I saw a quote today that summed up the state of mainstream economics more clearly than even Ben Bernanke could have done.
“The recession was un¬usually long and unusually severe and has proved unusually resistant to unusual amounts of stimulus,” says Neil Soss, chief economist at Credit Suisse in New York.
Or to take the contrarian viewpoint – if it doesn’t look like a duck, doesn’t walk like a duck, and doesn’t talk like a duck, then maybe it isn’t a duck!
That idea seems so far away from the consciousness of mainstream economics that they will flounder away for as long as it takes to prove beyond all reasonable and unreasonable doubt that we were never dealing with a simple recession in the first place.
Sadly ignoring this reality only means that the trajectory of the inevitable structural breakdown that particularly the Anglo-Saxon Western world is heading for is far steeper and more damaging than it need be, and all the average economist will say is no-one saw it coming.
Rubbish – I saw it coming in late 2004 and detailed the fact very thoroughly, as did any number of non-mainstream commentators – even Subcomandante Marcos, the leader of the Mexican rebellion called it as early as 1997, and Australian Steve Keen, an economist I do respect, was writing about where we were heading for the last 15 years. Minsky had it nailed about 40 years ago and Kondratieff (1892 –1938) wrote about long cycles over 100 years ago.
Nevertheless, politicians, bankers and economists together remain totally certain they can control and accurately manoeuvre the complex beast that is a modern day economy – the evidence for this is very poor but seemingly they still believe they have the means to corral the masses and direct their productive effort exactly where it is needed.
It’s the same old story – to a hammer everything looks like a nail; to a front-row prop everything looks like somewhere to put your head; to a politician everything looks like a legislative problem; to a banker and an economist everything looks like a liquidity imbalance.
But with apologies to hammers and props everywhere, the rest had a problem because it’s very hard to maintain a sense of direction when your head is in the trough and jammed tight in there by an unusual sense of entitlement.
Anyway, Alan Greenspan, the last Fed chief, has finally said something I agree with, and more significantly, something that helps explain a current conundrum – why are the equity markets of the world acting quite well when the rest of the economic signs are weakening? Greenspan had this to say: “If the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here.”
Of course when he says the stock market he means the Dow Jones and this is the one that has been subject to late afternoon pumping for some time, mainly because it’s easier to move as it represents only 40 stocks.
I first wrote about market pumping when discussing Japan back in January, and mentioned the similarity to the current Dow. As suggested in an earlier post, there is no question that purchasing the Dow futures at 3pm and selling at 4pm would work on the vast majority of days and this only happens in a market that is being ‘looked after’.
There are other reasons that the stock markets look so comparatively good – the alternatives looking pretty bad being the first. But one of the key things that has happened to larger companies since 2008 is the sharp improvement in their balance sheets, as they also have stopped capital spending, reduced staff, inventory and dividends, and so are flush with cash.
Add in the difficulties their smaller competitors are having in maintaining market share and profitability and it’s easy to see why the larger companies are attracting defensive investment.
Even in a docile economy they are looking far less risky than two years ago, and big companies have a big influence on indexes which may not be reflected in the underlying economy at all. In fact, given that most of them will be trading globally, their fortunes are likely not related to what’s happening in their domestic economy.
So as I said last time, be a little wary about being too bearish just now as any further slippage towards deflation will almost certainly generate QEII and that would send the equity markets sharply higher for a period.
Mr Greenspan was clearly feeling unusually candid as he also had this to say: “There is no doubt that the Federal funds rate can be fixed at what the Fed wants it to be, but what the government has no control over is long-term interest rates and long-term interest rates are what make the economy move. And if this budget problem eventually merges to the point where it begins to become very toxic, it will be reflected in rising long-term interest rates, rising mortgage rates, lower housing. At the moment there is no sign of that because the financial system is broke and you can not have inflation if the financial system is not working.”
(Clearly Greenspan was talking about interest rates alone in the last comment because the US housing market has begun a new leg down and with 18.9 million houses unoccupied and foreclosures accelerating, this is not a situation that is going to be solved quickly. This is one of the weird consequences of putting banks and economics ahead of people – save the biggest of the banks with taxpayers’ money and they in turn throw the people they last seduced into the housing market back into the street, and try and sell the empty house in a vastly over-supplied market, thereby hurting the next tranche of house-owners etc. etc. All the while the bank is allowed to value its securities as if they will settle at maturity, pretending that the undercutting process is not even happening.)
What is certain is that inflation is the tool that central bankers and politicians would most like to use, but this can only work if they can get the population spending and particularly taking on more debt.
However, what America and most other countries are finding is that spending is falling in all age groups as people seek to protect themselves from the helplessness of excess debt, being fully aware that should it be considered necessary they will be crushed like a bug in the interests of saving the financial system.
The only way the average person sees themselves not being a victim to such a move is to have no obligations to anyone, eliminating their debt as fast as possible and not be beholden to a merciless lender. Many individuals have already worked out that we are facing the ‘new normal’ but the influential members of the old normal won’t see the necessary changes occur without a substantial rear-guard action. Funnily enough, it’s exactly their own rears that they are seeking to protect, as true change frightens the hell out of them.
The rating game: One of the most amusing things I’ve seen lately is the Chinese developing their own ‘rating agencies’ and dropping the ratings of the Western countries to where they consider they should be.
Quite frankly, it doesn’t matter how they’ve come to their conclusions, they can hardly be worse than the corrupt nature of the big American rating companies. The story of how the securitised tranches of sub-prime mortgages, for example, were upgraded by the rating companies to AAA and then stuffed into investors worldwide is a scandal that should have seen the US rating companies wiped from the face of the earth.
In my view, this still has a good chance of happening as an increasing number of burnt investors are suing the rating agencies for their professional misjudgement. However, how a system where the company/country pays the rating service for the rating provided is ever going to avoid corrupt results, is beyond me. To see our own government cowering in the face of a visit from Moodys and S&P was cringe-making in the extreme.
To me it’s the same thing that we see with the mainstream economists/politicians/bankers – none of them saw anything untoward coming but now deserve to be listened to – absolute rubbish.
Globally the people who got the analysis right have been either ignored or vilified, while the mainstream continues to pat each others’ bottoms like happy cricketers.

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Wayne Lochore

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