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.

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CunnyFunt's picture

depressing charts

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."

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

economics9698's picture

Kill the central bankers, it will change.

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?

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.

Gunga's picture

That seems like a big deal to me,.

LawsofPhysics's picture

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

StychoKiller's picture

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

He could be a color-blind decorator!

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.

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.

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.

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. 

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.

Peter Pan's picture

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

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

knukles's picture

Love your Patriotism, Jim.

Future Jim's picture

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

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!"

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.

 

nick howdy's picture

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

Kali's picture

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

nick howdy's picture

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

Winston Churchill's picture

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

blunderdog's picture

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

knukles's picture

Just looking for the Polident sale.

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.

Sabibaby's picture

Are you saying I missed the recovery?

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.

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.

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

Dr. Sandi's picture

hissssssssssssssssssssssssssss

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.

Jim in MN's picture

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

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? 

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!!!

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?

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?

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.

 

 

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)

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?

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

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.

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 ? 

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..."

 

 

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.

Seer's picture

Magic underwear!

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

Seer's picture

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