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Why This Sucker Is Going Down... Again

Tyler Durden's picture




 

Submitted by David Stockman via Contra Corner blog,

George Bush famously told an assembled group of Congressional leaders in the aftermath of the Lehman filing that unless they immediately passed an open-ended Wall Street bailout “this sucker is going down”.

They blindly complied. Yet for awhile it seemed of no avail.

By the post-crisis bottom in Q1 2009, household net worth had plunged from $68 trillion to $55 trillion or by nearly 20%. That reflected a 60% collapse in the stock averages and a 35% meltdown of housing prices.

For a fleeting moment it appeared that economic truth had come home to roost. Namely, that permanent gains in wealth and living standards cannot be achieved by the kind of rampant speculation and debt-fueled financialization that had generated the phony boom of the Greenspan era.

But that didn’t reckon with the greatest and most unfortunate accident of modern financial history. The clueless White House advisors who counseled George Bush in September 2008 to violate the free market in order to save it, had also advised him to appoint Ben Bernanke to the Fed in 2002, and then to promote him to the post of Chairman of the Council of Economic Advisors in 2005 and finally to become head of the Fed in January 2006.

But here’s the thing. Bernanke was an academic hybrid of the two worst economic influences of the 20th century——the out and out statism of John Maynard Keynes and the backdoor statism of Milton Freidman’s central bank based monetarism.

Both of these grand theoreticians got the causes of the Great Depression wrong, and Bernanke did doubly so. You can reduce all of his vaunted expertise about the 1930s to a single proposition.

To wit, the Fed should have bought up the entire $17 billion of government bonds outstanding at the time in order to liquefy the banking system and thereby arrest the plunge in economic output.

I have refuted that hoary tale in detail in the Great Deformation. The short of it is that the banking system collapsed because it was insolvent after the 15-year, debt-fueled boom of World War I and the Roaring Twenties, not because it was parched for liquidity or because the Fed had been too stingy in the provision of reserves.

In fact, money market interest rates barely exceeded 1% during the 1930-1932 period when Friedman and Bernanke claim the Fed was too tight; and excess (i.e. idle) reserves in the banking system soared by 15X.

There is no evidence that any solvent bank that was a member of the Federal Reserve System was denied discount loans or that solvent main street business that wanted more credit couldn’t get it.

Instead, what happened was that the reckless expansion of bank credit during the years prior to the 1929 crash was liquidated because it couldn’t be serviced or repaid.

Total loans outstanding had grown from $15 billion to $40 billion during the proceeding decade and one-half, but much of it had gone into margin loans on Wall Street, real estate speculation and massive over-investment in US export and capital goods industries that collapsed once Wall Street financing of foreign customers dried up after the crash.

So the money supply measured as M1 shrunk by about 30% during the three years after the crash because bad loans were being liquidated and bank deposits extinguished. There was no disappearance of that Keynesian ether called “aggregate demand”. Rather, it was that the phony wealth of the prior credit boom which inexorably evaporated.

Needless to say, the events in the fall of 2008 had nothing to do with what actually occurred after the 1929 crash. Back then the US was the world’s powerhouse exporter and creditor, but like in China today the apparent prosperity of the times depended upon vendor finance.

That is, with the help of the Federal Reserve, the US banking system and bond market had advanced the equivalent of $2 trillion in today’s economic scale to foreign customers of US farmers and manufacturers.

When the stock market bubble collapsed in October 1929, however, the Wall Street market in foreign debt went stone cold, triggering a cascade of worldwide defaults. By early 1933, the booming foreign debt market of the 1920s had become the subprime mortgage market of its day—-with debt prices sinking to less than ten cents on the dollar.

In short order, Warren Buffett’s famous metaphor about naked swimmers being exposed when the tide goes out was well demonstrated; it transpired that US export customers had been borrowing new money in order to pay interest on their accumulating debts, but without access to new credits they had no option but to drastically curtail new orders.

Accordingly, US exports collapsed by 80% during the three years after the 1929 peak, leaving US industry stranded in excess capacity and overloaded with working inventories of raw materials, intermediate goods and finished products.

