Sham Economy, Part Three

In late October the government reported that third quarter GDP came in at 3.5%, about half of which was attributed widely to stimulus schemes like the first time home buyer credit and the cash for clunkers program.

Then the first revision brought the "growth" down to 2.8%. Today the Associated Press is reporting that the final revision brings third quarter growth down to 2.2%, which means that the economy, minus the hundreds of $billions in other stimulus spending, may actually have contracted in the third quarter, meaning "the recession" hadn't ended yet:

The economy grew at a 2.2 percent pace in the third quarter, as the recovery got off to a weaker start than previously thought. ...

The Commerce Department's new reading on gross domestic product for the July-to-September quarter was slower than the 2.8 percent growth rate estimated just a month ago. Economists were predicting that figure wouldn't be revised in the government's final estimate on third-quarter GDP.

You mean the same economists who warned us so long in advance of last year's financial tsunami?

The stuff they ladle out in this soup line we're standing in comes out of a crock of you know what.

It's a Depression

From Richard Posner of The Becker-Posner Blog, on Gross Domestic Product:

But it is necessary to emphasize that it is just a starting point. I disagree with economists who say the “recession” ended in the third quarter. The depression (as I think we should call it if only because of its enormous potential political consequences) has caused massive unemployment with all the associated anxieties and hardships, has greatly reduced household wealth, has caused private investment to turn negative, has cost the government trillions of dollars in lost tax revenues and recovery expenditures (TARP, the fiscal stimulus, the mortgage-relief programs, the auto bailouts, etc.), has undermined belief in free markets and altered the line between government and business in favor government, and is threatening a future inflation while deepening our dependence on foreign lenders. To view a change in GDP from negative to positive as signifying the end of a depression (by which criterion the Great Depression ended in 1933 and again in 1938) is to misunderstand the utility of GDP as a measure of economic activity.

Go here for the complete article.

Drunk on Debt and Stuck on Stupid

According to Steve Keen, private debt growth in the United States has been outpacing GDP at a rate of 2.7% per year since 1955. The baby boom has been on a generational bender, encouraged by the so-called Greatest Generation which was demoralized by the Second World War and has utterly failed to transmit the American values of industry and frugality to its children. And despite all that has happened so far in what Keen calls the Great Financial Collapse, total private debt has barely declined at all. The drunkard just keeps going back to his bottle.

Government everywhere specializes as co-dependents in this addiction problem, spending money it does not have on anything but the truly urgently needed things like clean water, sewers, oil refineries, natural gas storage capacity, nuclear power plants, a secure electrical grid, and bridges. Instead it hands out borrowed funds so that Americans can go more deeply into debt by buying depreciating assets like houses and automobiles. Only a few lonely souls like Dave Ramsey have gotten religion and are telling people what they need to hear: pay off debt or sell it if you have to, and eat more red beans and rice.

The debt level is truly ominous, in excess of the level of the early 1930's, and approaching 300% of GDP, as Keen's research shows.

The increase becomes unsustainable at some point, followed by a great deflationary collapse. This storm is not over by a long shot.

"The Feds Have No Faith in Recovery"

Penetrating analysis here from the chief economist at Delta Global Advisors.

November 5, 2009

The Feds Have No Faith in Recovery

By Michael Pento

The stock market has enjoyed a significant rally since the end of the first quarter. The Bureau of Economic Analysis reported last week that the economy grew at a 3.5% annual rate in the third quarter--a figure they achieved by that claiming inflation was running at only a 0.8% annual rate, despite a sharp drop in the dollar, a spike in commodity prices and record highs for gold.

The cyclical bull market in stocks and positive print on GDP has caused some on Wall Street and in Washington to claim the recession has ended. Despite all the good economic news, an end to fiscal and monetary stimulus is nowhere in sight, precisely because policymakers know the happy news is artificially derived.

A closer look indicates that neither the administration nor the Federal Reserve believes its own recovery rhetoric. They understand that the economy will not prosper without continued life support.

I believe removing such artificial stimulus is needed so the country can immediately begin de-leveraging and to prevent the accumulation of yet more baneful debt. What is truly amazing is how many people on Wall Street are foolish enough to postulate that our problems have been solved. The stock market will not be so easily fooled for much longer.

The Great Depression Part II was narrowly averted last year by slashing interest rates to near zero. The Fed made money virtually free because the record level of indebtedness ($34 trillion) in the economy required such low rates so that borrowers could service their obligations. Otherwise a cataclysmic domino effect of defaults and bankruptcies would have occurred. To avoid that scenario, the public sector assumed some of the private sector's debt and then subsequently took on a significant amount more. The debt of the nation continues to increase at a 4.9% annual rate. All public debt is ultimately the responsibility of the private sector to pay off--either directly or through future taxes. As a result, the economy has never been more precarious than it is today.

In spite of this, the stock market appears to be doing quite well. We've seen a 57% rally off the March lows in the S&P 500. However, if you measure the market against other assets its performance is much less impressive. Since the beginning of 2000 the S&P is down about 50% measured in terms of a basket of currencies other than the falling U.S. dollar. The index is down nearly 80% against the real inflation hedge--gold!

The sad truth is that this recent market rally has been produced on the back of a weakening dollar and the slashing of corporate overhead. Cutting payrolls and research and product development projects are not a prescription for sustainable growth. As I like to say, you can't burn your furniture to keep your house warm forever. Eventually, top-line revenue growth must emerge or Wall Street's game of beat-the-expectations will be short lived.

It's also worth noting that a country cannot devalue itself to prosperity and that a bull market cannot survive an inflationary environment for long. In the short run, nominal gains in the averages can occur since everything priced in dollars tends to increase in value. However, the rally will be truncated unless the Fed provides consumers and corporations with a stable currency.

