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2008 Flashback: The Risk Of Redefining Recession
Submitted by Lakshman Achuthan via The Economic Cycle Research Institute,
Ignorance about recessions has taken hold because of a simplistic idea that a recession is two successive quarterly declines in GDP or, more broadly, a situation where we see some, but not all, of the typical markers of recession.
Recession? Or just a slowdown? Some will tell you it doesn't much matter - that it's a distinction without a difference. Nothing could be further from the truth - or as dangerous a delusion.
Ignorance about recessions has taken hold because of a simplistic idea that a recession is two successive quarterly declines in growth domestic product, a measure of the nation's output.
The idea originated in a 1974 New York Times article by Julius Shiskin, who provided a laundry list of recession-spotting rules of thumb, including two down quarters of GDP. Over the years the rest of his rules somehow dropped away, leaving behind only "two down quarters of GDP."
Like most rules of thumb, it's far from perfect. It failed in the 2001 recession, for example. At the time and until July 2002, data showed just one down quarter of GDP, leading policy makers to claim there had been no recession. Yet, later that month, revisions showed GDP down for three straight quarters. Complicating matters further, with the benefit of time, we now know that GDP actually zigzagged between negative and positive readings, never showing two negative quarters in a row.
The far more important issue in 2001 was the loss of 2.7 million jobs - more than in any postwar recession. Even taking into account labor force growth, those job losses were greater than in most recessions over the past 50 years.
Clearly, there are times when the reality of the economy outside your window is harsher than GDP might imply.
In fact, if you insist on using a rule of thumb, you're better off "defining" recession as a period when the economy sees four straight months of job losses, since that rule has been much more accurate. However, like the GDP-based definition, even that is too narrow a rule.
Any trustworthy definition of recession needs to encompass the key elements of the recessionary vicious cycle - output, employment, income and sales.
While all government data are subject to revision, simultaneous reliance on all four of these aspects of the economy produces judgments that can stand the test of time.
To appreciate why, we must first understand what a recession really is.
A recession is a self-reinforcing downturn in economic activity, when a drop in spending leads to cutbacks in production and thus jobs, triggering a loss of income that spreads across the country and from industry to industry, hurting sales and in turn feeding back into a further drop in production - in effect a vicious cycle.
That's why the proper definition of recession cannot be limited to GDP and industrial production, but must also include jobs, income and spending, all spiraling down in concert.
To keep it simple, just look for the "Three P's" - a pronounced, pervasive and persistent downturn in the broad measures of those factors.
Are we there yet?
Having established the facts about recession, we'd like to offer our opinion about where we are in this business cycle.
While GDP has yet to decline, we have already seen four straight months of payroll job losses. That suggests that the economy is on a recession track. And it implies that either one or both of the recent, slightly positive GDP estimates will be revised down to negative readings by next year. Or, we will see a negative GDP quarter or two later this year.
But while the final determination of recession might be delayed by a year of more, our leading indexes have never been this weak outside a recession. If this is indeed a recession, policy makers would be remiss in assuming that this is an economic slowdown rather than a recessionary vicious cycle.
Japan is a case in point. Not many know that Japan didn't experience sustained deflation until nine years after its asset bubble burst in 1989. Because of their misguided belief in the "two down quarters of GDP" recession definition, Japanese officials only belatedly recognized the reality of their 1997-1999 recession 15 months after it had begun, when that "rule" was finally satisfied.
This enabled wrong-footed economic policy, resulting in a prolonged, severe recession that set off years of deflation. It's easy to see how definitional delusions can cause a lot of damage.
Simply put, if an economy is in recession, economic stimulus can be provided without much concern about inflation, since recession always kills inflation. But if this were just a slowdown, such stimulus could set off an inflationary spiral.
That's why it is essential not to be misled by a flawed rule of thumb, or imagine that it makes no difference to policy whether or not we are in a real recession. This is even truer in an election year, when politically expedient policy prescriptions are all the rage.
