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

Tyler Durden's picture




 

Submitted by Charles Hugh Smith from Of Two Minds

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

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.

 

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Tue, 11/27/2012 - 13:54 | 3014660 Jason T
Jason T's picture

to be objective, aggregate hours worked have increased as have productivity.

The question is, what exactly are we producing?

Recession 2013 about to be confirmed on Friday.

http://research.stlouisfed.org/fred2/series/RECPROUSM156N

Tue, 11/27/2012 - 14:14 | 3014676 Cognitive Dissonance
Cognitive Dissonance's picture

"Recession 2013 about to be confirmed on Friday."

Very likely. But the clown car economists won't officially call it for another 9-12 months. It's always easy to make the call with the benefit of hindsight and when everyone is expecting it anyway.

<Ohhhh, so that's why it hurt so much to urinate last year. Thanks for clearing that up bro.>

Tue, 11/27/2012 - 14:39 | 3014808 Joe Davola
Joe Davola's picture

And short men's underwear?!?!?!?

Tue, 11/27/2012 - 14:40 | 3014812 NotApplicable
NotApplicable's picture

Interesting, though I'm at a loss to explain how this data was compiled from census data.

Also, why are they charting so many irrelevent things such as magazines and plastic forks, yet nothing that matters like appliances and such?

Tue, 11/27/2012 - 15:00 | 3014887 knukles
knukles's picture

Erroneous information:
Contemporaneous with the FED's discontinuation of the M2 data series, the "fork and spoon" category taken from the imaginary census question of "What do your friends prefer to eat when they come over to your house drunk?" was eliminated in favor of "sporks" as in "How many sporks does your neighbor have strewn about on their lawn between the abandoned car and rusty washing-machine?"

(terrible thing when the left hand truly knows not what the right hand is doing due to a severed medulla oblongata)

All ya' gotta do is ask.

Tue, 11/27/2012 - 15:44 | 3015056 SAT 800
SAT 800's picture

The entire US economy has been a mind trick for the simple-minded for that last 14years at a minimum. Remember the reports that the US had a "consumer driven economy", 70%of GNP is the number I recall being bandied about. Look at the figures for the HELOC peak; 333 million dollars every 24hours; 7/365; for years. What's a consumer driven economy? there's no such thing. Manufacturing produces value added; which is then distributed in some percentage between the primary capitalists, the secondary capitalists, (stock and bond owners),and the workers. When the ruling class arranged to sell the USA to China; when they accomplished their life long wet dream of manufacturing with slave labour and no regulations and selling into the dollar region; it was all over. Remember the propaganda about globalism being good for everybody? No critical thinking. China has most favored nation trade status; why? How does "off shore manufacturing" work? you send them the money; they keep it. Period. It's like the British Empire in reverse; how to destroy your country; just play make believe and ignore the basic reality of economics. Modern wealth is value added through manufacturing; the manufacturer, (as a country or trading block), keeps the money; the buyer becomes bankrupt and destitute. This is the basic fact that no-one seems to understand.

Tue, 11/27/2012 - 18:31 | 3015622 ACP
ACP's picture

It's a "SELF-SUSTAINING MIND TRICK."

You know, delusional.

Tue, 11/27/2012 - 14:21 | 3014711 LMAOLORI
LMAOLORI's picture

 

 

Why wait until Friday the Tyler's have already confirmed it :) and we know the government lies

 

HOW GOVERNMENT LIES ABOUT THE ECONOMY Exclusive: David Kupelian exposes amazing financial fairy tales we're told daily

 

 

Chart Of The Day: Continued Collapse In Capital Goods New Orders Confirms US Is In Recession

 

Tue, 11/27/2012 - 14:44 | 3014832 SheepDog-One
SheepDog-One's picture

Banksters 'recovered'....everyone else 'yer fucked'. Self sustain us all right into an early grave.

Tue, 11/27/2012 - 14:00 | 3014671 Dr. Engali
Dr. Engali's picture

The recovery is strong and getting stronger..I know this because the messiah and CNBS told me so,and that's good enough for me. Now if you'll excuse me I need to go wait in line at the nearest mission for tonight's can of dinner.

Tue, 11/27/2012 - 14:18 | 3014726 LMAOLORI
LMAOLORI's picture

 

 

CNBS? I heard it from Jamie Foxx (s)

 

Jamie Foxx: 'Our Lord and Savior Barack Obama'

 

Tue, 11/27/2012 - 14:43 | 3014823 NotApplicable
NotApplicable's picture

Well, he is a comedian.