The latter, for example, dropped from $40 billion to $18 billion and capital spending dropped by 75% during 1930-1933. Likewise, with the collapse of the stock market and the easy credit boom, sales of durable goods like autos, washing machines and radios dropped by upwards of 70%.

In short, the Great Depression was not an avoidable mistake of the Fed during 1930-1933 as Bernanke falsely demonstrated when he xeroxed Milton Friedman’s erroneous history of the 1930s; it was the economic consequence of the unsustainable 1916-1929 credit and financial bubble that had been fostered by the Fed.

So Bernanke had it upside-down as a historical matter, and way out in left field as a contemporary policy matter. That is, as he ran around Washington in the fall of 2008 yelling that Great Depression 2.0 was at hand he was preaching groundless hysteria.

The fact is, at the time of the housing and mortgage bust the US economy did not resemble that of 1929 in the slightest; and there was not even a remote risk of the kind of industrial depression that had occurred in the early 1930s.

That’s because after 20 years of Greenspan-Bernanke money printing and its replication by China and the rest of the EM export mercantilist central banks, the US economy had been essentially de-industrialized. There was no risk whatsoever that the kind of capital spending reduction and inventory liquidation that had occurred in the early 1930s would be replicated.

Indeed, for a short period of time the brunt of the industrial production adjustment occurred in China and the EM.  In effect, China and its supply chain had become the exporter/creditors of the present era.

Thus, the post-crash Hoovervilles this time around were in the Chinese interior as 100 million migrant workers streamed home after suddenly being thrown out of work when world trade collapsed in the fall/winter of 2008-2009.

By the same token, spending by US households after the 2008 crisis was bolstered by a surge of automatic income transfer payments for unemployment insurance, food stamps, Medicaid/Medicare and other safety net programs; and by employment in the vast domestic service sector that as an inherent structural matter does not shutdown to liquidate inventories because it has none.

During a spending recession service businesses shrink incrementally, not radically. Pilates instructors book less hours but their studios do not go dark like factories.

Needless to say, the global debtor, massive importer, service-based de-industrialized welfare state that the US had become by September 2008 was the polar opposite of the 1930s economy that Bernanke so badly misunderstood in the first place. And for that reason, a classic industrial depression was never in the cards.

To take one example, inventory liquidation during the Great Depression amounted to a 20% shrinkage of GDP, but only a 2% reduction during the Great Recession.

In fact, as I also demonstrated in The Great Deformation, the moderate liquidation of the excess inventories and payrolls that had built-up during the Fed’s unsustainable housing and credit boom was over and done by mid-2009. Indeed, the recession had cured itself even before the $800 billion Obama stimulus program or the Fed’s massive QE maneuver had any measurable impact on the US economy.

So Bernanke lunatic money printing spree which took the Fed’s balance sheet from $900 billion on the eve of the crisis to $4.5 trillion did not prevent any semblance whatsoever of a Great Depression 2.0.

What it did, instead, was inflate the mother of all financial bubbles. Not only was the phony household wealth that had b een destroyed by the last crisis entirely recovered, but it has been increased by another $18 trillion to boot.

Needless to say, the above chart is the product of massive asset price inflation, not increases in the ingredients of real societal wealth. That is, gains in labor hours employed, productivity gains realized and entrepreneurial energies unleashed.

In the case of labor hour growth, for example, there has been none.

That’s right! Between the Q3 2007 pre-crisis peak and the most recent quarter, household wealth as measured by the Fed soared by $18 trillion or 24%, but labor hours have risen less than one-half of one percent.

Likewise, labor productivity has stalled dramatically. Since the pre-crisis peak nonfarm business productivity has grown by only 1.1% annually or at just half its historic 2.3% rate. Moreover, during the last five years productivity has grown at just 0.4% per annum.

There is obviously no way to quantify entrepreneurial activity per se. Indeed, the various facets of it—- creative destruction, business innovation and disruptive technological change—-are crucial to capitalist prosperity precisely because they can’t be quantified in recurring statistical series from the government’s data mills.