This was originally published by CNN on May 6, 2008... and seemed rather appropriate once again.
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Meow said the recession fairy.
What better way to hide the recession/depression than a false flag attack that can say 'look over there, not over here'? Israel is behind the Paris attacks >> http://bit.ly/1MsOwe2
Recession is sustain negative growth, in other word, retraction of economic activity. If you are print more money, and add in "financial service" into GDP, you are easy show economic growth. There, problem is remedy, no recession. Please continue to consume fast food and twerking of youthful MTV while tweet and face your book. Let us call this is "blue pill" fix.
Oh, and do not forget take selfie.
I follow you on Twitter Boris and wish you posted as much there as you do here...your stuff is funny af.
How good can the economy be with 94,000,000 folks sitting on the sidelines, half of all 25yr olds living at home with half the country making less than $30k? Cooking the books doesn't help.
Amerikansky Dream is Illusion?
http://tragicsouls.blogspot.com/2011/09/american-illusion.html
step 1 keep redefining gdp making it meaningless
step 2 redefine recession to mean down stock market
step 3 inflate stock market
Recession? Pffftcession!
My thoughts exactly. Recession is a concept made up to scare little kids. </sarc> <-- I shouldn't have to put this here.
Correct about redefining GDP. Long ago it was alled GNP, Gross National Product. The difference being thr trade deficit being deducted from total. Certainly a different picture when reduced half trillion+ a year.
LONG
GDP is nonsense to begin with. Anything measured with nonsense is itself nonsense.
Vice Blowback
The Silicon Valley Project is like trying to control the universe from our solar system. It’s a great project for a 10 or 12 year old, but that’s it. Not everyone in Silicon Valley is so stupid as to take it seriously, and not everyone in San Francisco is so stupid as to take Silicon Valley seriously. Do you really think that in 70 years no one has been able to figure out how to find a submarine or counter nuclear MAD?
The problem is always to find a needle in a haystack, or its inverse. If you as individual were capable of distributing money effectively, effectively discounting majority peer pressure, what do you suppose the majority would do? Government is like a 6-year-old bully in a sandbox in some ghetto, assuming that it is life. In a world of extortion, is the shortest distance between A and B a straight line?
Do you really think that the pathway from lead to gold is a straight line, or that your biochemistry professor really knows anything about biochemistry, because he can categorize and summarize outcomes? Do you really think that Trump doesn’t know that poll results are a function of media, good or bad? Why isn’t Trump talking about corruption in real estate, and why isn’t Carson talking about corruption in healthcare? And why does Rubio want to belong to the establishment so badly, leaving Clinton to stroll through the wreckage unscathed?
It’s long past time to move on, but the majority is locked into a divide and conquer psychology of its own creation, leaving war, self-destruction, as its only option. The morons at EC are telling Portugal that it cannot leave or it will be subjected to demographic, financial and physical war, and Portugal’s response is communism? That should work out well, like what happened in France, a collapsing ponzi, as if the French haven’t seen that before, and the US is just going to step out and wait until they divide and conquer each other, like no one has seen that before?
Virtual reality is no more reality than the nation/state, except for the adolescents playing the game, and the critters have run out of geography, sandboxes to steal. Those oil tankers aren’t stacking up by accident. The problem isn’t the number of people on this planet; the problem is the stupid infrastructure, Florida sending orange juice to California and vice versa, to jack up the price of real estate and make room for all the middlemen, to do nothing and record the activity as productivity, and then respond to the stupid outcomes with a healthcare ponzi.
The only people dumb enough to move to the global city are those that think an aggregate ponzi is better than a local ponzi, because recognition takes longer, wasting more of their time. And the few moving back to the countryside, with inflation in tow, to be fleeced by the same ponzi operators that never left, wonder why the locals, subject to that inflation, will not accept them. While the ponzi economists collect data, to make the process more efficient.
