Economic Depression And Denial: "We Want To Believe We Aren't Japan"

Tyler Durden's picture

Authored by Jeffrey Snider via Alhambra Investment Partners,

Back on March 10, the New York Fed’s attempt at real-time GDP forecasting predicted that the Q1 2017 estimate would be 3.2%. That would have qualified as another decent quarter, the second out of the past three and somewhat in keeping with “reflation.” As we know today, the advance figure calculated by the Commerce Department amounted to just 0.69% growth in Q1.

The point is not to cherry pick the highest quarterly prediction and make fun of FRBNY. At the same time in mid-March the Atlanta Fed’s GDPNow competing model had already collapsed below 1%. Like the New York version, the Atlanta tracker had early on projected better than 3% growth for the quarter. It was at one time in early February just shy of 3.5%, higher than at any point for the other one.

The New York Fed’s parsimonious statement today tersely explained:

Today’s advance estimate of GDP growth for 2017:Q1 from the Commerce Department was 0.7%, substantially weaker than the latest FRBNY Staff Nowcast of 2.7%.

While that was of no value, pointing out merely the obvious, the regular weekly report gives us a clue ironically in trying to explain why we should readily trust its methods.

Extensive back-testing of the model, research, and practical experience have shown that the platform is able to approximate best practices in macroeconomic forecasts. The model produces forecasts that are as accurate as, and strongly correlated with, predictions based on best judgment.

There is a whole lot to that statement covered underneath statistical jargon and buzzwords. That they attempt to “approximate best practices” rather than the results of those practices is especially significant. The New York Fed is trying to model the economy that “should be” rather that the Atlanta Fed’s model of the economy as it actually is. Very important to the former is sentiment, one reason why monetary policy builds itself philosophically around rational expectations and the institutional expectation for successfully manipulating them.

The major disconnect is in the latest quarter entirely one of that area. PMI’s and other measures of business attitudes were through the roof, as were the various indices attempting to gauge consumer confidence. Yet, neither form of sentiment or confidence translated. The difference on the consumer side was especially important given the weight of risks for the future economic trajectory as well as the majority basis for this quarter’s (repeat) disappointment.

None of this is new, of course, as the discrepancy emerged as far back as 2013. But it found another level importantly in 2014, particularly with respect to consumer confidence. Just when the BLS started reporting the “best jobs market in decades”, the various indices recorded a similar surge in positive consumer emotion. The University of Michigan’s Index of Consumer Confidence was in July 2014 barely above 80, but by January 2015 it was nearly 100 and suggesting normalcy at long last. Taken together, the labor statistics as well as confidence was a powerful mix for mainstream interpretation. Is shouldn’t have been that way.

Consumer confidence relatedly did not fall much as the economy clearly did through the “rising dollar” period. As “reflation” after it has taken hold, it is right back again at multi-year highs; in the UoM format just less than 100 like the days of the housing bubble. That means confidence remained high even though consumer spending seriously decelerated (retail sales were in 2015 and early 2016 among the worst in the entire data series).

Other parts of the UofM survey did register significant pessimism that more closely matched the trajectory of consumer spending as the economy overall.

Inflation expectations, longer-term expectations in particular, clearly showed a hard change and one that occurred at the exact same moment the whole survey was claiming confidence was surging.

How do we make sense of what is clearly a contradiction? I think the answer lies in the space between the New York Fed’s NowCast model and the Atlanta Fed’s GDPNow alternate. Consumer confidence indices appear to be reflecting expectations for the economy that “should be” while inflation expectations might better exhibit the pessimism of how things haven’t changed, and are in further danger of remaining that way more permanently. It is reminiscent of the huge divergence between the stock market and the bond market, and surely the latter has to some degree affected consumer thoughts on the “should be” side.

