The Keynesian End Game Is Near: No Escape Velocity This Year, Either

Tyler Durden's picture

Submitted by David Stockman of Contra Corner,

The economic releases of the past few days are putting the lie to the Keynesian escape velocity myth. The latter is not just around the corner - and 2014 is now virtually certain to mark the fifth year running when the boom predicted by Wall Street economist at the beginning of the year fizzled as actual results unfolded.

In that context, yesterday’s punk number on personal consumption expenditures during May was the inflection point. Not only did American consumers not come bounding out of their winter ice caves as predicted by virtually every “sell side” economist, the number actually embodied a case of groundhog economics. That is, the May constant dollar PCE (personal consumption expenditure) print of $10.881 trillion suggested that consumers went back into hibernation! It was nearly the same as that during frigid February and actually below the March level of $10.916 trillion. Stated differently, the American consumer is dropping, not shopping, and the winter weather—-that surprising thing called snow and cold—had nothing to do with it.

So this is the time to call out the Wall Street amen chorus. Its impudent insistence that the Fed’s mad money printing campaign is the magic elixir that will revive the main street economy has gone altogether too far.

In that context, a bubblevision guest on Wednesday dismissed the shocking Q1 GDP shrinkage as stale news that reflected events……well,100 days ago! Only in a world were Wall Street stock peddlers masquerading as economists think the world turns on the weekly maneuvers and word clouds of the Fed could 100 days ago be considered irrelevant ancient history.  But the young man in question—-one Dan Greenhaus, chief investment strategist of BTIG—-had an even more preposterous point. Based on the sentiment surveys and other factoids, he had divined that the negative Q1 number reflected January and February results and that the US economy had strongly rebounded in March.

In other words, he had done what amounted to an intra-quarter seasonal adjustment and explained away the following true facts. There have been 265 quarterly GDP prints since 1947; only 18 of these posted a number below the -2.9% recorded for Q1; and in only one of these 18 deeply down quarters was the US economy not in recession. To spot a four-week run rate of sunshine economics hidden in that 13-week stretch of badly slumping activity is surely evidence of too much time at the Kool-Aid dispenser.

Here is the more sober take on the matter. After two months, Q2 real PCE is running at $10.889 trillion, and is therefore clocking in at a 1.2% annualized rate of gain on Q1. Moreover, even if June’s nominal PCE prints at a 0.8% monthly gain—-a rate that has not been realized in years—-Q2 real PCE would still come in well below 2%. And since the Keynesian case requires consumers to come screaming out of the blocks pulling the 70% of GDP accounted for by PCE behind them, the distinct possibility exists that Q2 results will come in below 3%. That means that by mid-2014 the US economy will have barely attained the level posted for Q4 2013.

After all, there are no signs that the other components of Q2 GDP are on any kind of tear. Housing starts are actually below Q1 after two months. Likewise, real fixed business investment has been decelerating over the last few quarters—and there is no indication of a reversal. Likewise, quarter-to-date global trade data offer no hope of a sudden boom in US exports; nor has there been any evident acceleration of government sector consumption and investment. Even if inventory accumulation picks up, there are only three quarters in the last 45 that have added more than 2.0% to the quarterly GDP print.

The truth is, the “consumer is back” narrative is getting pretty tiresome because it is belied by the facts. The May print, for example, reflected only a 1.8% real PCE gain over May 2013. And delving further back into the so-called recovery, it is obvious that real consumer spending growth has been decelerating, not fixing to explode. Thus, the Y/Y gain in May 2013 was 1.9%, and that compared to 2.4% the prior year, and 2.6% the year before that (i.e. the years ending in May 2010). Overall, real PCE has expanded at a only a 1.2% annual rate since its cyclical peak in the spring of 2008.


That trend rate is in the sub-basement of modern history. During the prior six-year cycle, for example, real PCE had expanded at a 2.5% rate from the October 2001 peak—or by more than double the rate of the current cycle.


Moreover, the latter had the benefit of the Fed’s last push of US households into the stratosphere of peak debt. And it cannot be emphasized enough that era is over. Real PCE growth, therefore, is a function of wage and salary income growth, and it is evident that that latter is not happening. Indeed, the Fed’s wealth effects policy is undoubtedly having a perverse effect.  Corporate boards and CEOs are being rewarded for stock buybacks and restructuring charges.  So they borrow more and hire less.