The Fed, along with all its central bank followers, ran out in front of the parade and is trapped, because the demographic ponzi has hit the wall, as all viruses do. Those leaks in the dam are kids jumping the gap, while the army of automatons hits the wall, and this is just the beginning. The majority is collecting a check to nothing productive, to consume in compliance, some to watch TV on the Internet, and most pretending to work programming the show.
I am not writing to influence anyone, or to be known as a writer, but rather from the perspective of a husband and father who has had his children kidnapped and his wife brought before tribunal, in an effort to force him to build the weapons, to program the empire’s schedule, because it doesn’t have any more kids waiting in line to tell Steve Jobs what needs to be done next. And those punctuation marks represent time durations, the physics of operation. But thank you for the thoughtful response.
Yes, I can build better weapons than the weapons builders the communists have, but I prefer to design propulsion, and let the kids decide where they want to go. Yes, I do know what is wrong with the sunk cost equipment, but I’m not going to waste my time fixing it. Nor am I going to waste my time arguing with feminists in a California court, handed down by chauvinist predecessors, so they can produce the same skit, over and over and over again, to pay the rent on their BMWs and McMansions, smugly driving by the poverty of their creation.
Funny, how Putin knows just how far to go. Keep your powder dry, while all else are losing their heads.
So, assuming that you are not a kid that has bypassed the system all together and are reaching escape velocity, what you see is that the problems you created in the past are getting closer and majority peer pressure is growing in front of you. Naturally, the easiest thing to do is enter with momentum, and an exit already built, before you decelerate to zero. Both ‘problems’ are a function of allowing the majority to see your path, creating a vice.
If you get a job at $15 going to $65, you don’t care what the median price of a house is, so long as you can get accommodation at less than 25%, and the act of doing so will right the boat. The old-timers that haven’t already vacated space for you are either waiting for you to show up or only know corruption, strangling the economy as make-work for themselves. Life is about showing up when you are expected, with an unexpected solution.
Greed is its own worst enemy, not something you fix.
Guaranteed we are all knee deep in the Greater Depression that will eventually spiral into the apocalypse some are calling the Third World War. Once the Third World War gets into gear we all have nuclear winter to look forward to, yippie!
Everyone should have known this would happen since March 10th 2008.
Recessions as the author has defined them, as a self-reinforcing loop, can exist only in a fractional reserve, debt-based monetary system.
It happens in such a system because when the downturn causes a default, it also causes an even larger reduction in the monetary supply, in turn triggering more defaults.
But no one in conventional economics will tell you this. They take their definitions of recessions as an irreducible primary.
When you have a fractional reserve banking system, which is to say one where government has granted banks the authority to loan money they don't actually have such that the transaction create a net gain in the amount of currency...which at the time of the loan was not backed by actual material production or savings, you are one part credit-based money. Specifically the loan that the bank extends is not actual money, but virtual money that can circulate until one of three things happen:
A) The money can spawn an innovation that lowers the cost of production such that the same inputs create more wealth that can back the virtual money, turning it from virtual into actual.
B) The money can spawn a productive business, whose production directly or indirectly causes a net inflow of foreign real capital, such that the once virtual money is now backed by actual production from abroad. In this case the real capital was not produced by the loan, but produced elsehwhere. The action of the loan was to ATTRACT that production into the local economy. When the economy is global, and the loan in question was from the Reserve currency, this can't happen. It can't because the Reserve currency already has to describe all the production of the world in order to be universal...which is to say, be the numeraire.
C) The money can be discovered by someone in the supply chain to be something other than money. This is what has happened when a default occurs. If the money were not credit, which can simply disappear, but a physical currency that cannot, then it would not disappear, but only change hands during a default.
Therefore Recessions as the author has defined them, exist SOLELY because of the practice of extending credit not backed by any real production.
That was the US 19th C monetary system. Today's is INFINITELY worse. Today's monetary system is 99.5% credit based....and that means 99.5% of all paper wealth can simply evaporate like the morning few.
His version of recessions exist because money created from nothing can return to nothing, while money that comes from nature will still be a part of nature long after humanity expires.