Free Markets, Free People

Federal Reserve


Recovery? Maybe it is time to use the “D” word

Market Watch writer Al Lewis opines:

The Great Depression that Federal Reserve Chairman Ben Bernanke claims to have averted has been part of the background radiation of our economy since at least 2008.

It’s just that like radiation — it’s invisible.

Uh, no.  It’s no.  It is simply a word, a description, that most of the media refuses to use.

Here, try it out.  “Depression.”  See, it’s not so hard.

In fact anyone who takes an objective look at what we’ve been suffering has concluded that while our current condition may not fit the arbitrary definition of whatever is considered a depression today, our economy certainly isn’t in any condition to be called recovered or even “recovering”.  In fact, it is a disaster:

 

073112recovery1

 

In a new research note, JPMorgan points out that since 1970, Japan, Finland and Sweden have all gone through what the U.S. is currently going through. And all three of them had recoveries stronger than America’s. The above chart compares the economic recovery — as measured by real GDP per capita — of each nation at different points after the trough of their recessions. And the U.S. is in dead last after 12 quarters from the bottom.

Take a particular look at Japan.  That is the economy during the “lost decade” that we’re currently underperforming.  Says JP Morgan’s Michael Feroli:

The poster child for slow growth coming out of a debt-fuelled financial crisis has to be Japan, which ever since the early 1990s has had trouble getting a head of steam. The recession which kicked off Japan’s “lost decade” lasted from 1991 to 1993. Including the recovery experience from that recession is sobering: we are currently faring worse than Japan at the same point in their lost decade.

So what’s the plan?  How are we going to work ourselves out of this position?  What policies will we institute to begin the actual, not pseudo, recovery?  Well, it’s an election year.  Don’t expect to hear the hard truths from this administration.  Instead, prepare to be reminded “its working”.  That in spite of reality:

As the economy reels, the national debt approaches $16 trillion, and we hear fears of Congress jumping off a fiscal cliff by year-end. Many states and local governments are struggling with massive deficits, too. Three California cities have filed bankruptcies.

U.S. companies are warning of slower growth amid Europe’s meltdown, yet the Dow Jones Industrial Average has crossed the 13,000 mark, and some observers are predicting new highs for the index soon.

The rising stock market is as counterintuitive as interest rates falling to new lows after the U.S. lost its triple-A debt rating last year. It isn’t that investors aren’t wary. It’s just that every place else makes them more wary. This isn’t the definition of a recovery.

No, it’s not.  But then Lewis doubles down with stupid:

The cure for our battered economy has been to allow our disasters to occur more slowly through taxpayer bailouts and extraordinary interventions from the Fed. So far, this strategy has worked. We have averted a sudden crash in favor of a depressingly slower one.

As we said from the very beginning, you can either let the economy takes its course and suffer the results quickly, get over it and recover, or you can find a way to extend it to where the effect may not be as dramatic but will linger and linger and linger.

We chose the latter path and it hasn’t at all worked out the way it was predicted (remember, at this point, unemployment was supposed to be in the 5% area if the stimulus was approved and 8% area if it wasn’t – so it’s hard to say “it worked”, isn’t it?).

The spin says the downturn was softened.  But again, I point to the promises vs. the reality.  We are no better off in terms of unemployment than it was claimed we’d be if we didn’t go an additional trillion dollars in debt.

And the economy isn’t recovering, it’s bouncing along the bottom of a trough with the possibility of going even lower if Europe implodes.

Yet the only plan I’ve seen or heard about is to repeat what failed previously with the Fed talking about a QE3 while we’re already awash in about 10 trillion dollars in funds it has already injected.  I don’t know about you but I simply haven’t much confidence in Ben Bernanke’s assurances that he can wring all that cash out of the system without triggering another economic downturn or hyperinflation.  History is not on his side.

I think Ace points to the truth of the matter that the media and politicians simply won’t touch:

This is the worst "recovery" by any nation since 1970, and it could be partly due to a category error: We’re not recovering from a recession, we’re still in the depths of a depression.

