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A Tale Of Two Streets: Main Street Lagging, Wall Street Booming
Submitted by David Stockman via Contra Corner blog,
The most important number in yesterday’s GDP revisions for Q4 was $16.20 trillion. That’s the annualized constant dollar (2009 $) value of final sales during the quarter and, naturally, it was not mentioned in any of the media reports. But its important because the final sales figures strains out the noise of quarterly inventory fluctuations, and thereby provides a reasonable benchmark for where the overall economy currently stands.
In that context, the second most important number was $14.97 trillion—the real final sales number recorded for Q4 2007 on the eve of the Great Recession. As a matter of calculation, the rate of change between those two points over the last seven years is 1.1% per annum, and it embodies the tale of how main street is lagging while Wall Street is booming.
The starting point for appreciating that proposition, therefore, is to recognize that there is no point whatsoever in comparing the Q4 figure with the prior quarter—–or even with the cumulative gain since the bottom of the recession back in June 2009. Those kinds of comparisons are the gist of the Keynesian narrative that both Wall Street and Washington assiduously peddle—-but they are designed to rationalize the status quo, not to elucidate the real condition of our national economy.
As to the standard quarter/quarter comparisons, they are just plain irrelevant and more often than not misleading. The quarterly GDP data is seasonal maladjusted, full of short-term quirks and subject to so-called benchmark revisions in the future that can wash out today’s apparent Q/Q incremental changes entirely.
For instance, the national defense spending component of GDP dropped at a 12.8% annual rate in Q4, but not because Washington has gotten around to reining in the military-industrial complex. Actually, it reflected more nearly the opposite impulse—–a timing correction for an equal and opposite surge in Q3. During that period, national defense spending was up at a 15% annual rate, reflecting the fiscal year end scramble in the last days of September to spend the Pentagon’s available dollars.
In fact, on an apple-to-apples basis defense spending went nowhere over the course of the full year. At an annual rate of $699 billion in Q4, defense spending compared to $701 billion in Q4 2013, thereby neither adding to or subtracting from GDP over the past year. The quarterly numbers were just noise.
Nor is this example an outlier. On a year over year basis, the massive $1.87 trillion health care component of GDP grew at a 3.7% annual rate—undoubtedly reflecting the fact that Obamacare is adding smartly to reported GDP, even if its not adding to the efficiency and productivity of the nation’s already bloated medical care system. Yet within the course of 2014, the health care component dropped at a 1% rate in Q1 and then surged at a 7.6% annual rate in Q4.
Those extreme quarterly fluctuations obviously represent dislocations and measurement problems owing to the sweeping changes in the health care sector legislated by Washington, not real change in the size of the US economy. And they had absolutely nothing to do with improvements in the nation’s wealth or welfare.
Sometimes these short-term fluctuations in the GDP accounts get downright comical. For instance, beginning around Christmas eve of 2000, the Greenspan Fed went on a 30 month stimulus rampage during which it slashed the federal funds rate from 6.25% to 1% to ward off what were alleged to be severe recessionary pressures. And in due course the official economic watchdogs at the NBER declared a recession for March to November 2001 based on negative real GDP and related factors recorded for that period.
Ooops. During subsequent benchmark revisions, the 2001 recession disappeared entirely! As shown below, real GDP during the final quarter of the recession is now actually posted at a higher level than during the quarter before this phantom “downturn” incepted.

Here’s the thing. There is absolutely no reason to focus on short-term changes in the published GDP numbers - given the endless quirks, revisions and timing anomalies of the type illustrated above. In fact, their only use is to provide talking points to politicians bragging about the benefits of their policies or criticizing the failures of their opponents, as the case may be.
Likewise, the quarterly GDP numbers keep Wall Street economists and strategists busy digging out clues as to why it is a good time to buy stocks; and most especially they provide an all-seasons basis for the monetary politburo to justify its chronic efforts at short-term micro-management of the US economy.
But that gets to the related reason why comparisons with the recession bottom are an even worse idea than the quarterly chatter that animates the financial media. As I have previously argued, we are now in the era of the Great Immoderation, not the self-congratulatory Great Moderation that Bernanke proclaimed back in February 2004.
That means that rather than flattening or even smoothing-out the business cycle, modern monetary policy has actually exacerbated the natural fluctuations of our capitalist economy. By systematically fueling financial bubbles that ultimately burst, they periodically send the main street economy into a nose-dive during which excess inventory and labor artificially built up during the central bank fueled boom are abruptly liquidated.
