The Recovery That Isn't And
the Bust That Will
Mark M. Rostenko
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