The ramifications of a crumbling currency are vastly misunderstood. A strong dollar is the cornerstone of a healthy economy. It is essential for balanced growth and healthy investment to occur. On the other hand a weak currency decimates the middle class and the corporate sector's ability to maintain earnings growth. Inflation lies behind all infirm currencies, and it is inflation that destroys the purchasing power of consumers. The diminished value of their wallets leaves them with the ability to buy only non-discretionary items. As a direct result, unemployment rates soar and economic output plunges.

I believe we will suffer from a protracted period of stagflation. Money supply, as measured by M2, has increased 5% Y.O.Y. Meanwhile the output of goods and services is falling. As long as the money supply is chasing a shrinking GDP pie, there will be upward pressure on prices.

Making the situation even worse is the manner in which the money supply is growing. The quality of growth is very low because the increase in supply is coming from commercial bank purchases of Treasury debt, rather from an issuance of credit to the private sector for capital goods creation. Total Loans and Leases at Commercial banks are down 8.2% from last year. Meanwhile, the amount of Treasuries held at all commercial banks is up 20% year-on-year.

That means money supply growth is emanating from government's misallocation and redirection of capital. It isn't being loaned out to build mines and factories; it is instead being loaned out to increase consumption and build even more consumer debt.

If the Treasury and Federal Reserve truly believed the economy and the stock market were on a sustainable recovery path, talk of extending and increasing the home buyer's tax credit would be off the table. The Fed would already be reducing the size of the monetary base. The truth, however, is that no one in government really believes in this recovery. If they did, they would be hiking interest rates and the deficit would be shrinking.

The government's realization of our precarious economic condition means its largess will continue. Near term, that may ease some pain. So did the artificial stimulus that gave rise to the housing boom. In the end, a protracted period of a near-zero interest rates, along with endless economic stimulus, will spawn another bubble and not a genuine recovery.

Michael Pento is chief economist at Delta Global Advisors and a contributor to greenfaucet.com.

War is the Father of Everything

From the very long term perspective, the spending on World War II which supposedly got us out of the Great Depression did nothing of the sort. It erected an enormous edifice which became the foundation for the present trouble, which is masked in the ever declining purchasing power of the dollar, the 1928 version of which is worth eight cents in 2008, the 1910 dollar, four pennies.

Instead of climbing out of that debt foxhole, we're digging it ever deeper, and the viccissitudes of a history of our own making are raining down upon us a torrent that will become a flood, collapsing the unsupported walls around us. The world knows a worthless currency when it sees it.

Heraclitus taught us that war is the father of everything. Consider the chart above. The very American nation was itself born of monies borrowed to finance its War of Independence. Mark the sudden upticks in expenditure as a percentage of gross domestic product which commence with the War of 1812, the War Between the States, World War I, the response to the crash of 1929 and World War II, the Peace Through Strength policy to defeat the Soviet threat begun under the Reagan administration, and the adventures in Afghanistan and Iraq since 2003. We've been paying for all that with the continuing slide of a fiat dollar.

Jesse thinks the day of reckoning fast approaches: "The States racked up some serious debt in keeping the world safe for democracy in the Second World War. On a percentage basis, it has recently spent a significant amount keeping its financial sector safe from productive effort and honest labour. They will raid the Treasury, take their fill, and then compel the government to confiscate the savings of a generation by defaulting on its obligations, its sovereign debt."

So does Sprott Asset Management, here:

In case you failed to catch it in our previous articles this year, we thought we’d state it outright for our readers this month: the United States Government is on a trajectory to default on their obligations. In its current financial condition, it will not be able to fund its forecasted budget deficits and unfunded Social Security and Medicare promises on top of its current debt obligations. This isn’t official yet, and we don’t know when the market will react to it, but there is no longer any doubt about the extent of their trajectory. There simply isn’t enough taxing power, value creation or outside capital willing to support its egregious spending.

The great imperative of our time is to bring spending to a halt, or as Jesse says, to need little, and want less. Willingly or no, little and less await us.

Yet Reason frowns on war's unequal game,

Where wasted nations raise a single name,

And mortgaged states their grandsires' wreaths regret,

From age to age in everlasting debt;

Wreaths which at last the dear-bought right convey

To rust on medals, or on stones decay.

Samuel Johnson

"The First 2.5% of GDP is Fictional"

Good stuff from Mish today on the recent GDP numbers.

He says they are inherently deceptive because they count all spending, including government spending, which is by definition consumptive spending extracted from the productive side of the economy.

He quotes Federal Reserve Chairman Ben Bernanke admitting as much:

"It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate."

About which Mish says:

Inquiring minds might be asking: Why does it take 2.5% growth to keep the jobless rate constant? The answer is the first 2.5%+- of GDP is fictional. When the economy is growing at 2%, it feels like a recession because it probably is, even though no one will admit it.

"A Sham GDP for a Sham Economy"

OCTOBER 29, 2009, 1:18 PM ET

Mean Street: A Sham GDP for a Sham Economy

By Evan Newmark

Americans rejoice! GDP grew by 3.5% in the third quarter and the recession is over.

It’s time to drink champagne, dance in the streets, and have a group hug with Nancy Pelosi and Ben Bernanke. But whatever you do, don’t ask yourself why the recession has ended. The answer might ruin the party.

The recession is over only because Washington decided it should be. With billions in fresh government spending, it was only a matter of time before GDP posted some growth.

It’s too bad all that government spending is borrowed money. Someday, we’ll actually have to pay off this year’s $1.4 trillion deficit.

Go here for the rest of the story at WSJ Blogs.