Free Markets, Free People
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:
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.
And like it or not, the Obama administration’s future probably depends on turning that around somehow:
The April 20-23 Gallup survey of 1,013 U.S. adults found that only 27 percent said the economy is growing. Twenty-nine percent said the economy is in a depression and 26 percent said it is in a recession, with another 16 percent saying it is "slowing down," Gallup said.
With growth slowing to 1.8% in the first quarter, those on the pessimistic side seem to have a point.
Severe winter weather, a dip in defense spending and higher energy prices all slowed the growth of gross domestic product in the January-through-March quarter.
Of course our economic experts – who’ve been so dead on all through the financial difficulties – say this is only a temporary blip and recovery should restart anytime. But:
Leaders of the Federal Reserve, for example, said Wednesday that they expect the economy to grow 3.1 to 3.3 percent in 2011; in January their estimate was 3.4 to 3.9 percent.
Keep an eye on energy prices (which have an effect on everything we produce/buy) as a means of testing that claim. If they stay up, which appears likely, then growth isn’t going to speed up that much. Remember the economy needs to grow at about 2.5% annual clip to begin to expand the job markets. Right now that isn’t happening. And energy prices could be the drag that keeps it from happening.
Oh, and key demographic in the poll?
Fifty-seven percent of independent voters — a crucial segment of the electorate for Obama’s re-election bid — said the economy is in a recession or depression and 24 percent said it is growing.
Big job ahead to change those numbers around. And not much time.
Bob Shrum, perhaps best known for his masterful performance in shepherding John Kerry’s presidential race to…uh…it’s…conclusion, now sounds off about economic myths.
One of the most stubborn [myths] is what [John] Kennedy denounced at Yale—the notion that deficits are always evil and the balanced budget an inherent public good. This myth is now constantly exploited by do-nothing opponents of Obama’s recovery plan. On Sunday, George Stephanopoulos read a viewer’s complaint to Treasury Secretary Tim Geithner: “How do you justify printing money out of thin air?” Isn’t the inevitable consequence “hyperinflation?” Geithner calmly rebuked the cliché by pointing to the Federal Reserve’s capacity to counter inflation by raising interest rates once the economy is back on track.
Well, he’s cartainly right about that. The Fed can always just raise interest rates. It’s what Paul Volcker did as Fed Chairman in the late 70s and early 80s. If by “back on track” he means that we can have an unemployment rate of 12%, as we did in 1982, and a Fed Funds rate of 14%, then, I guess he’d be right. It certainly got rid of inflation.
After all, cutting spending now would accelerate, not reverse, the downturn, and trigger a spiral of declining federal revenues that could leave budget balancing out of reach no matter how deeply we cut.
And raising short-term interest rates by the Fed at some point in the future would…not?
This is elementary economics.
I certainly wouldn’t contradict that.
In reality, Roosevelt increased spending overall by 40 percent from 1933 to 1934, and the deficit by nearly a third. In the first five years of the New Deal, the gross domestic product rose more than 40 percent. The New Deal faltered not when FDR disdained conservative advice on deficits, but only when he briefly followed it. After Roosevelt drastically cut the deficit in his 1937 budget, the economy promptly tanked. When FDR reversed course, the economy turned around.
In reality, Roosevelt also increased tax rate; the top tax rate climbing from 63% to 79%. No doubt his conservative critics encouraged that, too. In other words, Roosevelt both decreased spending and increased taxes. In addition, there were new Social Security taxes in 1936 and 1937. And a new corporate tax on undistributed earnings went into effect in 1937, too. If only we had some way to know what effect tax increases have on economic growth!
Oh, and the Fed doubled reserve requirements on banks from 1936 to 1937.
I wonder–pure speculation of course–if significant tax increases and contractions in the money supply might have, in some mysterious way, contributed to the economic downturn of 1937-1938.
Sadly, we may never know.
In 1933, FDR blew up a London economic summit that sought to set fixed currency exchange rates, a virtual return to the gold standard that would have hobbled his economic strategy.
In other words, FDR was a unilateralist cowboy who intentionally flaunted international consensus for his own political ends, and, incidentally, reversed course a year later.
There was a lot more stuff going on in 1933-1940 than simply government spending. Not that you’d know it from reading Mr. Shrum’s amusing little article.
This morning on the Opie and Anthony show, Aussie comedian Jim Jeffries was a guest, and he told an amusing story. It seems that he and some fellow comedians were travelling from Perth to Kalgoorlie for some sort comic event. Things went well for a bit, until, about three hours outside of Perth, they ran into an emu. The poor emu didn’t die immediately, and, tragically, had to be dispatched with a large rock. Their car, however, did die, due to radiator damage.
They were stuck in the Australian desert with no transportation. Fortunately, in Australia, they do keep cell towers along the major roads, so Jeff and the boys were able to call a fellow they knew back in Perth, to ask if he could come help them out, and if he did, they’d try to see if they could get him some mike time at the comedy show.
He agreed, and told them he’d be on his way in about an hour.
So, four hours later, Jeff saw his car, coming down the road a couple of miles away. He also saw, anbling slowly towards the road, a large Red Kangaroo. As he watched, the car get closer, he also watched the kangaroo come closer and closer to the road. And in what must have been sort of a horrified fascination, he watched the convergence until BOOM! The car and kangaroo collided.
Fortunately for them, their friend’s car was still driveable after the accident, although the ‘roo was a total write off.
But, the story really encapsulated the way I’ve been feeling watching the economy over the last several months. You can see the elements coming together for some sort of horrible wreck, but there’s not really anything you can do to stop it.
And it looks like the kangaroo is coming closer.
Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department…
Last week, the FDIC proposed raising fees on banks in order to build up its deposit insurance fund, which had just $19 billion at the end of 2008. That idea provoked protests from banks, which said such a burden would worsen their already shaken condition. The Dodd bill, if it becomes law, would represent an alternative source of funding…
The FDIC would be able to borrow as much as $500 billion until the end of 2010 if the FDIC, Fed, Treasury secretary and White House agree such money is warranted. The bill would allow it to borrow $100 billion absent that approval. Currently, its line of credit with the Treasury is $30 billion.
Let’s examine the implications of this. TheFDIC fund is now depleted, and needs to be recharged. Not with $30 billion, but with $500 billion. Banks howled at premiums being increased, saying it could damage their business even further. So now Sec. Geithner, Chmn. Bernanke, and Chmn. Bair are asking for the federal government to open their credit line, which is currently restricted to $30 billion.
Does this mean that the SecTreas, FDIC, and Federal Reserve all believe the FDIC may need to come up with half a trillion dollars to pay back depositors for bank failures? If so, that’s…disturbing.
What do they know about the health of banks that we do not in order to come up with that number? What will the general public do if they figure out the implications of this? How will the markets respond?
Hop. Hop. Hop.