Nevertheless, Gallup has long tracked the birth, death and net change in US business firms, and that trend is unequivocal. It had been heading south for many years, but took a step-change downward after the financial crisis; and it still has not recovered.

Net Number of New U.S. Firms Plummets

Finally, it’s just a plain fact of history that without gains in real net investment there can be no gain in real wealth. Yet real net investment in the US business economy today is 8% lower than at the 2007 peak and 17% below turn of the century levels.

So how do you grow household wealth by $18 trillion in the face of these dismal real world trends?

In a word, with a printing press. But what happened today is that Draghi showed he is out of tricks and Yellen confessed she is out of excuses.

Yes, this sucker is going down. And this time all the misguided economics professors turned central bankers in the world will be powerless to reverse the plunge.

 

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Fri, 12/04/2015 - 09:21 | 6874968 HedgeAccordingly
HedgeAccordingly's picture

Indeed. Cruising for a bruising. USD futures up half of what was lost yesterday ahead of NFP. http://hedge.bz/1LeDdaX

Fri, 12/04/2015 - 09:25 | 6874975 sunaJ
sunaJ's picture

Never underestimate the establishment's ability to manufacture tricks or excuses.

Fri, 12/04/2015 - 09:34 | 6875008 TeamDepends
TeamDepends's picture

We're on an express elevator to hell, goin' down!

Fri, 12/04/2015 - 09:39 | 6875016 Money Counterfeiter
Money Counterfeiter's picture

What we have here is a failure to communicate.

We are fucking broke.

Signed.  Money counterfeiters of the world.

Fri, 12/04/2015 - 10:15 | 6875161 J S Bach
J S Bach's picture

Real money should act as a lubricant for man's economy and serve HIM as a smooth medium of exchange.  Instead, with debt-based fiat, our currency acts as a rust agent - binding up the gears and making it necessary for man to constantly service IT to keep it squeaking along.  This engine will break down in the near future.

Fri, 12/04/2015 - 10:14 | 6875166 Bendromeda Strain
Bendromeda Strain's picture

So, Stockman for Treasury and Jim Grant as the Fed Chair who is assigned with dismantling it?

/Dreamer... nothing but a dreamer

Fri, 12/04/2015 - 09:32 | 6875002 zuuma
zuuma's picture

So let the sucker go down, already!

Fri, 12/04/2015 - 09:50 | 6875075 semperfi
semperfi's picture

don't hold your breath - or make bets on it

Fri, 12/04/2015 - 10:48 | 6875279 xyzcracker
xyzcracker's picture

Powers in charge must be scared shitless. Print more script to buy more hired guns, er , cops.

Fri, 12/04/2015 - 09:21 | 6874969 lucky and good
lucky and good's picture

I'm afraid we haven't seen anything yet. A key assumption of the current "escape velocity" mantra is that we have all the time in the world to deal with our problems, it discounts the notion that forward progress may at any time be fouled by events often beyond our control. This feeling all is well is strengthened by the government's optimistic projections and numbers that fail to recognize how another recession could skew future tax revenue and cause spending to soar.

The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy. The easy money policies and artificially low interest rates of the last seven years has simply moved demand forward and created a slew of economic activity that is unsustainable in what would be considered a normal economic environment. The article below looks at how this will result in a hard landing.

http://brucewilds.blogspot.com/2015/07/hard-landing-scenario-is-not-out-of.html

Fri, 12/04/2015 - 09:45 | 6875052 Falling Down
Falling Down's picture

x2 on the moving demand forward part.

We're fucked.

Fri, 12/04/2015 - 10:27 | 6875210 durablefaith
durablefaith's picture

 The main goal of QE was to postpone collapse while global governance framework was put in place. Next up WW3, climate change narrative as rationale for transaction tax, global electronic currency where cash and barter are criminal tax evasion offenses.

Bankers version of checkmate against the goyim.

Fri, 12/04/2015 - 09:27 | 6874982 FreeShitter
FreeShitter's picture

Everyone knows what is coming: 1929 on barry bond fuckin steriods.

