The Recovery That Isn’t And the Bust That Will
I submit to you, dear reader, that most everything you’ve
heard about the economic recovery is a pack of lies, a
fraud, a joke, propaganda, twaddle and fiddle-faddle,
sprinkled with a liberal dose of bullpucky and a pinch of
hogwash for good measure.
Now that we’ve gotten the niceties and formalities out of
the way, let me share with you how I REALLY feel.
Most readers already know that the official statistics are a
pile of hooey, routinely manipulated to demonstrate an
economic fantasy that doesn’t really exist. Basically the
feds get to write their own report card every month and
they’re not exactly loathe to take some liberties in
compiling the numbers. (If there’s one thing feds are good
at, it’s TAKING liberties.) We’ve been over this before,
but let’s review a few blatant examples to lay the
foundation.
First off, one of the biggest frauds: GDP. This fabrication
is calculated using all manner of mumbo jumbo that I
purport neither to care about nor understand. AND the
official inflation data. Anyone who doesn’t sleep under a
bridge and force windshield washings upon unsuspecting
drivers for a living knows that official inflation data is about
as out of touch with reality as Rosie O’Donnell is out of
touch with the concept of stopping at just one helping. We
all know that the inflation figures are routinely
UNDERstated which leads to an OVERstatement of GDP
growth.
The inflation data makes ridiculous assumptions about
housing costs. Those numbers are calculated utilizing
rental rates and as we all know, rental rates have NOT
kept pace with surging home prices. As far as the Fed is
concerned, the cost of housing has only risen modestly
even as they pat themselves on the back for surging
home values. You can’t really reconcile the dual
“successes”, but the Fed trusts that the average consumer
will continue to accept the official line and never question
the obvious disparity.
The employment data. Now here’s a real piece of work.
These numbers fail to account for disgruntled workers
who have left the job search. The actual unemployment
rate is estimated as twice as high as the official figures.
Never mind that the bulk of job growth is a statistical
fiction based on questionable assumptions. It may
surprise you to learn that the job growth is NOT measured
by doing a head count of ACTUALLY created jobs.
Last but certainly not the least absurd, Alan Greenspan’s
favorite “hedonic pricing method” which makes all kinds of
wacky assumptions that only a bureaucrat could love. At
$25,000 a piece, the Fed doesn’t consider cars to be
much more expensive than $10,000 cars twenty years
ago because they’re better and loaded with more features
today! Oddly enough, however, computers that cost
$1000 are actually worth several times that when
calculating capital spending data because, well, because
computers are better and loaded with more features
today. Inflation down, capital spending up. Voila!
Economic recovery courtesy of Fed statistamathemagics!
Arguably when the basis for measurement of the
economy’s health is pretty much a fraud, it’s likely that
whatever you’ve heard from official sources about the
economy as a whole is flawed. The reality is that the
Fed’s policies have done very little to create a more
dynamic, healthy or productive economy but instead have
served primarily to boost asset prices, create new bubbles
in housing and credit markets and cause consumers to
plunge more deeply into debt.
Yet according to the headline data, it really looks like
we’ve been growing, albeit at a “measured pace”, if I may
be so bold as to borrow from the catchy repertoire of
“meaningless terms that sound like something important
to people who don’t really understand what’s going on”
coined by our great financial wizard Alan “I’ll say anything
you want to hear” Greenspan.
The headline data paints a rosy picture while totally
disregarding the brutal reality that festers below the
surface. For example, the GDP numbers indicate that the
economy is growing. But the ever-expanding trade deficit
makes it very clear that America isn’t producing much of
anything, and if it is, it’s not selling enough of it.
What’s going on here? The economy looks healthy
because consumers continue to buy more stuff. The bulk
of that stuff is produced by the Asian economies,
packaged and shipped to American companies which
offer a host of credit plans that allow consumers to borrow
more and more, spending what they don’t have to own
new toys they don’t need. Not healthy. The consumer
spends, the corporation bags a profit, the GDP figures
swell and Asian economies own a bigger and bigger
chunk of America with every passing month. Healthy
when you’re trolling your votes. Unhealthy when you’re
footing the bill.
All of this is made possible by the Fed’s easy money
policies. Interest rates have been maintained at extremely
stimulative levels. All that easy money floating around
(money supply has increased by more than five times
since the early 80s) has to find its way somewhere. Much
of it ends up in the financial and housing markets. (Which
is one major reason why the inflation data appears “mild.”
It doesn’t account for asset inflation.)
