Things Will Get Much Worse (Before They Get Better?)

It's almost worth the Great Depression to learn how little our big men know
   —Will Rogers

You can't teach an old dog new tricks
   —traditional proverb

I found a good article on the economy called Things Will Get Much Worse Before They Get Better. It's by Jeffrey Snider, president and chief investment officer of Atlantic Capital Management. Snider's title begs the question of whether things will actually get better, which accounts for why I put that part in parentheses in my own title. I'll quote the article, and inject a few comments along the way. Snider's remarks form the basis for an assessment of where America stands economically. Getting back to the basics once and awhile is always a good thing.

Snider begins by talking about European Central Bank policies, noting that "the ECB relented on interest rates, reducing both its benchmark rate and its deposit rate (to 0.00%), bowing to the reality that Europe's hoped-for economic progress is now firmly in reverse." But I'll skip that part and start in the middle.

Central banks continue to employ "monetary stimulus" in unconventional ways, through unprecedented means and taken to unbelievable levels.

And the arc of re-recession continues and spreads unimpeded.

Yes.

Here in the US, economic data continues to disappoint now at a near-universal pace. Economic measures may not be showing contraction yet (though the manufacturing ISM sunk below 50 for the first time since 2009), but there is little doubt as to the deceleration - a dangerous condition for even an economy growing at a moderate pace, let alone one barely in the plus column. This is a stark contrast to just a few months ago when the US economy was almost uniformly believed to be in the full bloom of recovery. That celebration itself was only a few months removed from last summer/autumn's slowdown and gloom.

The usual obligatory hope and delusional thinking.

In the post-2008 crisis period, the US and global economies seem to have compressed the course of their "normal" cycles. A typical "boom" period would/should last several years before exhaustion and malinvestment turn into a slowdown. Now, it seems, "boom" phases last only months before souring.

More than that, though, the nagging inability to grow at anything more than a trivial pace seems to be giving rise to outsized expectations, perhaps due to nothing more than frustration or exhaustion. Whatever may be causing this growing dichotomy between actual output and expectations, emotions are playing a larger role in charting perceptions of reality, and therefore transferring into the volatility of the real economy itself.

This is a key observation. I've been saying something similar for a long time now, though I believe there are all sorts of complex psychological factors contributing to the emotionally-based assessment of our economic prospects, as opposed to merely "frustration or exhaustion." The bottom line is that there can be no rational expectation that things will get better. Wishful thinking will not get us anywhere. As Snider notes, the mini-booms we've seen each year for the last 3 years were ephemeral, lasting only a few months.

There is nothing mysterious about this in so far as these episodes were necessarily mirages. These brief outbursts of hope did not rest upon a foundation of fundamental economic health. Volatility is an expected outcome in a depressed environment in which the central bank alternately does and does not bankroll debt markets and the stock market, which itself is an emotional non-indicator of our economic health. Movements in the stock market mean nothing.

There are several factors that may account for this economic compression, economic and accounting aspects I covered back in February when the world was still enraptured by both liquidity measures and seasonal adjustments. At that time I wrote:

"This third iteration of this pattern strikes me more as the last legs of the recovery, rather than the foundation of a new growth phase. The savings rate can fall only so far, there is only so much room for spending absent full employment and robust wages."

This point about wages is very important. Full employment without robust wages is not a solution to America's economic woes. I made this point on Friday in Overstating The Importance Of The Jobs Report. Politicians chant "jobs, jobs, jobs" as if that word has magic powers. It does not.

Lousy low-paying jobs may permit subsistence living, but that's all they do. If wage slavery is somebody's idea of a high-functioning, healthy society—it is certainly Mitt Romney's idea of a high-functioning, healthy society—then everyone having a shitty job is all that's required to restore us back to economic health. (Mysteriously, there were only a few comments on that post, and nobody spoke to the issue I had addressed.) Back to Snider—

Yet for all that optimism, the same problem remains essentially untouched. Despite the unending parade of "monetary" policies and stimulus, there is nothing monetary about said policies. Every means of stimulus enacted by central banks or central governments amounts to a version of borrowing to create growth...