The weight of evidence, such as Q1 GDP, remains all in the wrong direction. What’s left on that other side is merely unbacked mainstream rhetoric and the hollow assurances that amount to little more than agenda noise. Yet, confidence persists. It is dissonance, to be sure, but explainable.

I think what we are seeing expressed is this state of disbelief over the length of depression so far, thus its mere existence. None of us has any experience with a structural dislocation on this scale. Even the Great Inflation, though it lasted for more than fifteen years, was in the opposite direction, meaning that while it was no picnic it was at least characterized by movement and action – especially in labor. This last decade is nothing more than inaction, an economy apparently frozen deeper and deeper into desperate stasis; the figurative embodiment of Dante’s Hell.

As Japan has shown time and again, the worst case is not recession or even repeated recession. It is stagnation of a kind far more sinister than that of the Great Inflation. At least in the 1970’s there was action and activity. This version is where the economy is simply frozen. In Dante’s Inferno, Hell is not hot, it is increasingly cold as each layer is further removed from God’s true warmth. Heat is passion and life; cold is where living is further stripped away toward the inanimate. The bond market is making that same journey, if not in a straight line, further into the lower reaches as the economy grows colder and colder.

For most of us, this just cannot be; it cannot be possible that there is so little growth and opportunity after ten years of none. Even if predicated on just randomness alone, blind dumb luck, the economy should start to correct at some point.

It just doesn’t seem believable that in the 21st century depression of this magnitude and length could happen.

And so the longer it goes on, people seem to believe the greater the chance that something just has to go right. It is a happy a comforting thought, aided in emotional manipulation by the constant mainstream optimism. In that belief, every minor uptick is extrapolated far beyond its true significance as that thing that will surely restore positive balance and order.

Like inflation expectations, however, there are lingering doubts. We want to believe it can’t be this bad forever, but we also have to live to some degree, unlike policymakers and their regressions, in reality. In the middle of 2014, that meant not only could things be bad for such a long time, as they had been for seven years already by that point, they could actually get worse!


This is the legacy of the “maestro”, where “we” can’t make sense of where we are because it just doesn’t seem possible. There is no way that the Federal Reserve, once the standard for all technocratic excellence, could let this happen. Even the QE’s to some degree fall under this cultish existence, for trillions in money printing have to show up somewhere at some point. It can’t be that all the worst cases merge together; that the Fed could totally strike out like that, and the economy stuck without expansion for a decade and more. Who ever heard of an economy that just shrunk?

Unfortunately, we have been studying one for more than a quarter century, which only adds to the seeming impossibility of it all. We have known about Japan for all that time, so it can’t be that we are following that path being so aware of it. That might be, though, where a significant proportion of doubt has come from especially in inflation expectations unanchoring (as well as bond rates and eurodollar futures) because the Federal Reserve for all its posturing and assurances did exactly what the Bank of Japan did – and the results were exactly the same. We want to believe we aren’t Japan, and yet, we know on some level that we are.

I have no idea if denial is a stage of depression, but we have here all the evidence for it in economic terms.

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wisehiney's picture

Be right and sit tight.

Get paid to wait.



And try not to huff and puff and sweat this hard over just a little yard work.

fbazzrea's picture

A ZHer Must See:

All The Plenary's Men by John Titus

He exposes the banksters as the true sovereign of this nation.

Just released yesterday. Five stars!

Giant Meteor's picture

Excellent 5 minutes in, thanks for this ..


fbazzrea's picture

sort of explains why JPMorgan's silver manipulation is never going to be halted by the SEC. they're above US law... according to Obama's DOJ. haven't seen anything from Sessions to think he's going to be any different--yet.

only way the banksters are going down is if in the next crisis the American peeps refuse to allow our crooked politicians to bail them out--AND repeal current bail-in provisions. bet if any movement in that direction, they'd hurry and bring the house down before any legislation could be passed.

nostromo17's picture

vs long net deflation in fact? since 9/11.