Fri, 12/04/2015 - 09:30 | 6874985 db51
db51's picture

I've been coming here every day since 2009 and I've heard the sucker isn going down mantra daily.......Ain't gonna happen...and we all know it.   If only I'd been BTFD every day....I'd be a 1%er.   Just saying folks....Thanks to this wishful thinking, I am nearly destitute.

Fri, 12/04/2015 - 09:49 | 6875073 j0nx
j0nx's picture

Slow learner eh? I stopped listening to this shit around 2013 and I thought I was a slow learner. Since then home prices have gone up 20% while I sat around patiently waiting for the next collapse which appears to never be coming at this point.

Fri, 12/04/2015 - 10:52 | 6875302 Oldwood
Oldwood's picture

All that is required for this thing to really tank is for enough of us to abandon our beliefs that it will. The day, no, the hour I buy back into this market is the end of it all. I make this statement not based upon conjecture but absolute pure experience. I bought silver at $35/oz. It subsequently started its fall within two days. I bought a high yield mutual fund both in 2001 and 2007. I sold out in 2010.

I am a better contrarian indicator than Gartman.

Fri, 12/04/2015 - 13:07 | 6876131 GernB
GernB's picture

Just the opposite. We all know this sucher is going down, because there's no path out of the problem. However, nobody knows when. Instead ot the mantra or this sucker is going down, go with the mantra the markets can remain irrational longer than you can remain solvent. The latter trumps the former.

Fri, 12/04/2015 - 09:31 | 6874998 NoDebt
NoDebt's picture

"But I can't be out of money.  I still have checks."

Mrs. NoDebt

Fri, 12/04/2015 - 09:31 | 6874999 reinhardt
reinhardt's picture

down?

no

there is plenty of upside coming

look out for q3 2016

trust me

i've predicted stock markets successfullly before

r

https://enronnext101.wordpress.com/

Fri, 12/04/2015 - 09:32 | 6875001 yogibear
yogibear's picture

The Fed will do whatever it takes to ensure Wall Street keeps the wealth transfer going.

Fed schemes we can't even dream of.  

Schemes cooked up in the Fed's financial engineering laboratory with the assistance of the derivative criminals at JPM and Goldman. 

Fri, 12/04/2015 - 09:34 | 6875005 xyzcracker
xyzcracker's picture

This could be it - this time....

Fri, 12/04/2015 - 09:48 | 6875069 semperfi
semperfi's picture

no way - this sucker is going up up up up up up until all of us here are dead and gone

Fri, 12/04/2015 - 09:34 | 6875011 Ghordius
Ghordius's picture

"So how do you grow household wealth by $18 trillion in the face of these dismal real world trends?

In a word, with a printing press. But what happened today is that Draghi showed he is out of tricks and Yellen confessed she is out of excuses."

David Stockman, here, makes an argument focused on US issues and numbers... only

in short, very little about the eurozone, too little to say "Draghi showed he is out of tricks", imho

who, btw, talks about "stabilization". oh, he knows that we eurozoners love to hear all things connected to the word "stability"

Fri, 12/04/2015 - 10:55 | 6875317 Oldwood
Oldwood's picture

Gamblers NEVER want to hear about stability, only the lack of it. An economy based on gambling will do all it can to remove stability. It is volatility that moves markets and a sense of the players that they are smarter, know more, than anyone else. Geniuses, every one.

Fri, 12/04/2015 - 12:32 | 6875926 Oracle of Kypseli
Oracle of Kypseli's picture

What good is it that the system is in place, while 99%  of the people everywhere can hardly survive?

Fri, 12/04/2015 - 09:39 | 6875027 wmbz
wmbz's picture

Banksters Inc. will not go down without a fight to the death.

If anyone thinks we have seen printing so far... just wait until these crazy motherfuckers go flat out full blown retard! 

Fri, 12/04/2015 - 09:41 | 6875031 buzzsaw99
buzzsaw99's picture

if it goes down it won't be because they are powerless. it will be because that is what they want. rigged on the way up, rigged on the way down. if it ever really does go down. i think zimbabwe's stock market is still soaring.

Fri, 12/04/2015 - 09:42 | 6875037 mandalou
mandalou's picture

Going down??? Nigga please!!!!