But capitalism is not a doomsday machine that inexorably veers toward collapse absent the ministrations of the state and its central banking branch. In fact, when excess payrolls, plant capacity, inventories and other operational inefficiencies are cured, the downward dynamic stops on its own, enabling business to regenerate and idle labor and capital to be redeployed.
In the context of a macro-economy that is already at peak debt—-and the US economy with $58 trillion of public and private debt outstanding surely is—–there is no reason for monetary “easing” whatsoever in response to a business liquidation; and most certainly there is no case for zero nominal interest rates, negative real rates and the accompanying torrential money printing spree that we have had during the last several decades.
The truth of the matter is that the FOMC amounts to a monetary chorus of lip-syncers. The 2% GDP growth they claim credit for has nothing to do with their monthly jawing sessions, the word clouds they emit after the meeting or the instructions they give to the open market desk to buy government bonds hand-over-fist. All of that artificial liquidity and fiat credit never leaves the canyons of Wall Street.
By contrast, the main street economy is more than capable of producing 2% growth without any help from the Fed, and has actually done so almost uniformly year after year since the Great Recession ended - and regardless of which phase the Fed’s money printing campaign was under at the moment.
At the end of the day, therefore, our modern Keynesian central bank amounts to little more than a serial bubble machine. Its cheap money and severe financial repression campaigns inexorably fuel leveraged speculation in the financial markets which eventually cause asset prices and valuations to become unhinged from the real main street economy. Then the bubble bursts, as it has already twice this century - even as the Fed drives the financial markets to a third and even more spectacular meltdown in the not too distant future.
So the valid way to look at the GDP numbers is on a bubble-peak- to-bubble-peak basis. That is, to assess the rate of output expansion between the successive financial breakdowns which are embedded in the heart of current monetary policy.
And that’s where the 1.1% CAGR for real final sales during the last seven years since the last bubble peak comes in. Its actually the worst trend rate ever recorded in the post-1950 period—-and by a long shot.
Even the Greenspan-Bernanke housing/subprime bubble period did better, sporting an annual growth rate of 2.5% during the 7-years after the 2000 bubble peak.
Needless to say, earlier cyclical “recoveries” all generated real final sales growth rates that were 2X to 4X greater than the meager 1.1% trend rate which occurred after the housing bubble crash was supposedly “cured” by an even more stupendous spasm of money printing. During the 7-years after the 1981 inflation peak, for example, real final sales grew at an annual rate of 3.6%.
Even during the stagflationary 1970s, the record was far better. The 7-year growth rate after the 1973 peak averaged nearly 3X the annual rate recorded since 2007.
The bottom line is this. Since the credit channel of monetary transmission is broken and done due to the arrival of peak debt, the only thing that the Fed’s massive money printing campaigns actually reflate is the financial markets. Since the last peak the S&P is up by 31% as shown below.

By contrast, the main street economy is plodding along, making modest headway on its own two feet—notwithstanding the headwinds of financialization and the channeling of income and wealth to the top of the economic ladder in the Wall Street casino. Not surprisingly, therefore, the gains have been disproportionately among the top households which own more than 80% of financial assets.
At the end of the day there is a considerable irony. The Fed has now become the tool of liberal Keynesian do-gooders - exemplified by the school marm who heads it. But its policies are exclusively benefiting Wall Street and the top 1%. They are redistributing income and wealth to the top, not the bottom of society as liberals have always claimed.
Needless to say, main street does not need that kind of “help”. And it would do far better on its own hind legs if the monetary politburo joined its Soviet colleagues in the afterlife of mistaken ideologies.
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Fed is dead
That's what I said
Another junky plan
Reality, what does it mean?
If you wanna be a junky why?
'Cause Fed is dead
-Curtis Mayfield
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com
"The Fed has now become the tool of liberal Keynesian do-gooders - exemplified by the school marm who heads it. But its policies are exclusively benefiting Wall Street and the top 1%. They are redistributing income and wealth to the top, not the bottom of society as liberals have always claimed."
This is where Stockman loses me. Is he really suggesting that the Fed is "liberal" and has only inadvertently enriched the top? I also recall that he believed in trickle down, which obviously does not work. Come on, Stockman. Call a spade a spade and stop putting political labels on the problem. We are ruled by bankers. Politics and ideology have nothing to do with it, and are only a debate used to distract the masses.
Politics are the banker's muscle. Remember that bill passed with with a phony quorum on Christmas eve long ago? You have better odds separating co-joined twins.