Dilluminati's picture

When you consider the following 10 year CD Cussip DSH4O7384 DISCOVER BANK 2.750000 05/03/2027 05/03/2017 call protected FDIC insured.  And then look at the T-Bill rates, your getting the 20 T-Bill at 10 year CD.

Now that ought to tell you something.  Because I actually studied debt deflation post 1989 on the nikkei.

I bet allot that the 10 year at 2.83 (which was I got in on) will outperform the market over the next ten years.  I'll be forced to re-invest the yield annually, however I think by simply buying beaten up stuff I'll again outperform.

Now here is the facts.

According to the latest 2014 release of Dalbar's Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.

Now I locked in 2.83 annual for 10 years, in IRA and have the FDIC protection, call protection, and survivorship protection, with the compounded investment will probably do better than 4% if my ability to pick sectors is any good.  Somewhere the market gets cheap again and I buy dividend stocks.  I went with an additional ladder in another account and have about 30K on black swan account, ready to jump on a quick change and then cover the leverage.  

But there is no way that deflation was beaten and most of the recent decsiions by central bankers isn't going to change that.  If anything the rotating the deflation into wage deflation, health care deflation (you must buy it and it's rising) or any other mechanism will end up illustrating a simple fact. There is too many debts chasing too few dollars, too many retirees wanting to sell the same funds. For every hit it big story you hear, the facts remain the same.  When you look at the election, the first 100 days of Trump that brief moment of time was the opportunity to be the contrarian and buy the 10 year!

Even Monday when the market opens for a 401K which is not taxable you can effectively outperform the QAIB and the 20 year in 10.

Why does this matter?

Because your money market, bond fund, no longer is required to provide a dollar back on a dollar invested!

In 2008, the share price of one fund fell below a dollar, “breaking the buck,” in Wall Street jargon. That set off a panic among some institutional investors and required the government to create a temporary insurance program.

When deflation reasserts itself and the jobless recovery is complete and the MAJORITY of youth are either housing their parents or the parents housing their youth, the real effect of the age of disruptive technologies, robotics, AI, and cheap labor will be known, and that garunteed ROI in negative interest, ZIRP, and QE landscape will look good.

I'm awaiting the next round of rate hikes to throttle the economy, just choke it off as the credit rates kill purchasing, student loans crush students, hell even condos incapable of refi get walked out of on variable rate loans that have been easy.

Monday that cussip is going to probably be smaller in return, was as high as 3.0 and won't go there again anytime soon.  But for ten years it will outperform the market and you should have ignored the sizzle and bought the steak, the reflation bull market is about to come to an end.  

tahoebumsmith's picture

I haven't partcipated in discussion for a while , however I feel the need to tell it like it is...BITCHEZ

How you doin? Stock Market is up and you have equity in your home again. Oh well the song that comes to mind is Jamies Crying by Van Halen.

Oh Oh Oh Jamies Crying. Maybe we should ask Eddie Van Halen to sing the lastest version? Oh Oh Oh Janet's crying...

Like every other Ponzi Scheme this latest Trump bump is going to come to a screeching halt and add editional obligations to the tune of 22T worth of debt. The Fed can't backstop this looming disaster anylonger with over 4.2 T on their books. The World is culpitulating around you and all you see is good? Might just as well pretend i'm in Mayberry with Aunt Bee eating a fresh Blackberrie pie or sompin...


No I'm not from NH I'm from VT  and I do what I want...However NH is Not Happin....How many ways can you say no? Nope, nada, uh uh, nile,no way,at this point it doesn't matter.

The powers that be have sucked the American Jonny come lately's back in for another big beating. I see another 3T being transferred out in the next sad to see my friends and neighbors pawned to the oligarchs that don't give one rat's ass about nutttin but money.

Shit is about to hit the fan...that's my story and i'm sticking to it

precipice BITCHEZ

Deep Snorkeler's picture

Dangerous and anonymous forces,

coming from globalization and technology,

are degrading our lives.