Tue, 11/27/2012 - 15:09 | 3014934 Dr. Engali
Dr. Engali's picture

Don't you have to be funny to be a comedian?

Tue, 11/27/2012 - 14:19 | 3014735 Cognitive Dissonance
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"Now if you'll excuse me I need to go wait in line at the nearest mission for tonight's can of dinner."

Kibbles 'n Bits bro. No need for refrigeration and your coat gets really soft and shiny to boot. That's always a plus with Mrs. Cog.

<Now if I can just shake this desire to hump a leg.>

Tue, 11/27/2012 - 14:31 | 3014777 kliguy38
kliguy38's picture

I will ONLY believe it if Diane Swank from Mizuree Capital tells me its so (and she will) Then and ONLY then will I BELIEVE. CONtrolfidence.....the essence of the game

Tue, 11/27/2012 - 14:00 | 3014672 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Nobody has said to take the punch bowl away.  The "Grand Bargain" will not show any major reductions in the deficits and the issuance will stay over $1T all while Bernanke continues to buy $45B worth of MBS/mo and $40B of USTs/mo then fractionally reserving and rehypothecating the assets on reserve (re: gold).

Tue, 11/27/2012 - 14:34 | 3014786 NEOSERF
NEOSERF's picture

And it will come out over this weekend so they get a maximum Monday pop on the stock market which will in turn get retail cash registers ringing because THIS is the way you get back to the fabled 5% GDP growth rate...timing is everything!

Tue, 11/27/2012 - 14:03 | 3014675 max2205
max2205's picture

All non believers please report to the blue pill room. Stat!

Tue, 11/27/2012 - 14:21 | 3014741 Winston Churchill
Winston Churchill's picture

Its room 101.

Watch the step.

Tue, 11/27/2012 - 14:03 | 3014680 BlueCollaredOne
BlueCollaredOne's picture

Deja Vu

 

Tue, 11/27/2012 - 14:06 | 3014686 Canadian Dirtlump
Canadian Dirtlump's picture

[obi wan kenobi]This isn't the depression you're looking for[/obi wan kenobi]

Tue, 11/27/2012 - 15:52 | 3015087 Burticus
Burticus's picture

Just the usual Jedi mind trick...

(Wave hand) This isn't the gold you're looking for.

(Wave hand) Pay no attention to the central bank behind the curtain.

(Wave hand) No depression to see here, folks.  Move along.  Move along.

Tue, 11/27/2012 - 14:08 | 3014689 walküre
walküre's picture

Housing is NOT recovering in the sense that families are going out buying a new or bigger home or a second dwelling. Money is diverting from non-performing assets to assets that are considered safe. Real estate is a place to park money for investors. Since money has been printed like there's no tomorrow, it is only obvious that some of that money would end up in real estate transactions.

But it's blatantly false to proclaim that the US consumer has recovered and is back into spending mode. Everyone is watching their Dollar and is alot more prudent on how every last Dollar is spent. Unless the consumer can spend other people's money, they're not spending. The default risk is greater than ever as well.

Tue, 11/27/2012 - 14:08 | 3014692 Rearranging Dec...
Rearranging Deckchairs's picture

Hey wait Consumer Confidence is at a 4 year high. All problems solved. Who cares if said consumers are debt ladden and have no more disposable income to service more debt to buy more crap. /sarc

Tue, 11/27/2012 - 14:16 | 3014717 Glass Seagull
Glass Seagull's picture

Aladdin's profligate brother?

Tue, 11/27/2012 - 14:31 | 3014773 NotApplicable
NotApplicable's picture

Four years ago, you say?

If I recall, things were pretty fucked up back then.

Party On!

Tue, 11/27/2012 - 14:11 | 3014701 Skateboarder
Skateboarder's picture

There is no recovery because this is a game of orders of magnitude. If you rig the game at the level of 3-6 times the order of magnitude of a significant amount, say $1M, there's no going back. Ever.

If a big bank gambles on the order of tens to hundred of billion dollars, loses, and ends up with a petty fine in the order of tens of millions, how is that even a valid system?

If a CB creates trillions of dollars out of thin air and quantitatively eases on the order of tens to hundreds of billions, how is that even a valid system?

Bascially, people don't understand orders of magnitude. If they did, the guillotines would have been long out in the streets. Million, billion, trillion, quadrillion... what's the difference when you only have ten bucks in your pocket.