The FED will be here way after your grandchildren are dead. Get your joobux from daddy just like the rest or learn how to really get paid. Most get their weekly allowance from daddy.

Fri, 12/04/2015 - 09:44 | 6875048 booboo
booboo's picture

That's why destroying infrastructure, razing intire countries to the ground and killing off millions is the last refuge of the monatary psychopaths that rule over us. Doubt me at your own peril.

Fri, 12/04/2015 - 09:47 | 6875056 semperfi
semperfi's picture

the madness has not ended - it will continue for longer than anyone has an attention span for - inflation is our future for a long time

Fri, 12/04/2015 - 09:46 | 6875057 Junerberno
Junerberno's picture

Averages versus means. Average one David Tepper with 1 million regular guys and you can claim a recovery if every regular guy is far worse off than in 2008. People simply have no idea how much some of these Jews have taken out of the system. Tepper pays himself a salary of over $2 billion per year. It's mind-numbing.

Fri, 12/04/2015 - 10:36 | 6875129 S Spade
S Spade's picture

it's a pretty simple stooge who blames a few million jews for all their problems

 

barack, democrats, illegals, and muslim extremists are counting on your predictable vote.  it's beyond me how jews can support the democrat party...i suppose it's the handouts/bailouts and ability to work their will through their crooked representatives.

Fri, 12/04/2015 - 10:50 | 6875290 astoriajoe
astoriajoe's picture

I think you're overcounting. Its more likely only a few thousand that they're concerned about. 

Fri, 12/04/2015 - 09:46 | 6875059 CHoward
CHoward's picture

"At this point what difference does it make?!"

Fri, 12/04/2015 - 09:50 | 6875077 Budd aka Sidewinder
Budd aka Sidewinder's picture

The playbook is not nearly complete...World War III has to happen first and they're doing their damndest to get that party started

Fri, 12/04/2015 - 09:54 | 6875098 chomu
chomu's picture

Bullish..

 

On mason jars and cattle feed

Fri, 12/04/2015 - 09:57 | 6875110 Trick Shroadé
Trick Shroadé's picture

Ignoring ZH's gloom and doom since 2009 has paid off handsomly. 

Fri, 12/04/2015 - 10:00 | 6875125 semperfi
semperfi's picture

Tyler, I can't believe you let Blankfein in here! 

Fri, 12/04/2015 - 10:39 | 6875254 Atomizer
Atomizer's picture

If you go back into time, Goldman Sachs blocked Zerohedge so the blandness could be relieved in BTFD. 

These fucker's are stacking fear. It will implode. The IMF / ISIS war will find death within. Too many wishelbowers. Not enough central planning fuck wads. 

Fri, 12/04/2015 - 09:59 | 6875118 S Spade
S Spade's picture

recessions are natural, unlimited government/fed interventions are the root cause of depressions (this one included)

Fri, 12/04/2015 - 10:01 | 6875127 lester1
lester1's picture

This sucker ain't going aint going down. The Fed will continue buying stocks covertly through their primary dealers. What's to stop them?

 

We I'll be in a recession and the DOW will reach new all time highs..

 

Then you know for a fact the Fed is buying stocks !!

Fri, 12/04/2015 - 10:16 | 6875168 S Spade
S Spade's picture

deleted

Fri, 12/04/2015 - 10:15 | 6875169 S Spade
S Spade's picture

it one were to substract new debt from gdp growth, one would realize we've been in a depression for some time.  the fed with their funny money bailout and wealth redistribution machine provides the veil for the total errosion going on behind stage.

Fri, 12/04/2015 - 12:06 | 6875763 Atomizer
Atomizer's picture

What happens when the Federal Reserve starts rebuying the same stock they bought.

Sat, 12/05/2015 - 09:41 | 6879612 Farqued Up
Farqued Up's picture

Becomes proprietorship if carried to conclusion. Then, roll it into The Rand Corp.

Fri, 12/04/2015 - 16:51 | 6877342 NihilistZero
NihilistZero's picture

We ARE in a recession and the DOW IS REACHING new all time highs!