Household Leverage Ratio - Click to enlarge

Household Leverage Ratio – Click to enlarge

The Household Leverage Ratio Is Still Off The Charts – Click to enlarge

The truth of the matter is that we are now living on borrowed time. Shortly, we will enter month 61 of the current so-called recovery, meaning that the present cycle is already long-in-the-tooth compared to the 55 months average of 10 cycles since 1949. Yet there are two headwinds that the Kool-Aid drinkers constantly deny.

First, even CPI inflation is back in the two percent zone and possibly accelerating.  That means that real wage and salary incomes are stalling, as is now the case on a year-on-year basis.

Secondly, even the tepid recovery of PCE that we have had—-was achieved at the expense of drawing down the household savings rate to nearly rock-bottom levels, as shown below. Why in the world do Keynesian think that an aging population will defer saving for retirement indefinitely? More importantly, why would monetary policy be designed to punish savers with zero deposit rates for seven years running?

The answer is self-evident. The Wall Street hockey sticks are designed to elicit bullish impulses on main street. Zero interest rates are designed to prop-up risk asset markets—-so that the sheep can once again be led to the slaughter.

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Cattender's picture

no. it is a recovery. i will go out and Max out my credit card ASAP. so let it be written.. so let it be Done!

Vampyroteuthis infernalis's picture

The 4th Turning is here. A new regime is on the way. BTW, screw the Fed!

CH1's picture

LOL... "Escape velocity!" That's a good one!

Normalcy Bias's picture

Escape Velocity now = Gulfstream V & VI 'High Speed Cruise' speeds.

Top Gear's picture

If only our nation would follow the economists who know what the hell is going on, then we'd accelerate like SEARS!

Ayn Rand-loving CEO destroys his empire

Is Ayn Rand Responsible for the Downfall of Sears?

Just remember to read between the lines in these attack pieces on the goddess of capitalism, ok?

Ben Ghazi's picture

What's all this Keynesian "NOISE" about anyway?


Did my buy 3,000 shares of GPRO order fill yet, or not?

Boris Alatovkrap's picture

World is not need more "sell side" economist, is desperate to need suicide economist. If not jump, maybe Boris is giving little push out of skyscraper window:)

cocky roach's picture

Nice strawman you have there Top Gear. Did you make it yourself?

BringOnTheAsteroid's picture

At this point in time why doesn't every US citizen go max out the credit card to buy PM's, take out insurance on the PM's then tragically have said PM's stolen. I'm not even remotely joking.

ghostzapper's picture

One could argue given the current scenario everyone would be rational to max out every form of debt offered, convert the USD to bitcoin/gold, default, and let the bank sell it off to Yellen.

doctor10's picture

Any armchair IQ could have predicted that when Americans were forced to pay the ObamaCare "tax" -as our Supreme Court  Chief Justice assures us all it is-to their health insurance company-at multiples of their previous premiums -that all disposable income would go down the sewer-and GDP would follow.

The very public,  abject failure  of all such "professional economists" to see and voice their observations accordingly -would in any other professional sphere be defined as professional malpractice.

Yen Cross's picture

  May(pun) the q-2 writedowns (excuses) begin. ;-D

Kirk2NCC1701's picture

Stockman is a righteous dude.  A genuine minority.

p.s. A good "The End Is Near" story.

sschu's picture

How much of this PCE can be attributed to inflation ... I mean real inflation, not the ficticous numbers dreamed up by those dreamers at the Fed etal.  I am guessing real PCE is down a LOT more than even Stockman wants to admit.


techstrategy's picture

Not this time.  Sell scam stocks.  Raise cash.  Buy good.  They are pinned.

techstrategy's picture

Not this time.  Sell scam stocks.  Raise cash.  Buy good.  They are pinned.

Spastica Rex's picture

Economic gravity well.

We need an economic space elevator.

HardlyZero's picture

...or autoload bootstrap.

I think that is what fiat finance is all about...some do pull out before crashing.


The PCE charts look toppy and may be the real deal.  wow.


TVP's picture

Prepare yourselves, ladies and gents.

For things may be about to get very, very interesting.



" If Bulgarian banks announce that they do not have adequate funds to cover all of their depositors' savings, this will ignite a contagion of bank runs that will quickly spread across the globe.
The results will be beyond catastrophic. "


StychoKiller's picture

Hmm, "Dope will get you through times of no munny, better than munny will get you through times of no dope!"

Aquarius's picture

"Sheep" or "muppets"?

Incest is a well known known phenomenon that contorts its carrier.