Tue, 11/27/2012 - 14:59 | 3014879 walküre
walküre's picture

Good sentiment. Sums it up nicely.

Million, billion, trillion, quadrillion... what's the difference when you only have ten bucks in your pocket.

We're being HAD. Few are enjoying a struggle free life because they create their own paycheques with the push of a button. The majority is making ends meet, busy working away and trying to survive.

The paper pushers are laughing at the rest of us. They own the politicians, their law "enforcement" and their judges. The three pillars of democracy are bought and paid for by the banks and the corporate elite.

Any unforeseen event can derail this system and stop their game. They really think they are in control over it all. They cheat, steal and lie as much and as long as they can. Unfortunately for us, we have to listen to their hubris and give them the time of day when we know they're full of shit.

Do as they do, not as they say. There is no honor among thieves. If Robin Hood was alive today, I'd join his merry gang and get some real wealth redistribution started. At least until the honorable King returns.

Tue, 11/27/2012 - 15:04 | 3014911 CPL
CPL's picture

1, 2, 4, 8, 16, 32, 64, 128, 256, 512, 1024, 2048, 4096, 8192, 16384, 32768, 65536, 131072, 262144, 524288, 1048576, 2097152, 4194304, 8388608, 16777216, 33554432, 67108864, 134217728, 268435456, 536870912, 1073741824, 2147483648, 4294967296, 8,589,934,592,17179869184,34359738368,68719476736,137438953472,274877906944,

549,755,813,888...

x2 multipler in action.

 

Tue, 11/27/2012 - 14:16 | 3014716 EZYJET PILOT
EZYJET PILOT's picture

This article was posted yesterday but it's even better the second time.

Tue, 11/27/2012 - 14:19 | 3014730 kchrisc
kchrisc's picture

Now I know what Paul Simon was singing about.

http://www.youtube.com/watch?v=nKxyoud_c-E&feature=youtube_gdata_player

Tue, 11/27/2012 - 14:31 | 3014770 devo
devo's picture

If the data were real interest rates would be rising.

Tue, 11/27/2012 - 14:42 | 3014821 imapopulistnow
imapopulistnow's picture

Best charts and graphs ever.  Seriously.

Tue, 11/27/2012 - 15:00 | 3014886 imapopulistnow
imapopulistnow's picture

The current rapid wage decline began in 1999.  If i recall correctly this was when the USA lost 2 million manufacturing jobs in a single year.  It is also when telecommunication advances allowed white collar back office jobs to shift overseas in great numbers 

May i suggest the cause of the wage decline can therefore be traced in good part to the rapid advancement of global economic integration; the ascension of China as the world's manufacturing center, India as the world's call center capital, etc.

The USA labor force now competes globally, at a labor cost disadvantage with emerging economies.  This will not self-correct until greater equilibirum in wage differentials - many years away.  Of course there may be exceptions such as Germany with their superior engineering technology, Norway with abundant fossil fuel stores, but they are the exceptions.

Regardless, it is what it is as the charts and graphs in this piece so clearly show.  Publc policy must acknowledge this reality and respond in what ever fashion is best to mitigate the consequences.  Either that or we accept that it is OK to allow a majority of Americans to live in poverty.  (In addition to the other economic consequences pointed out above)

Tue, 11/27/2012 - 15:07 | 3014926 imapopulistnow
imapopulistnow's picture

Charles, I went to your web site for the first time and will start reading your past posts.  Your book will be on my Christams list for the kids who can never think of what to buy their old man!

Tue, 11/27/2012 - 15:16 | 3014930 walküre
walküre's picture

Germany has implemented some harsh labor laws over the last decade. You get good qualified labor for 5 bucks an hour. Industry has been incentified to hire the unemployed with gov't subsidies. Innovation and superior engineering are only one part of the equation. Germans have collectively lost big time since the introduction of the Euro. Their standard of living was higher before the Euro.

It's a global race to the bottom only so that a few rich can live longer off the rest. They don't need a functioning middle class in Germany, in England or in the US. They just need x amount of consumers globally that will take their money as loans to buy shit their factories are producing. The elite is thinking in global terms when it comes to parking their wealth and putting their wealth to work. America is only one of the places where their money is at. Since our governments have sold out collectively and allowed the elite to run up massive debt without any consequences to the elite, the elite has long "diversified" their interests.