Fixed if for the LOLz ;-)

Fri, 12/04/2015 - 10:08 | 6875147 Atomizer
Atomizer's picture

Benjamin Netanyahu has been quiet lately. Quessing the NATO /Turkish proxy war has his hands filled.

When is Iran going to drop the nuclear bomb again? You must be too busy to answer that question. Time to meet with Obama at a bathhouse. 

/LOL

 

Fri, 12/04/2015 - 10:16 | 6875152 lordbyroniv
Fri, 12/04/2015 - 10:18 | 6875175 Zero-Hegemon
Zero-Hegemon's picture

Cheer up, the good news is that we haven't hit bottom yet

Fri, 12/04/2015 - 10:20 | 6875185 Kolchak
Kolchak's picture

"The clueless White House advisors who counseled George Bush in September 2008"

Bull shit, quit pandering this vomit, those fuckers knew exactly what they were doing, raping the world for the .001% who run it. Sooner people are taught the truth, the sooner we dig out of this oppression style of living.

Fri, 12/04/2015 - 10:21 | 6875196 EmeraldWI
EmeraldWI's picture

It's a shame we were never able to use the roads, bridges, public buildings and infrastructure build by the men and women of the WPA, CCC and other non neoclassical economic interventioners. If only we'd built our FDR house of cards on the market gamblers with belief only in laissez faire as the only cure for to the human condition. The Saint, Ayn Rand, is the only spirit who can rid us of that last governmental rule and transform us to the U.S. of Utopia. The difficult part of free market training has always been conditioning participants to watch losers starve to death for the sake of the god, capitalism. But, the Koch brothers will keep stocking our universities with monetarists and neocons and harvesting new rational souls to take us back to that thriving free market paradise the U.S. once was back in... (history to be rewritten at a later date).

Fri, 12/04/2015 - 10:45 | 6875244 S Spade
S Spade's picture

we wouldn't be in this mess if not for the hands, err tentacles, of over reaching government distorting competitive economic balance.

 

hands on government similarly turned a recession into a prolonged depression during FDRs reign

Fri, 12/04/2015 - 11:02 | 6875351 EmeraldWI
EmeraldWI's picture

If I give you the first point, could you consider the possibility that capitalism failed in 1929 and 2000-2009 not because it doesn't work but, because of it's success?

Fri, 12/04/2015 - 10:50 | 6875292 xyzcracker
xyzcracker's picture

E = MC squared

Every down day met with equal and opposite up day.

Chart to nowhere.

Fri, 12/04/2015 - 10:51 | 6875296 xyzcracker
xyzcracker's picture

Need more Lies Man with bullshit narrative.

Fri, 12/04/2015 - 10:52 | 6875303 xyzcracker
xyzcracker's picture

Where is Diane S W O N K - K N O W S ?

Fri, 12/04/2015 - 10:53 | 6875308 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

Great article, Stockman.

Fri, 12/04/2015 - 12:17 | 6875827 Professorlocknload
Professorlocknload's picture

Any day, now, David,,,any day.

Fri, 12/04/2015 - 12:44 | 6876007 El Hosel
El Hosel's picture

..... Uhmm, sounds like Clinton on Lewinski but I guess they all sound the same after a few administrations.

Fri, 12/04/2015 - 13:35 | 6876293 Thomas Sowell
Thomas Sowell's picture

Dang. I was going to go long National Bank of Greece yesterday chart looked good to me.

Fri, 12/04/2015 - 13:37 | 6876302 tommylicious
tommylicious's picture

And Spooz new highs!

Fri, 12/04/2015 - 15:18 | 6876795 maxamus
maxamus's picture

I believe I posted about a dozen times ysterday to just BTFD......

Fri, 12/04/2015 - 20:36 | 6878356 JOHNLGALT
JOHNLGALT's picture

THEY ARE GETTING DESPERATE. Repeated messages are coming onto the screen. This site's security cannot be trusted. Sites security REVOKED.  HEH HEH HEH. MUST BE GETTING CLOSE.  _JOHNLGALT.

Who is JOHN GALT?

Do NOT follow this link or you will be banned from the site!