Negative trends are accelerating.

American lives are now at a huge

inflection point. A confluence of

global patterns has created an epic

Age of Consequences.

You must delay gender reassignment surgery.


Winston Smith 2009's picture

It's Trump's fault. No, wait, it's the Russians. No, wait, it's Trump's AND the Russian's fault.

decentralisedscrutinizer's picture


Almost all the world’s economic and political problems revolve around the hegemony of a global corporate cartel, which is headquartered in the US because this is where their military force resides. The only way to regain our sovereignty as a constitutional republic is to severely curtail the privileges of any corporation doing business here. As a free nation, we really have to stop granting corporate charters to just any “suit” that comes along without fulfilling a defined social value in return. The "Divine Right Of Kings” should not apply to fictitious entities just because they are “Too Big To Fail”. We can't take the incorporation of private transnational banks for granted anymore. The government must be held responsible only to the electorate, not fictitious entities, if we are ever to restore sanity, much less prosperity, to the world.




It was a loophole in our Constitution that allowed corporate charters to be so easily obtained it created a swamp of corruption around our capital. It is a swamp that can't be drained at this point because the Constitution  doesn’t provide a drain. This 28th amendment is intended to install that drain so Congress can pull the plug ASAP. As a matter of political practicality, because they defend each other with battalions of corporate lawyers, and because said corporations virtually constitute a global empire, we can't outlaw corporations through the States’ amendment process but must rely on the Article 5 Convention for which the electorate will need to prepare for consensus beforehand. Seriously; an Article 5 Constitutional Convention could solve that problem in days. This is what I think it will take to save the world; and nobody gets hurt:




28th Amendment


Corporations are not persons in any sense of the word and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to:


1, prohibitions against any corporation;


a, owning another corporation,


b, becoming economically indispensable or monopolistic, or


c, otherwise distorting the general economy;


2, prohibitions against any form of interference in the affairs of;


a, government,


b, education, or


c, news media, and


3, provisions for;


a, the auditing of standardized, current, and transparent account books, and


b, the establishment of a state and municipal-owned banking system


c, civil and criminal penalties to be suffered by corporate executives for violation of the terms of a corporate charter.




Think about it: The Founders had to fight a bloody Revolutionary War to win our right to incorporate as a nation – the USA. But then, out of legislative inexperience, our Founders granted unrestricted corporate charters, (with enough potential capital & power to compete with the several States, smaller sovereign nations, and eventually buy out the Federal government itself) to thieves and con men. Ooooops! Now they all got together and want to buy the whole shrinking Planet, coalition armies and all! How whacky is that?!


brushhog's picture

Change 1. "prohibitions against any corporation" "Prohibitions against the GOVERNMENT;" And you'd have something there. Otherwise you're just vesting limitless power to the government to interfere in the economy...which is what has got us in this mess to begin with. They'll just use those powers to help their friends and crush their competition. LEARN from history already, its been going on to long for people to keep making this mistake. Not good.

Salmo trutta's picture

It is axiomatic that the smaller the degree of price competition in a market and the greater the degree of private unregulated monopoly power over prices and output, then the higher the amount of unit prices, the greater the tendency for restricted output and employment and the smaller the degree of downward price flexibility. 

Abolish all resale price maintenance laws.  Conduct antitrust actions on the basis of the most economical size of plant.  That is, limit corporations to a size that would achieve minimum unit costs at optimum rates of output.  Outlaw the conglomerate and holding companies beyond the first degree, and severely restrict vertical as well as horizontal corporate aggregations.  That is to say, prohibit corporations from conducting unrelated activities under a single corporate roof, from expanding in order to broaden their share of the market or from controlling their suppliers through ownership or legal devices.

Eliminate Buy Americas Act provisions, tariffs, import quotas, customs “red tape” and classification practices that restrict imports.  Limit Export-import bank credit to those situations in which our exports are at an artificial disadvantage.