That’s right, it isn’t the “worst recovery”.  There hasn’t been a recovery. There have been “bright spots” here and there which quickly faded, but overall, we’re in the same place economically we’ve been for months and years.  And it isn’t an “invisible” depression to the unemployed and those who’ve given up hope and dropped out of the job market.  It is very visible.  And most likely they remember the promises and the results.

Of course, instead of facing this and holding politicians accountable, our media will continue to play to the distractions, the nonsense and the irrelevant instead of asking the hard questions, demanding answers and informing voters.

Unfortunately, such is life in America today.

~McQ

Twitter: @McQandO


“Kicking the can” in a cul de sac

Or maybe a better analogy is Nero and Rome.  Politicians and hard decisions just don’t seem to mix very well do they?  It is much better to be Santa Clause than the Grinch.  Especially if you want politics to be your career.

Maybe that’s the problem.  If you remember correctly, at least in the US, politics was supposed to be a part-time job.  But here as in Europe, it has developed into a full-time job that requires excessive pandering to special interest groups using taxpayer money and borrowing as the means.

And here we are.

In Europe, it has, as predicted for decades, finally reached a tipping point.  And the political elite?   They really have no idea how to handle the problem (and the same sort of problem is becoming evident here).  So they resort to the usual reaction of politicians caught in an uncomfortable situation.  Defer a decision:

Under pressure to deliver shock treatment to the ailing euro, European finance ministers failed to come up with a plan for European countries to spend within their means. Such a plan is needed before Europe’s central bank and the International Monetary Fund consider stepping in to stem an escalating threat to the global economy.

The ministers delayed action on major financial issues – such as the concept of a closer fiscal union that would guarantee more budgetary discipline – until their bosses meet next week in Brussels.

If their finance ministers can’t put together a plan of action, what in the world are the ministers going to do next week?  Megan McArdle notices the can kicking as well and also recognizes that they’re doing that in a cul de sac:

Keeping the euro together requires much more than fiscal integration–all fiscal integration does is turn the peripheral countries into something like those Algerian ghettos ringing Paris.  Actually correcting these imbalances is going to require a lot of people in the periphery to get up and move.  That’s a really tall order.  Despite the fabled European multi-lingualism, in my experience, the majority of workers speak English about like I spoke high-school French and college Spanish; well enough to go on vacation, but not well enough to enjoy living in another country.  I’m told that this is about standard.  And that’s just one of the many barriers to movement between countries.

It’s not just the Germans who have to ask themselves whether the PIIGS won’t eventually say "Enough!" and renege.  The bond buyers have to ask the same thing.  At this point, it’s not entirely clear to me that any solution is credible enough to kick the can more than a very short distance down the road.

McArdle’s question in the title of the piece is “How can Europe possibly save itself?” You could read the question two ways.  The first is wondering out loud what Europe could do to fix the problem and solve the dilemma they’re in.  The second is rhetorical and reflecting a belief that it can’t.

Given this latest deferral, I’m beginning to see the question as rhetorical and the result as catastrophic.  If you want to see a real “Domino Effect”, let Europe collapse.

Oh, and by the way, they just downgraded the third quarter GDP estimate from 3.1% to 2.3%

And that sound you hear?   The can clinking along as politicians the world over do what they do best.

MICHAEL ADDS: You could actually read the question a third way: Who will step in to save Europe from itself? Why, none other than good ole Uncle Sam (aka we the taxpayers):

The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

This is essentially a back-door bailout of the Euro. The Fed fixes the interest rate for these loans (the currency swaps) at today’s rate, sends a bunch of US dollars to European central banks (and elsewhere), which then loan out those dollars to European banks facing a “liquidity crisis” — i.e. running out of money and holding diminishing assets (one of which may have almost crashed last night). Nominally, the European central banks are on the hook for any losses suffered, but we all know how that works.

You can read more about how these swaps work here.

~McQ

Twitter: @McQandO