Economic policies are totally and completely captured by credit and debt — there is nothing else to them.

Right. There is nothing else to them.

The economic theories that guide these credit-focused responses are ill-equipped for the structural problems that exist today because those structural problems are themselves artifacts of previous versions of credit-focused policies.

There are some sentences I wish I had written myself. That's one of them.

The Federal Reserve created a housing bubble to "save" the economy from the potential deflation of the dot-com bubble, creating an incentive structure that led to $7 trillion in mortgage debt and countless trillions in debt in other sectors (including the generous portions of debt accumulated in the public or official sector). However, the fact that central banks accomplished the trick once is enough to give credence to expectations of replication. Thus the mini-cycles...

And then, closer to the end, there is this—

Economists will continue to expect results that conform to their subsets of the real economy, and will continue to be confounded by the "unexpected" weakness that persists. What they, and any businesses that rely on them, should be working toward is an understanding of the economy free from the paradigm of historical relationships.

Yes, exactly. What Snider means here is free from the pattern of economic historical relationships among macro variables like interest rates, growth, credit, inflation and so on. If you step outside this narrow, misguided paradigm, and look at the deplorable historical trends in health care costs, private debt, college tuition costs, lost manufacturing jobs, wealth & income inequality, and so on, the moribund state of the U.S. economy is no longer a mystery. The usual suspects never consider those trends. Policy-makers attempt to run the economy as though it exists in a vacuum. We find this characteristic myopia in astrology, too.

Growing the economy through artificial means is no longer an answer to the difficult questions of global trade and monetary imbalances. Sure the Fed "engineered" a recovery from the dot-com bust with a $7 trillion housing and multi-trillion dollar government debt bubble, but what bubble can they pull out of their hat to replicate that neat trick now? The flow of productive capacity overseas was papered over for nearly twenty years, now there is nothing left to make up for that lost wage potential.

The fact that there has been no repeat of the 2003-2007 artificial "boom" in the three years since the end of the Great Recession more than suggests that waiting for delivery of such a boom is a fool's errand; albeit one that is aided in every way by the continued re-assurance of authorities and the rapidly diminishing sway they have on asset prices.

I find it unlikely that conventional economists and monetary practitioners will see it that way, so the volatility of the mini-boom/bust cycle is likely to be with us awhile longer.

But even that has a potential end once people stop listening to these old and outdated conventions and begin to step outside the narrow confines of historical extrapolations.

At this late stage in American history, is it possible for people to stop listening to these old and outdated conventions and begin to step outside the narrow confines of historical extrapolations?

For a variety of reasons, I think it is impossible for American policy-makers to escape the narrow confines of historical economic extrapolations. Vested interests are entrenched. The political system is corrupt. The economic problems themselves are now overwhelming and unsolvable. American society lacks cohesion. Our decline is quite advanced. The time to act was 30 years ago. The arrow of time  runs only one way—forward. We can not go back to do it all over again.

Generally speaking, people are unable to learn new ways of thinking, even if they are willing to admit they have been mistaken. Try to imagine for a moment Ben Bernanke (or Paul Krugman) admitting that his entire professional life has been based on a fundamental misunderstanding of how the world works. You probably can't imagine it because it is unthinkable. In the elegant phrase of John Kenneth Galbraith, Ben Bernanke is not a man who would be willing to expedite his own demise.

The ongoing response of America's corporate elites and public policy-makers in the years after the 2008-2009 meltdown tells us everything we need to know about the future. Therefore, we have every reason to believe the future will be worse, or we will get more of the same. We can have no rational expectation that the future will be better.

Comments

[T E Cho]

Yep.

It astounds me that a simple macroeconomic model hasn't been written for a PC or iPad app, visually illustrating what can happen or what's going on. Again, Monopoly is a great and educational game, perhaps part of the downfall is no-one plays Monopoly anymore...

PhDs can miss the obvious for decades. It took an UNDERGRAD physics student to point out that a flaw in the sun's fusion rate calcs were based only on the proton-proton collisions done here on earth, when the sun has an equal number of electrons involved in its plasma(reducing the repulsion forces, etc.).

Stooopid PhDs...