Repeal the Davis-Bacon Act and similar laws concerning union wages paid under government contracts and exempt juveniles from minimum wage laws.  Eliminate union provision that put excessive restrictions on apprenticeships or require excessive entrance fees, and abolish hiring halls operated by unions.

 Use severance and other unit taxes as conservation measures to prevent windfall profits and as sources of revenue to subsidize public transportation and reduce the tax burden on the poor.


Archive_file's picture

North Korea is the new Jonestown Massacre. Lil' Kim is the new Jim Jones.

America is the new Soviet Union and its 1989.

Long Koolaid and television.

"Long live the new flesh."

Salmo trutta's picture

As I said one year ago: "The economy is behaving exactly as it is programed to act. Raise the remuneration rate and in a twinkling the economy subsequently suffers. The Fed's 300 Ph.Ds. in economics don't know the differences between money and liquid assets."


Apr 28, 2016. 11:25 AMLink

- Michel de Nostredame (the peerless seer)

DaveA's picture

We're not Japan because Japan has the good sense to keep its borders closed. Meaning that no matter how severely the population declines over the next 100 years, it will still be a *Japanese* population, not a festering mass of third-world scum shitting in the streets.

Codwell's picture

But at some point the economy and working population will deteriorate to the point you can't stop immigrants from pouring in.  BTW, Japan has recently increased the number of guest workers allowed to enter their country because they had no choice.

Codwell's picture

The Fed, Wall Street, main Street, whatever, it makes no difference.

This situation in the US is caused by the same thing causing it in Japan - Demographics. Our mean population age in both countries continues to climb and our birthrates are below replacement.. Europe is in the same boat.

Why do you think the US and European leaders are trying to import so many immigrants ?  Do you really think it is due to some moral position. 

The only policy that can turn this around is immigration policy. Nothing in the economic realm can resolve this problem.

There will be no hyperinflation. Creeping deflation and stagnation will be the rule. 

Ditch PMs or any other inflation hedge and horde cash.

sinbad2's picture

The situation in Japan was caused by the US forcing Japan to sign the Plaza accords

The situation in the US is caused by American stupidity, you painted yourselves into this corner.

Codwell's picture

The plaza accords did not cause Japan's birthrate to fall below replacement rate, nor did it cause the mean age to rise. 

Japan, US, Italy, and the list goes on of countries who's birthrate fell below replacement and who's economies have stagnated.


Batman11's picture

Of course we are Japan, we did all the same things.

Japan blew up a debt fuelled asset bubble before 1989.

They saved the banks and left the debt in place and it has been stagnant ever since.

The rest of the West did this before 2008.

It is the repayments on the debt that lead to stagnation.

The Japanese experience was so good everyone else couldn’t wait to try it. 

Our mainstream economists do't include debt in their models so they don't know.

Someone that does know after watching Japan since 1989.

Batman11's picture

Mr. Goldman Sachs alumni expert, what should we do?

Just save the banks.

See a problem?

Circa. 1999

Mr. Goldman Sachs alumni expert what should we do?

Don’t regulate derivatives.

got it?

Batman11's picture

It's not even hard.

The theory, which is outside the mainstream neoclassical economics (the clowns don't look at debt).

Irving Fisher produced the theory of debt deflation in the 1930s.

Hyman Minsky carried on with his work and came up with the “Financial instability Hypothesis” in 1974.

Steve Keen carried on with their work and spotted 2008 coming in 2005.

This is the build up to 2008 that can be seen in the money supply (money = debt):

Everything is reflected in the money supply.

The money supply is flat in the recession of the early 1990s.

Then it really starts to take off as the boom gets going which rapidly morphs into the US housing boom, courtesy of Alan Greenspan’s loose monetary policy.

When M3 gets closer to the vertical, the black swan is coming and you have an out of control credit bubble on your hands (money = debt).