"This is where Stockman loses me. Is he really suggesting that the Fed is "liberal" and has only inadvertently enriched the top?"
Nothing inadvertent about it at all, first and foremost the Fed is statist, a symbiotic arm of the government and all that entails, created by it (the state) for war & welfare. Only a fool would think "the regulator" could regulate himself to have welfare without war, its an arm of the state.
There is nothing altruistic about the state Rand, everything has its price & effect, the centralization of credit in the hands of the state (a monopoly) is that price.
Its also plank number five in the communist manifesto, by the way ;-)
Why are you stuck on Marx? The Fed is the definition of fascism. It is a private cartel of bankers that use the state to achieve its ends. Its members select the politicians from which we get to choose. Last I heard, no one at the Fed is suggesting turning over the means of production to the worker (Marx). You are stuck in an ideological rut, Nmewn. Look past the trees for one minute.
"Why are you stuck on Marx? The Fed is the definition of fascism."
Why am I stuck on Marx and fascism? Besides fascism being just one form of socialism, believe it or not, its because I'm trying to help/show you something about yourself that you refuse to see.
So lets just start with this plank number five, do you believe the state should have an exclusive monopoly on credit (if you believe in credit) and if so why...or if not, why not?
The state -- consisting of elected representatives -- should have no monopoly on anything except the power to prevent private interests from forming monopolies by private force. Do you agree or disagree with that? Why?
"The state -- consisting of elected representatives -- should have no monopoly on anything except the power to prevent private interests from forming monopolies by private force."
So in answering my question without actually answering it, you accede to the notion (by your exclusion) that YES, the state has the power to CREATE its own monopoly on credit, for if given the power to prevent, it also has the power to create.
Very well, you agree with plank number five and your deflection didn't work.
What about plank number eight, equal obligation for EVERYONE able to vork, has to vork, yes or no?
Good luck with your dream of a privately run world of no elected government run by oligarchs. They have you well trained in focusing on Marx instead of themsevles.
The oligarchs (Marxist & Capitalist & Monarchist) are running it now Rand, with your consent and acceptance to be ruled by them in your own particular flavor, of course.
Guess what? I'm an "outlaw" partial to my own particular flavors and rules.
Good luck with yours, you're gonna need all the "state power" they can muster for you ;-)
I always enjoy reading you guys back and forts...
Put me in the Cynics camp on all this. "If you think there's a solution, your part of the problem" - George Carlin
We are so far through the looking glass that all you can look for are small victories in and of themselves. I consider the Net-Neutrality ruling a victory. Many would consider it a statist one. I also consider the progress of drug law reform at the state level, in defiance of .gov, a very libertarian victory.
There is no utopia on the horizon fellas. I prefer ask if each thing, in and of itself, along with possible consequences, makes life better for "the rest of us". Ideology is less important to me than my fellow non-oligarch, human beings getting a fair shake.
Carlin was a genius, way ahead of his time, comedic as well as socially.
As you might have surmised by now, I have a decidedly different view of government at all levels (state & federal) and most of it in the negative. Very little good can come from its hyperactivity and growth as it is not the sharpest tool in the box and is eminently corruptible.
On net neutrality, it is an opinion formed by regulators (unelected bureaucrats), not a law, so anything can change, its vapor. The regulatory body in question (the FCC) presumes powers not granted to it and will now busy itself with deciding what is "legal" (more edicts) and what is not on the internet, along with all the lobbying, bribery and patronage that entails.
Meaning, your internet bill is going up in the future.
As far as reefer, you already know what my opinion is. I've smoked it and will smoke it again but all that has really happened is .gov (state level) has placed its tax on it, thereby "legalizing" it. Try being caught with some "unregulated" pot or trading some for any other commodity of your choice and see how truly libertarian it is...lol.
What is presented as positves are often negatives when .gov is involved ;-)
Philosophically I'm an Anarchist myself. Fuck .gov. We can self regulate. As I told an anti-drug poster here last year "...if you don't have the balls to walk over and FORCE your neighbor not to do drugs and risk all that would entail don't call some .gov Jack booted thug to do it for you!" As for Net-Neutrality, bro your bill was/is going up anyway. The monopoly is already in place via Telecom's being in bed with local governments. With NN you're not as likely to get double dipped by the content providera whom the ISPs have been gouging. As it was any startup offering bandwidth intensive services was doomed. Now they have a chance to compete with the Telecom's preferred content. Like the boneheaded libertarians who argue for open borders fail to understand, nothing happens in a vaccum.
