May 28, 2011

The Mirage of Economic Recovery, Revisited

One of the pleasures of keeping a thought diary (h/t: George Orwell) is that you can observe your own ideational evolution. You can see where your grasp of things has been, where you went wrong, where you overstated the case, where you had it about right, even where you were correct to maintain a particular position in the face of conventional wisdom to the contrary.

I was reading, for example, a post I wrote in July, 2009, on the "the mirage of economic recovery." One of the subjects I tried to describe was the notion, popular at the time, that the Federal Reserve was funding banks on Wall Street in order to allow them to play the stock market so that at least one economic parameter (the American stock exchanges) would appear positive in the face of consistently downbeat econ stats from other quarters, such as high unemployment, declining house prices, exploding federal deficits, increasing use of food stamps, and rising gasoline prices. In this one narrow sphere, the Federal Reserve appeared to succeed, although my description of how it was being done was vague and uninformed. I still don't know exactly how the secretive Fed funnels money to its cabal of Primary Dealers, domestic and foreign, but it's become more apparent that the Fed is also desperately determined to create money through variously numbered Quantitative Easing episodes so that Treasury auctions proceed smoothly and give the government the patina of solvency. In the process, the Fed has increased its balance sheet from about $800 billion in 2008 to the $2.8 trillion we see today.

So what has been accomplished through this massive increase in the monetary base? And if the national debt has gone from about $9 trillion to $14.3 trillion (actually in excess of the statutory debt ceiling) since November, 2008, as it has, do we have a lot to show for that either? As someone whose natural instincts are more along the lines of social satire, what interests me most is the mindset that produces these anomalies. I'm not surprised that no national politician of prominence ever comes out and says that America simply lived on borrowed money for too long and attempted to sustain a standard of living incongruent with the underlying economic reality. The political classes are just incapable of that kind of realism; it doesn't "play." It doesn't sound "exceptional" enough. Unicorns and rainbows work better on the public airwaves, such as the "wealth effect" of bubbling house prices from 1998 to 2008. These provided the mirage of general prosperity, and since 2/3rds of Americans claim their house as the most important financial asset, it's obvious that the illusion was maintained for as long as it was because of debt-fueled unreality. The estimates of lost wealth in the residential real estate market, so far, run to about $6 trillion, and if Deutsche Bank is right about its forecast (made about two years ago) that housing prices will continue to slump until 50% of homeowners have no equity at all, then this downward trajectory is far from over.

The re-fi, line-of-credit game of fueling consumer spending has ended, replaced for a while by the Squatter's Rent game, where people spend into the general economy with money "saved" by not paying their mortgages as they await foreclosure. That game has a certain end point, and then what? I think the federal government is nearing the end of its borrowing capacity, no matter what Paul Krugman says, and then how do we keep the game going?

If you measure this decline from the summer of 2007, when George W. Bush emerged from his emergency meeting with Hank Paulson and Bernanke and other tribal chiefs of High Finance with W's unadulterated look of sheer panic on his face, having been presented with the inevitable result of his indifference and neglect, then we're coming up on four full years of getting nowhere. There's still no talk of anything fundamentally different, no recognition of a paradigm shift. Everything is still directed toward restoring the status quo ante. Water up those camels at the next oasis; we've still got a long caravan ahead of us.

1 comment:

  1. hammerud1:54 PM

    Financial Sense Online (FSO) this weekend said something along the line that that it is as if we are on a train going 100 miles per hour, heading over a cliff and, incredibly, nobody is doing anything about it. The consensus seems to be that Bernanke will try to keep things alive through this election cycle with more QE, although it may be disguised in one way or another. Whether things can be kept going that long is an open question. According to FSO, more than 40 cents of every dollar the government now spends is borrowed money. Even a non-economist like me realizes that can't last.