm, but it often takes a 4th whack. Look for many boats, RVs and other highly discretionary and vastly depreciating assets to wash over this land like a wealth/confidence tsunami.

Tue, 11/27/2012 - 06:49 | 3013734 Seer
Seer's picture

Magic underwear!

People 65+ know the secret!  Wear "Depends!"  "Huggies" are for losers!

Tue, 11/27/2012 - 06:51 | 3013735 Seer
Seer's picture

Oh, and Charles, "sustainable" and "growth" do NOT belong in the same sentence: bad premise = bad results/conclusion.

Tue, 11/27/2012 - 07:31 | 3013751 negative rates
negative rates's picture

There is a recovery for youin's, and a recovery for wein's, and they ain't the same recovery.

Tue, 11/27/2012 - 07:51 | 3013759 overmedicatedun...
overmedicatedundersexed's picture

sleep walking markets will meet a sudden fall..but it will be reported as the expected correction which all the talking heads will say they warned of ..ala cramer and Bear. the worst news is never reported in such a sick economy so that the people understand, no the job of MSM is to pacify and lie and they are great at it. ergo $600 pcln a co that does what? or FBroke a co that does what? the FED knows if it stops QE the bid is gone.

Tue, 11/27/2012 - 08:05 | 3013768 Seer
Seer's picture

Even worster is the fact that the entire System is based on sickness (improbable perpetual growth on a finite planet).  The collection of stories are all within one BIG book of fiction; no surprise that individual stories, therefore, ARE fiction.

Slinky down the staircase... and Slinky no go UP the staircase unless everything is turned upside down, in which case it's STILL DOWN...

Tue, 11/27/2012 - 08:30 | 3013796 Being Free
Being Free's picture

...the Keynesian Cargo Cult...

Great descriptor of Keynesianism!  If Feynman were still around he'd probably add some words about Keynesian economics to the Cargo Cult lecture.  http://calteches.library.caltech.edu/51/2/CargoCult.pdf

Tue, 11/27/2012 - 09:32 | 3013931 Shizzmoney
Shizzmoney's picture

This debt-based consumption (according to the Keynesian Cargo Cult) will spark so much "growth" that the expansion will become self-sustaining. Corporations will see the rise in sales and become confident enough to make capital investments and hire more workers, who will then spend their paychecks consuming more stuff, and so on.

Yeah, but if they don't hire workers at competitive wages with inflation (or at least, true inflation) and today's economy, then all will be for not.

On top of that, social safety nets are being slashed and regulated more healivy, as proven by this excellent article on Naked Capitalism today:

Welcome to the Future of Your Health Insurance. It Sucks. http://www.nakedcapitalism.com/2012/11/i-have-seen-the-future-of-your-health-insurance-it-sucks.html#XaLhXEbmRQGEFrRt.99 Costs will only be passed onto the people.  And that's when the people start breaking windows.  I just can't wait for all of these baby boomers who makes "good" money now, to realize their kids will have shittier lives, lower wages, and less opportunity.......despite their culutral "beliefs" that "hard work pays".  Oh the lulz.
Tue, 11/27/2012 - 09:41 | 3013953 d edwards
d edwards's picture

Just wait until the higher taxes and the cost of 0bamacare kick in next year.

 

It'll be a blow just like H. Hoover raising taxes at the start of the Depression, and made it much worse.

Tue, 11/27/2012 - 10:23 | 3014060 vote_libertaria...
vote_libertarian_party's picture

But we do have a huge boom in reality shows.  So take that into account.

Tue, 11/27/2012 - 10:32 | 3014087 Vince Clortho
Vince Clortho's picture

Recovery?  What recovery?

Did I miss something?

Manipulating selected statistics on charts does not constitute a recovery.

Wed, 11/28/2012 - 07:10 | 3016791 JohnF
JohnF's picture

The problem, as anyone can see here, is indeed aggregate demand. If people aren't earning money one way or another, they'll not buy stuff.

The problem, of course, is that the Keynesians, politicians and MSM pundits all have only one answer: government consumption. Largely due to the fact that economic historian mainstream believes that The New Deal turned the economy around (it didn't) and that the multiplier of government consumption for the entire economy is greater than 1 (it isn't when you factor in the costs, and even if you don't, it doesn't work that way), government spending is considered to be the only tool in the workbox.

It isn't, of course, but the alternatives - reducing the cost of doing business, reducing taxes on labor and lowering government spending, which is always a parasitic drag on the economy - are far too unpopular for politicians to consider. Not the rest of us, of course, but politicians hate the idea of giving up power in any way, sort or form.

It's too late to say it'll end in tears. It is already starting to end, and the tears are there in the eyes of those losing everything because their jobs are gone, gone, gone. Now the only real question is how bad is it going to hurt when we all do the dead cat bounce.

Do NOT follow this link or you will be banned from the site!