July 03, 2009

The Mirage of Economic Recovery

These are halcyon days for the Armageddon Financial Bloggers (the AFBs) who experience something akin to orgasm when they behold the latest unemployment figures from the Dept. of Labor, or quote from the Federal Reserve's monthly "Beige Book," which lays out American economic parameters in all their horrifying detail. Things really are bad - very, very bad indeed. There is actually no reason that the AFBs or anyone else needs to exaggerate our parlous state. It's real, alright.

Word is leaking out, even from the Head Cheerleaders on CNBC, that the recent 4-month rally on Wall Street, led, suspiciously enough, by financial stocks, was the result of federal manipulation. The Plunge Protection Team, that cabal of big econ players who operate out of the basement of the White House or somewhere like that, have been investing the Fed's "money" in equity positions in the big commerical and investment banks as a means of providing them with funding. One can look at this continuing favoritism as further evidence of a government-Wall Street conspiracy or simply regard it as a token of Ben Bernanke's sincere belief that we must stabilize the banking system to avoid turning a downturn into an absolute panic where people are rushing to the teller lines to get their money out and put it somewhere safe, like in the broom closet. The feds didn't want to nationalize these banks so they've turned the cat around and are stroking it a different way. The Titans of Wall Street are reacting the only way they know how: by draining out the resumed largesse in the form of huge bonuses for themselves. The run-up in the Dow, however, gives the people the impression of returning prosperity, and this is no doubt a desired side effect of the federal intervention.

Some thoughtful observers, such as Hale Stewart on the Huffington Post, believe that signs of turnaround are here, and point to historical markers (factory orders, that kind of stuff) as reliable indicators that prosperity is just around the corner. Prez O has talked about "green shoots" and "hopeful signs." Well, what else are they going to say?

Down on Main Street, the U-6 index says that about 16% of the workforce is unemployed or marginally attached to employment. John Williams with his ShadowStats irritates the government by using the standards in force prior to Bill Clinton's decision to define away a large part of the unemployed, and gives us a figure of 20% unemployment. Since the methodolody Williams uses is about the same as that used during the Great Depression, his is probably the most accurate for comparing the current doldrums to that classic era. We're within about 5% of Depression levels.

Housing prices continue to slip, there is another large wave of foreclosures coming (Alt-A and prime), the commerical real estate market is in trouble because of all the shuttering retail stores, wages are falling and over a half million people a month are thrown out of work. How does that translate to "green shoots?" More problematic yet is that the forecast for recovery, when you get right down to it, is based on the Mayan Observatory Hypothesis. You can see this theory in action at Chichen Itza in the Yucatan. The ancients celebrated the solstice becuase they believed the gods had once again kept the sun from falling completely out of the sky. The sun dipped to its lowest orbit in the southern sky, shining through the slot in the limestone dome, and then, miraculously, it began to rise again. Time to party!

I think that something like that is happening now. Indicators from past recessions are consulted; if there's a fit, then it must mean we are at a certain place on the road to recovery. What this leaves out is that the American economy has been hollowed out by decades of offshoring, globalization, free trade agreements, decline in educational standards, a ruinous rise in the cost of health care, massive trade deficits caused by an over-reliance on imported oil, a failure to invest in mass transportation as a means to get people around, and a systematic over-investment in nonproductive military expenditures, including completely unnecessary wars. To wit, the conditions for recovery are simply not the same as in previous down-cycles, which often were caused by classical economic problems such as a temporary misfit between supply and demand. That's not this recession. This one is structural, and it happened when it did because we finally ran out of games to play with cheap foreign money, which in turn was available because we were in the climax of the Consumer Economy, the Shopper to the World.

It's now said that Americans are "saving" money. They're not saving money as opposed to buying gadgets and stuff; they're simply paying down credit cards and other debts in an effort to hang on. But the turnaway from consumerism means that the 70% of the economy that relied on largely discretionary spending is taking a body blow.

A good result from all this, probably the best that can be hoped, is that a smooth transition to a lower level of economic activity and prosperity (about 40% lower) occurs without a massive "discontinuity." That is, without panic or public insurrection. I think that will turn out to be Obama's job, and maybe his conciliatory, mediating style will actually be appropriate to this task. I don't think he's really a galvanizer, now that I've seen him in action. The problems he's experiencing now that he's in charge of this mess were highly predictable, and he will take tremendous flak for not solving problems immediately that were about thirty years in the making. That's the inevitable result of our ahistorical style of discourse. Maybe at some point he'll realize that the attempt to get the economy back to early 2007 levels is futile and even dangerous, given the gargantuan debt the government is taking on, and then he can devote his efforts to transforming our energy regime, which is the only path out of this desert.

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