That "Collective" of US "leadership" suffers from this disease which has done its best, while suffering, and has brought the USA to the point of total self-destruction aka Maximum Entropy. Desperation is on its last breathe; Ukraine which brings the US its final failure and soon the EU will remove itself from US clutches as well, another failed enterprise. The future is building with Russia, China, India, Japan, Korea(s) and South American Nations, Africa, and the rest of the sane World of Nations, while Israel and now clearly seen, with its Colonial vassal state, the USA, will be isolated to suffer the vagaries of internal revolutions and civil disobedience. I wish the good peoples of the USA good wishes in their adventures to wrest back control from the madmen that have usurped their Nation and Constitution (The greatest Monument to Freedom and Humanity in the known writen histroy of man, ever constructed in language).

All this has been predictable, as in the Universal laws of Nature, there are few invariables or constants, but the one constant which is always ignored is "human behaviour". Circumstances are meaningless; merely a parable; a story; another chapter; another book all where the underlying nuances are always the same but coloured by circumstances.

Clearly, these "elite' are totally shit-scared that their beloved and warm (to them) "status-quo" is about to destruct (and it is now as close as dammit); They feel they desperately need resources and here they are correct, but fail to identify the correct resources. Not oil, not markets, not vassals, not land, not energy. This elite totally lack all of the cognitive resources necessary to fix the mess that they have had cleverly (from their point of view) constructed for their own conveniences. These dinosaur are about to become history. Being in a state of 'extremis', this lot are desperately lashing out and bringing high volitivity to all in their reach. Warning: Keep calm.

Markets are of no importance, if the hostile forces led by the Bankers are disarmed and returned to barracks. Bankers and their barking dogs, economists can then be castrated through immediate bankruptcy (mind you, a rope and a nearby lamp post will often be found to be more than convenient).

Then, cool minds, competent hands, mature adults that are Objective in their efforts to rebuild human Society, while dumping the failed "State" into the furnaces, can begin with a sustainable future for all mankind - until history is again ignored. Begin by bringing rebirth to the US Constitution and Bill of Rights: start from the beginning, keeping fresh in mind, the events of recent years.

We cannot escape the volitivity in which we are now engaged, all efforts just increase this volitivity. "To gain control, one needs to do nothing" Pallas Athena

Find a safe place and remain calm.

"All that needs to be said, has been said" 

Ho hum


WhyWait's picture

"Warning: Keep calm."

Good advice.

The criminal elite still control the Doomsday Machine - so long as US servicemen are willing to follow their orders - and their actions around Ukraine show they are willing to play chicken with it.  

Can we get throuth the coming collapse of their Empire without triggering or allowing them the Samson Option?  

That is Putin's problem, and the leaders of the EU seem to be waking up to it, but we all need to make it our own.

BullyBearish's picture

Max out credit, convert all assets to gold/silver, go on EXTENDED vacation.

HardlyZero's picture

Push the button, Max.


Seriously, this following article has defined 2014 for many reasons.   Basically says there is NO EXIT.


Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten

IMF Working Paper, WP/13/266

Carmen M. Reinhart and Kenneth S. Rogoff


People read this in December 2013 and have been living it.

TeethVillage88s's picture

Nice, Page 9

Box 1. The Elements of Debt Reduction (Historical, singly or in combination)

1. Economic growth
2. Fiscal adjustment-austerity
3. Explicit (de jure) default or restructuring
4. Inflation surprise
5. A steady dose of financial repression accompanied by a steady dose of inflation

Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten

IMF Working Paper, WP/13/266

Carmen M. Reinhart and Kenneth S. Rogoff

Thomas Aquinas's picture

It's all very sad. At the moment, it's like reading the early chapters of a tragedy, knowing what the end will be!


Jimbodude's picture

I just read this in the London Daily Mail.

CBI: Retail sales slowdown in May as England's early World Cup exit dampens hopes for a sales boost Read more:

So, The Confederation for British Industry (CBI) claims that slow retail sales last month (May) are being driven by Englands early exit from the World Cup (which occured in June?) They reason that depressed soccer fans are not spending as much??

Last year, they claimed that June retail sales were down because everyone was staying at home to watch Brit tennis star Andy Murray win Wimbledon (which he won in July?)

I don't know which is worse. Expecting us to actually believe this rubbish or the fact that some people really will believe it?

falak pema's picture

Its all Juncker's and Putin's fault; they have curdled the milk of Cameron's Hype now turning more into Farage gripe-mania; sour grapes of wrath at seeing Euro group federation whisperings in Brussels's corridors of power gaining the upper hand  and even Tony Blair is saying : Its time I come and take over 10 downing like when I was Messianic on Iraq and Afghan. 