The result is that consumers feel wealthier and thus feel
comfortable borrowing more money to buy more toys.
They refinance their homes and pretend they now have
more money, conveniently ignoring the fact that they must
pay all that money back with interest. That consumer debt
translates into consumer spending which of course boosts
the economic data.
In the end, there’s very little in the way of real, net growth.
Easy money inflates the markets. (Said another way, it
creates asset bubbles.) Consumers borrow against their
perceived new wealth, feel happy and secure with their
new toys and the economic data registers gains.
But where’s the increase to wealth and savings, the REAL
stuff that REAL expansions are made of? Consumers are
spending debt that is backed by inflated markets which
are driven higher by the decreasing value of the
underlying currency. In essence, it’s all a big numbers
game, a huge Ponzi scheme where one asset is devalued
in order to create the appearance of growth in another.
Whatever real wealth is generated in this process
routinely boards a ship and sails its arse over to Asia.
You see, producers accumulate the wealth that
consumers toss away. Production generates wealth.
Consumption generates “not wealth.” Get it? In the worst
case, consumers go into debt buying what producers
produce. And welcome to the worst case!
We are no longer a nation of producers. America is the
world’s biggest consumer. When’s the last time you saw a
new factory being built? Where’s our textile industry?
Gone. Where’s our steel industry? Almost gone. That TV
in your house: made in America? Nope. How about the
computer? Your appliances? Washing machine? Nope, no
way and nada. The automobile industry is on its last legs,
as GM’s recent news makes abundantly clear. Wave
“bye-bye” as soon as the Chinese advance their factories
to a competitive level.
We’re consumers and borrowers. And that’s no formula
for wealth. Wealth is built from savings and our savings
rate continues to flirt with historical lows. Consumption
isn’t a bad thing, mind you. But when it’s the primary thing,
we have a problem.
What is bad is that we’re borrowing in order to consume.
We’re selling our future production in order to consume
now. This is a recipe, THE recipe for financial ruin. And
other nations are the benefactors or our profligacy. It’s
done at the individual level and at the national level.
America has gone from being the world’s largest creditor
to the world’s largest debtor. Every month other countries
accumulate another chunk of America. More than half of
our debt is held by other nations.
The headline data talks about growth but under the
surface it’s just a massive transfer of wealth, a slow bleed
from West to East. This isn’t growth. It’s a steady erosion
of our economic might. All debts must eventually be
reconciled. Will we pay off our national debt own
American “free and clear?” Never. We can’t. Not possible.
It’s gotten out of hand.
Worse yet, the only way to sustain the current illusion of
growth is to keep expanding debt, to continue borrowing
more and more. Which is precisely what we’re doing,
precisely the Fed’s strategy. Keep printing money, keep
folks borrowing and keep this big asset transfer going for
as long as possible, all the while “legitimizing” it by
labeling it “economic growth.”
I don’t know how or when it ends, but no credit bubble has
ever ended well. Bubbles can’t and don’t go on forever.
Regardless of how it ends, we’ve undoubtedly sold off
enough of our future that the days of global U.S. economic
dominance are numbered.
Can we reverse course? Sure. Anything is possible with
enough pain, hard work and discipline. We’d have to
become producers again. We’d have to get competitive.
Not easy to do when Asians are willing to work for a
fraction of our costs. Is corporate American willing to stop
feeding at the “easy-financing-forever-indebted-to-us”
trough and make honest money by manufacturing real
stuff? Doubtful, but possible. Is government willing to
give up the pork, entitlements and transfer payments?
Well, that would put a whole lot of politicians out of work,
competing with real, hardworking people for real, honest
jobs. That one, I’m afraid, will NEVER happen.
Nothing is inevitable. It’s possible to reverse course. It’s
possible but it won’t happen as long as Oprah always
comes on at 4pm and the snack bowl remains “chock
full’o’Twinkies.” Until it hurts, I sincerely doubt anything
will change. Until we have to change, we won’t.
In the end, a lot of folks will get hurt when the housing,
stock and credit bubbles bust and they’re left having to
pay off record levels of debt with simple wages that aren’t
rising nearly enough to keep up with inflation. I don’t know
when that will happen because I DO know that the feds
will do every asinine thing available to them to ensure the
bubbles don’t pop before they absolutely have to. And if
there’s one thing I’m not good at, it’s estimating the full
extent of political & central bank stupidity...
Mark M. Rostenko
Editor
The Sovereign Strategist |
