Don't be fooled by good economic news(Read article summary)
Unemployment is going down. Consumer debt is going up. Even the housing market is showing signs of improvement. But the US economy is far from recovery mode.
We have a wintry landscape here in BaltimoreâŚor what is left of one. But forget the weather, happy days are here again.
At least, that is what you might think from reading the newspapers. Unemployment is going down. Consumer debt is going up. Even the housing market is showing signs of improvement.
Gold is rising â investors seem to think inflationary pressures are building. The 10-year T-note yield is back over 2%. And stocks are having their best January in 15 yearsâŚ
And now, once again, the commentariat is talking about a ârecoveryâ from the Great Recession.
But weâll give it to you straight, dear reader. There wasnât any Great Recession and there wonât be a recovery. You donât recover from what ails the US economy. You die. Then, a new economy can be born.
Still, there are many recovery sightings. But so far, the recovery itself remains as elusive as Bigfoot.
Hereâs Bloomberg, with more details:
A decline in unemployment and pickup in manufacturing point to accelerating US growth. Some economists say the numbers may not be as good as they look.
One reason: the severity of the economyâs plunge in late 2008 and early 2009 after Lehman Brothers Holdings Inc. collapsed threw a wrench into models used to smooth the data for seasonal changes, according to analysts at Goldman Sachs Group Inc. and Nomura Securities International Inc.
âThe impact of the financial crisis does seem to have affected seasonal factors for several indicators,â Andrew Tilton, a senior economist at Goldman Sachs, said in a telephone interview from New York. It âmight tend to make things look a little better in the early winter and look a little worse in the spring time.â
Most economic data are adjusted for seasonal changes to facilitate month-to-month comparisons. Without those changes, for example, construction would always pick up in the summer, when the weather is milder, and decline in the winter.
The adjustment process is unable to distinguish between a one-time shock, like Lehmanâs demise, and a recurring issue that would need to be smoothed away. For that reason, the mechanism gives some data a leg up from about September through about March before turning negative the rest of the year.
The economy contracted at an average 7.8 percent annual pace from October 2008 through March 2009, the worst back-to-back quarters in the post World War II era. The 18-month recession ended in June 2009.
The adjustment process âhas been knocked out of whack by the financial crisis,â Ellen Zentner, a senior US economist at Nomura in New York, said in a telephone interview. âThe model ends up adjusting for a growth pattern that isnât there. The sudden drop-off in economic activity in late 2008 is not a pattern, it doesnât happen late every year. It was a one-off event.â
In effect, the models are over-compensatingâŚtrying to make sense of the big collapse of â08-â09 by treating it as though it were a seasonal adjustment issue. If the winter weather were so severe as to cause such a big drop-off, the machines reason, we must move the bar lower next year. Then, even a modest improvement will look spectacular.
But Goldmanâs economists estimate that unemployment will average 8.5% this year â almost unchanged from last year. That is not a recovery. And we have to wonderâŚwhat will power the ârecoveryâ analysts believe they seem coming?
Not household spending. Households donât have any money to spend. What then?
Nothing. There will be no recovery. Instead, the US economy is in the process of zombification and ossificationâŚwhich is what happens when the feds refuse to allow dead-men industries to die.
Ottmar Issing, of the European Central Bank, is on the case:
âThe problem of âtoo big to failâ is that it has made society â more precisely, the taxpayer â hostage to the survival of individual financial institutionsâŚthe taxpayersâ billions committed to rescue supposedly systemic institutions has dealt a big blow to confidence in the free market systemâŚand has in turn become a threat to free societies.â
Well, yes. Now, the game is rigged. The fix is in. The zombies are dealt the aces. The rest of us get a bum hand.
But waitâŚdidnât the US government make a profit from its loans to the banks? Didnât the banks pay back the money? Didnât taxpayers come out ahead?
Oh dear reader, please stopâŚwe canât stop laughing. Weâre afraid we might pull a muscle.
Imagine a bartender. He realizes that his customers have been handing out IOUs all over town â including to him. And he also knows his customers canât pay. People are beginning to wonderâŚtheyâre beginning to discount the IOUs. A crisis is comingâŚ
What does he do? He lends the customers more money and buys the IOUs from the other merchants! Naturally, the value of the IOUs goes back up. Because now, holders know theyâll get their money. Even the value of the IOUs owned by the bartender go up. Wonder of wonders, he has even made a profit on the deal!
Happy days are here again.
Which reminds us of Hemingwayâs conversation between Bill Gorton and Mike Campbell.
Bill asks; âHow did you go bankrupt?â
Mike answers: âTwo ways. Gradually. Then, suddenly.â
Weâre still in the âgraduallyâ phase. Stay tunedâŚ
Â for The Daily Reckoning