Growth based on watered down employment figures, of under paid partime burger flippers and real estate peddlars of London's beanstalk of forever rising RE, promises...when Oligarchs pull the rug at the slighest signs of asset about turn. 

TrustbutVerify's picture

Wouldn't it be better if a higher precentage of personal consumption dollars didn't end up leaving the country?  How good is it for the country if goods purchased aren't made here and the money goes to pay someone out of the country?  Shouldn't this be a crucial consideration in our daily lives? Imagine the benefit of rebuilding our manufacturing sector - even for basic goods like clothing.  

TeethVillage88s's picture

They used to call it "infant Industry" Economic Policy where developing countries would protect their factories so they could develop.

In our case we just call it protectionism or tariffs or made in the USA, buy USA.

Of course "Free Trade" might not be free at all. Markets night not be open, might be really slave labor, child labor, no worker rights like overtime, holiday pay, night differential, weekend differential, minimum wage, right to organize, equal pay, and little or no benefits, few work breaks, short lunch period, no recourse if pay is short of actual hours worked.

Jimbodude's picture

That horse bolted 20 years ago when TPTB decided it would be easier if we got Asian people to make the stuff for us and give it to us for free.

TeethVillage88s's picture

Some Down Sectors of Consumption

Real personal consumption expenditures: Services: Household consumption expenditures: Transportation services: Public transportation: Air transportation
2012: 39.1 Billions Chained 2009 Dollars (down from $53 B)

Personal consumption expenditures: Household appliances
2012: 48.8 Billions of Dollars (down from $51.6 B)

Personal consumption expenditures: Durable goods: Furniture and furnishings
2012: 164.1 Billions of Dollars (down from $171.8 B)

Personal consumption expenditures: Durable goods: Musical instruments
2012: 5.1 Billions of Dollars (down from $5.5 B)

Personal consumption expenditures: Durable goods: Educational books
2012: 9.7 Billions of Dollars (down from $9.9 B)

Personal consumption expenditures: Durable goods: Tools and equipment for house and garden
2012: 19.6 Billions of Dollars (down from $21.3 B)

Personal consumption expenditures: Nondurable goods: Gasoline and other energy goods
2014:Q1: 410.7 Billions of Dollars (down from $442 B)

Personal consumption expenditures: Services: Household utilities: Natural gas
2012: 44.7 Billions of Dollars (down from $68.1 B)

Personal consumption expenditures: Nondurable goods: Fuel oil and other fuels
2012: 26.7 Billions of Dollars (down from $30.8 B)

Personal consumption expenditures: Durable goods: New motor vehicles
2012: 236.8 Billions of Dollars (down from $252.4 B)

Personal consumption expenditures: Durable goods: Net purchases of used motor vehicles
2012: 103.1 Billions of Dollars (down from $116 B)

Bazza McKenzie's picture

The Fed owns the bubble completely and, by implication, so does whoever is in the WH.

The Fed also knows that a soft landing is impossible.  Once the bubble is pricked the collapse will make the Great Depression look like a minor recession.

Once that happens, the Fed's credibility will be totally obliterated.  Every Congress-critter will be pretending they had nothing to do with it, pointing their fingers at the Fed and President and demanding heads in order to protect theirs from the public.

Whoever is in charge when the collapse occurs will bear most of the blame.

So, for their own preservation, the Fed and its head have no choice but to keep pumping.

They know it will end terribly but they just hope the collapse will start somewhere else, Europe or China or Japan, that they can plausibly claim is not their fault.  Their excuse will be nonsense of course, but most of the media and public won't know that if the first big collapse happens elsewhere.

Volker was able to take the punchbowl away with Reagan backing him.  But that was in a reasonably real economy and financial markets that could be expected to correct and continue after being popped.  Today's economy and financial markets are almost entirely puffery, so even Volker could not produce anything better than total disaster.

So, one way or another, the Fed will pump and pump and pump, until it blows, always hoping the collapse happens on someone else's watch or starts in someone else's country.

Incidentally, imagine the impact on Hillary Clinton's campaign to be the first female president if a massive financial collapse occurred under the first female Fed chairman.