While I get/share your anti-gov sentiments, unless the whole thing blows up at once you have to not let the perfect be the enemy of the good. If Obama's crazy fascist/progressive bureaucracy stops the Time Warner/Comcast merger should I be any less pleased? Sure I'd love to live in Libertopia, where biz is free to merge as they please, but you and I know the TW/C merger is INCREDIBLY bad for "the rest of us". In fact if government has any job it should do, and has done well in the past, it's infrastructure. The Federal government should have built interstate fiber and local governments from those lines to your door. With the cables being part of the commons you'd have the choice of whatever ISP you chose. More competition and lower prices. 1 week of QE3 could have given us this and coast to coast fiber would have opened up a lot of opportunities for business. BTW you've made the eloquent argument for decriminalisation v legalization before and I agree with you. But would you not welcome legalization as opposed to continuing the drug war? Let's take what we can get. That's the only point I'm trying to argue...
I don't understand what you mean by a state monopoly on credit. That can only mean the state is the only entity loaning money. I'm not sure where such a monopoly exists, but it's nowhere in the US.
Keynesians believe that for every dollar that is spent by the government, GDP will increase by more than a dollar--they call it a multiplier effect. Keynesian Economics is a view of economics that states that when the government spends money, GDP rises, and jobs are created. Most on the liberal left gravitate to Keynesian Economics for just this reason. When you can justify endless government expenditures under the belief that we can solve our social issues while improving the economy, then what possible reason could there be to limit the growth of government? They believe that all we have to do is continue to raise taxes on the rich, increase funding to government programs, and we solve our problems. Not!
So when exactly did anyone start raising taxes on the rich? I keep hearing about it, but I'm not seeing it. Care to explain your thesis with some examples?
Top earners were the main target of recent tax increases under President Obama, but the federal income tax system is already highly progressive. The top 10 percent of income earners paid 68 percent of all federal income taxes in 2011 (the latest year available), though they earned 45 percent of all income. The bottom 50 percent paid 3 percent of income taxes, but earned 12 percent of income.
http://www.heritage.org/federalbudget/top10-percent-income-earners
Do you really not understand the the truly wealthy don't have income? They have capital gains and dividends. What you are talking about is tax on the upper middle class, which I agree pays a far disproportionate share. In fact, they do so precisely so it makes it harder to break into the truly wealthy class. But good job repeating the mantra of the .01% that the problem is that they pay too much in taxes.
Let me ask you this -- if Sam Walton's heirs paid less in taxes, what would that do for our economy? They already have 5 of the top 10 spots for wealthiest Americans.
The rich are going to pay most of the taxes under any tax system, because they have the most income and the most money.
I'm with you LetThemEatRand. He thinks they're just Keynesian Ideologues who don't know what they're doing. I think they know exactly what they're doing. Enabling a bankers paradise.
Stockman telling the truth again.
If it isn't clear to even the most brain dead or deluded casual observer (Steve Liesman, et.al.) the "Federal" Reserve works for the BANKS!!!
They have ZERO to do with the citizen, the working people, the savers, the retirees, the children, the nation.
The FED works FOR THE BANKSTERS, the criminal class of parasitic ass wipes destroying the nation from within - sucking every last penny and hope of every generation.
They are CRIMINALS along with their masters on Wall Street who need to be strung by the neck until dead from whatever structure will support their corpulent greedy dark souls and NOW.
Questions?
As an outsider looking at the US one can clearly see what a stuffed up system you have there. For a start your Reps in Government dont work for the People, but only work for the big end in Town. Your Fed works only for the Banks and big Business, yet all the troubles you have would have been gone with full employment if the ponzi Money would have been spend on fixing your collapsing Infrastructure and not given to those Crooks. Whatever is coming will be the fault of those who except this and will only wake up when it is to late. The rest of the World is slowly waking up to what the US is really about and that is ugly and that what will replace it is no better. So how can one win?
Great- now what? I don't know why Stockman bothers with these never- ending diatribes - probably 40 a year. Nothing changes and he never forecasts when the collapse will happen. Waste of time.
Wall Street gets favorable tax rates. No surprise.
Approximately ninety-five [95] years ago, to this day, was the 'great deperssion', ??????(not yet at it's century mark)??????... which, if you pay close attention to page-one [1], explains where we are since 2008-- with a maximum of five years to recover our senses?
"Timeline of the Great Depression" v 'Timeline of the Great Resession?'[2008- present
http://www.huppi.com/kangaroo/Timeline.htm
jmo