The American goose no longer lays the biggest golden eggs for the elite. I know most here don't like the idea of wealth confiscation because it would possibly hurt them as well. But I think if it had been done sensibly over the last 40 years, we wouldn't have the problems we're facing today. Taxes on the rich have to be raised. It's probably too late but what the heck, let's give it a shot. The tax loopholes needed to be closed decades ago. The wealth transfer to tax havens had to be shut off as well.

Tue, 11/27/2012 - 15:28 | 3015015 imapopulistnow
imapopulistnow's picture

The challenge is in finding a way allow more people to have eggs without killing (or starving) the goose.  Unfortunately the ideologues on the left will starve the goose and the ones on the right will starve the masses.

Tue, 11/27/2012 - 14:49 | 3014846 Quinvarius
Quinvarius's picture

Baby Boomers are our national burden.  Can't wait for my casket and funeral home stocks to finally give me some extra grim satisfaction.

Tue, 11/27/2012 - 15:02 | 3014901 walküre
walküre's picture

You'll be waiting a long time. The boomers are busy spending their children's inheritance and will leave the kids with nothing but the bill for the cost of the funeral. Guess how much the kids are willing or able to spend on their dead parents? You may want to go long shovels, tarp and duct tape instead.

Tue, 11/27/2012 - 15:02 | 3014900 venturen
venturen's picture

Can we get a QE GOOGLEPLEX please?

Tue, 11/27/2012 - 15:19 | 3014960 socalbeach
socalbeach's picture

The 4th graph from the top, Average Hourly Earnings, Y/Y % Change shows rising earnings since the percent change is positive.  The wages are rising at a declining rate however.  That can be consistent with the table below it, Real Median Household Income Declines ..., since that's inflation adjusted.

I don't know about your area, but around here rents are in fact rising, although not necessarily keeping up with overall price inflation.  The article said,

"... 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"

Tue, 11/27/2012 - 15:56 | 3015097 SAT 800
SAT 800's picture

Bought a December Contract for Silver today at a 33.95 price order. Will advice how that works out. note; for the lunatic fringe; this is a job; I get paid in dollars and I spend dollars; my family savings are already in serial numbered allocated silver bullion bars, okay? thank you.

Tue, 11/27/2012 - 16:00 | 3015109 toomanyfakecons...
toomanyfakeconservatives's picture

Torches and pitchforks... coming soon to a neighborhood near you.

Tue, 11/27/2012 - 16:24 | 3015185 Bansters-in-my-...
Bansters-in-my- feces's picture

Charles ,Charles Charles.... Do you honestly need convincing of ongoing inflation...? Home values going down maybe,but that does not mean inflation is not happening. Do you eat charles...????...

Any power bills...???

Wake the fuck up.

Tue, 11/27/2012 - 16:50 | 3015255 Lmo Mutton
Lmo Mutton's picture

Yahoo tells the truth:

"Strong Forecasted Growth"
Description: The following screen displays companies with solid growth forecasts and that average a "Buy" rating or better from Wall Street analysts. The screen also filters stocks out with share prices less than $5 in order to separate out more speculative investments on the OTC Bulletin Board. (Screening Criteria: Price > $5; Est 1 Yr EPS Growth > 25%; Est 5 Yr EPS Growth > 25%; Avg Analyst Rec > Buy)

Sorry, no search results were found. Click the back button on your browser and refine your search.

 

 

 

Tue, 11/27/2012 - 16:58 | 3015275 abgary1
abgary1's picture

The only way the mind trick will work is if at the peak of in-debtedness there is a debt jubilee. Then the debt bubble can begin again.

Debt driven consumption accommplishes 3 things: brings future consumption into the present, reduces consumption by way of debt servicing and reduces consumption because of inflated commodity values. All the consequences associated with bubbles.

What it will never do is drive sustainable growth. Not ever.

 

Tue, 11/27/2012 - 17:25 | 3015360 dexter_morgan
dexter_morgan's picture

BOK: This isn't the recession you are looking for.......

Guard: OK, then FORWARD!

Tue, 11/27/2012 - 17:30 | 3015388 omniversling
Tue, 11/27/2012 - 18:24 | 3015604 Money 4 Nothing
Money 4 Nothing's picture

It's all fake because the dollar is not teathered to reality. Exhibit A. Lil Timmah G said last week, "Forget about the deficit, raise it to infinity". Ben the Bernank said 1 day prior, "I will be printing 40 Billion a month open ended" Use your own reasonable deduction to where this is going. QE4 is in the batters box and then to infinity.

 

-JP 

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