Jimbodude's picture

You can bet your arse that whatever pricks the bubble will be an "out of our control" event. Minus 2.9% Q1 GDP print was caused by a polar vortex. Even Nixon managed to convince everybody that default on the gold standard was due to foreign speculators. Every recession I have experienced has been blamed on "outside factors". The Fed won't get the blame if China suffers a liquidity crisis. The BoE will not get the blame if Euroland goes down the toilet. To quote Bart Simpson "I didn't do it"

tomcat1762's picture

Watching the economic news and politics is tantamount to seeing a Shakespearian play performed on the Globe Stage, wherein the main character, collective humanity, can flavor the ending, creating a comedy if we reach enlightment and chose the best course of action before the conflict resolution, or a tragedy if enlightenment is reached after a brutal lesson is learned and through poor decision making true reality is subsequently exposed.

yellencrash's picture

As devastating as this crash will be, it will finally expose the naked swimmers. It will shut up the stupid financial press. It will make blaming Bush impossible. It will expose the banks for what they are. And it will probably make Rand Paul president, a no-win job no career politician will want.

db51's picture

Sorry, ain't gonna happen...not in our lifetime, probably never....until the Second coming of Christ.....the Ponzi is Infallible.

AdvancingTime's picture

Many of us the are far from optimistic. While the future is hard to predict, as in politics the people who watch and study the economy are becoming more polarized as to the direction of the economy. Many of us are slipping into one of the two distinct camps, one that sees this as an economy slowly on the mend with the worse behind us and the other who clearly takes the position that things are not working.

Not only have things gotten worse but the distorted economy and manipulated markets only mask the fact that a day of reckoning is fast approaching and we are facing a bigger and meaner economic set back then any the world has witnessed in modern times. More on this subject in the article below.

RaceToTheBottom's picture

Mission Accomplished!!!!!

dondonsurvelo's picture

Banks will soon be sending out credit cards without the need for an application.  They did this years ago to get people hooked on credit and they will probably do it again.  Watch your mailbox.  The consumer may still have credit cards to max out.


AdvancingTime's picture

Many people work hard for their money and even harder to save a bit of it but are lulled into complacency when it comes to protecting it. One of the saddest thing to witness is someone who has worked so hard losing all their money when an investment turns south.

This reminds me of the story about how many people describe going bankrupt, slowly at first then quickly at the end. This market has far exceeded the upside expectations of many bulls while the economy has languished and in many respects failed to regain all the ground lost since 2007. The question I put forth is, are we reaching the turning point? More on this subject in the article below.

grekko's picture

Q2 GDP Print coming up on the 15th of July (+/-).  Buckle up Bitchez!  It's going to be a bad ride.  Keep your powder dry and your silver stacked.

Colonel Walter E Kurtz's picture

The 1st estimate will be positive and it will wind up positive for the 2nd qtr when the final release comes, in so that the politicians can say we are not in a recession. Remember they removed all the estimated healthcare expenditures in the 1st quarter so that they can use them all in the 2nd quarter to guarantee the print will be positive.

falak pema's picture

So the Monetarist end game is near; now its more clear...

Friedman must be shouting in his grave! And Keynes laffing all the way.

Stockman needs to hock the beer he brews with another label than the one he shoes in.

all-priced-in's picture

If the GOP takes control of the senate the bubble will get popped within 3 months.

Democrat party will blame the Tea Party - and try and set up for the next election in 2016


I don't think it really matters who is in charge dem or GOP -- but when one side loses they can still gain something if they can at least blame the other party for something BIG.







jameswvu99's picture

Nope not near end of this bubble yet.  If we have a decline of 20% then expect QE Huge. I could see the Fed saying QE of $170 billion a month to reflate again like in 2011 after markets went down just shy of 20%. After that, we have a presidential election year that are usually turning points.  

A good analogy might be the NASDAQ, in 1995 to 1999 it went from 1000 to 3000, a threefold increase.  People were saying this was the top of this huge bubble, but then of course in 3 to 6 months we went up then same amount again in points 2000, so 4.5 plus years to get a 2000 point movement and then the mania phase of another 2000 points in only 6 months.  Fast Foward to 2009 S & P 500 hits intraday low of 666, and now very close to 2000, again a threefold increase in about 4.5 years or so.  IMO we are in the mania phase now, how high we go is anyone's guess.

novictim's picture

If only!

Please.  There is no Keynesian Policy underway in this White House or Congress or Fed.

When you start seeing massive infrastructure projects, road repair, bridge repair, public building repair, land improvement projects, etc (as under the FDR administration) then we can talk about "Keynesian".

I might add that Keynes was adamantly opposed to trade deficits.  He would have implemented Tariffs on Chinese and other slave labor imports.  

Nah, we are so far from Keynes it makes me wonder how the rest of you got your educations.

University of Phoenix degrees? University of India online?