Economist Dave Rosenberg, who is someone worth listening to, says the government is "freaked out" about the possibility of a new wave of economic contraction (a "double dip") later this year just before the mid-term elections—
What is most ironic is that the world financial markets managed to hit this latest inflection point just as the National Association of Business Economists (NBER) lifted their GDP forecasts for this year and next — talk about a contrary indicator. The U.S. government is so freaked out now about the prospect of a double-dip that just a week after Timothy Geithner was crowing about how well the economy was doing (aren’t payrolls rising — at least outside of the ADP survey?) we had Larry Summers advising Congress yesterday that a new $200 billion stimulus package (on top of the $787 billion earmarked from last year’s budget-buster) is needed.
Ironically, [this happened] a month after Mr. Obama established a commission to identify budget cuts in order to help shrink the deficit! You truly cannot make this stuff up.
That's right, Dave, you cannot make this stuff up. The Big Picture's Barry Ritholtz apparently disagrees with Team Obama and Dave Rosenberg. Apparently, Barry has moved away from the State of New York to the State of Denial, a pleasant land of shimmering lakes, green pastures and beautiful sunsets. Check out this quote—
[Barry lists the many signs of trouble in housing, jobs, etc. and then says...]
This is, historically speaking, normal. ECRI’s Lakshman Achuthan told Newsweek: “You always have a spurt in growth out of recession and then you throttle back. But we’d need to see a pronounced, pervasive, and persistent decline in the level of the leading indicators to start talking about recession risk.”
Normal? Is this chart form ECRI, where Lakshman works, normal?
A measure of future U.S. economic growth fell to a 39-week low in the latest week, pointing to a slowdown in economic growth, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 125.6 in the week ended May 21, down from a revised 127.2 the previous week, originally reported as 127.3.
ECRI Weekly Leading Index (WLI) percent change week-over-week.
Cliff diving toward the zero line—looks normal to me!
Ambrose Evans-Pritchard of the Telegraph (London) pointed out that the US money supply plunged at a 1930s pace as Obama eyed a fresh stimulus—
The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.
The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6%. The assets of insitutional money market funds fell at a 37% rate, the sharpest drop ever.
"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.
The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97% of GDP next year and 110% by 2015.
I don't want to get into the technical details here, but a sharply contracting money supply is, at least for monetarist economists like Tim Congdon (quoted above) and Paul Ashworth (below), a Big Warning Sign of deflation.
Paul Ashworth at Capital Economics said the decline in M3 is worrying and points to a growing risk of deflation. "Core inflation is already the lowest since 1966, so we don’t have much margin for error here. Deflation becomes a threat if it goes on long enough to become entrenched," he said.
Rosenberg agrees, saying that—
Throwing good money after bad, as the world’s governments are busy doing (this will cost Ms. Merkel her job) does not create inflation. By maintaining a policy of ensuring that risk assets get mis-priced and that capital gets mis-allocated, it is more likely that deflation pressures will intensify.
If you haven’t noticed, real M2 is down YoY now for the first time in 15 years. A reconstituted real M3 is deflating now YoY for the first time in 50 years. Wake us up in 2015 when the inflation comes.
[and from here]
One of our primary themes has been deflation — say that at a time when average wage offers to 2010 college graduates are 1.7% lower than they were for the 2009 crew. In fact, wages paid out by private sector employers as a share of total personal income just fell to a record-low 41.9%; it was almost 45% when the recession began in late 2007. Never before, 16 months after a recession began, has real income excluding government handouts been down anywhere near $500 billion as is the case now.
Our debt-ridden, credit-driven, bubblicious Phony Economy can not achieve lift-off. That's no surprise, because it's phony. I could go on and on here, but won't. Scenarios could be concocted, but what's the point? For example, GDP may not go negative, it may simply become anemic on the plus side. But who cares? GDP is the real fraud. (I've been meaning to update that article, and will soon.)
Regarding deflation, we may not get an out and out wage & price free fall (as in the early 1930s) because as I said yesterday, there are two worlds: the Real World where you and I live and the Money World where Ben Bernanke and Jamie Dimon live. And a global depression emanating from Europe and China will not help matters. (Also see Part II).
Suffice it to say that our economic prospects appear to be, and most likely are, dismal. Even Barack Obama and Larry Summers, who are asking Congress for more stimulus money, know that.
But there's a problem—there's no way to shock this monkey to life.
Something knocked me out' the trees
Now I'm on my knees
Cover me, darling please...
Shock! - watch the monkey get hurt, monkey
Shock the monkey
Shock the monkey
Shock the monkey to life
The more I read your writing the more I want to continue to read. Thank you.
Posted by: River Gibeaut | 06/09/2010 at 09:40 AM