Friday, April 10, 2009

Cheer Up! We are Over the Worst! Huh?

I have recently been astounded by some reports in the media. It appears that many outlets are collectively starting to call the end of the economic crisis. I am, of course, being very broad brush here and there are dissenting articles, dissenting media, but the trend is clear. Perhaps the most astonishing of the stories is this one from Time Magazine:
But, the great banking crisis of 2008 is over.
My response to this proposition is to ask what exactly would happen to the major banks if governments were to announce next week that they were no longer offering any bailouts, support or guarantees - that the government simply went back to pre-crisis business as usual? Does anyone seriously think that the banks would stand? Or would they be declared insolvent?

When I read an article like the one in Time, I can almost sympathise with the conspiracy theorists, as it is hard to believe that this anyone might write this without some kind of hidden motivation. Alas, I actually believe that the author actually believes this. This is a more scary scenario, as it reveals how completely lost/hopeless the mainstream media can be.

Perhaps the most interesting point in this upturn in optimism is the way that the media are presenting some pretty awful statistics. The method of presentation mirrors that of politicians, such as Barack Obama:
President Obama pointed to a 20pc rise in government-backed loans to small businesses last month and a "very significant" pick-up in mortgage refinancing as evidence that markets are improving. "We feel confident that as we deal with problems in the banking system that we're also fixing the non-banking sector when it came to auto and credit card loans," he said
According to Obama small businesses borrowing money that will only be lent with government guarantees is a good thing? As for mortgage refinancing, the actuality of the situation is:
Fannie Mae, the larger of the two government-sponsored entities that process refinancing requests under Obama's mortgage-relief plan, just began accepting automated applications from mortgage lenders on Monday, a spokeswoman said. As of Thursday, fewer than 1,000 loans had been refinanced under the program, said a Treasury official, though the official noted that the pace is expected to pick up dramatically in the weeks ahead.
So what we have here is a government backed programme, which has achieved a grand total, across the whole of the US, of 1000 loans, and those have been given to fund mortgages that are apparently not in trouble. More troubling is that anyone might think that people accepting government subsidies to make up for lack of equity in their homes might be a signifier of an improved economy.

An example of this kind of thinking in the media comes from Businessweek, who paint a picture of an economy possibly having reached the bottom of the slide. Whilst they add caveats to their discussion, they still paint a positive picture, as in the following section:
Consumers were far less tight-fisted in January and February than they were at the end of 2008. Retail sales excluding autos rose strongly in both months, after declining for five months in a row. And in March, car sales rose to a 9.8 million annual rate, from 9.1 million in February, while weekly store receipts continued to hint at fading weakness.
The point I would like to highlight here is the use of the expressions 'fading weakness' and 'less tight-fisted'. Also, note the use of 'annual rate', in which the figures are extrapolated to a year. I have seen this kind of language/presentation in other articles. A slow down in the rate of increase in unemployment becomes a sign of recovery, an uptick in any indicator from a very negative base becomes a sign of recovery. What these presentations are trying to hide is that the underlying figures are actually dire, but they are presented as positive - as they are less dire than they might have been. There is no reason to propose that these are signs of turning the corner, as they are just as likely a pause for breath in the downward slide, or might be a move to a slower but continuing decline.

One of the optimists in chief is Larry Summers, a White House economic policy aide. His positive remarks have been widely reported, but I like the Reuters reporting for the following passage:
The decorated economist said it remained unclear how long it would take for the economy to return to strong, sustained growth, though he did cite "anecdotal" signs of improvements in credit markets that would allow inventory cycles to return to normal.
In particular, I liked that they clearly point out that his comments are unsubstantiated. I suspect that the view from the White House (excuse the metonymy) is that a dose of 'confidence' will somehow 'magic' the economy back on to the right tracks. However, it is hard to see how confidence can magic the economy back into action when 654,000 people became unemployed in the US in the previous month. Once again, in the article I used for the statistic, there is a positive spin placed upon this abysmal figure by some analysts:
"The good news is that the trend in initial claims isn't worsening. The bad news is that the level of claims still speaks to a very weak labor market," said analysts in a note to clients.
How anything about such massive lay-offs can be 'good news' is simply puzzling. 'Yes', the figures could be worse, but that they are not worse does not represent 'good news'. As for a 'very weak' labour market, the word abysmal is more to the point.

An excellent pricking of the optimism bubble is provided in Canadian Business, which says the following in response to news that new home sales had risen in the US:
Take that housing report. Sales may be up, but median prices for new homes continued to decline, tumbling 18% in February from a year earlier, to US$200,900. As Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University, explains, "It's helpful to think of the U.S. housing market as effectively two markets. There's the market in foreclosed properties, where, if prices drop dramatically, it stimulates some economic activity." (That explains the recent uptick in sales in such hard-hit markets as Surprise, Ariz.) However, the rest of the market remains "stalled," Retsinas adds. "It's hard to imagine that market recovering until we see a full economic recovery across the U.S."
What all of this 'good news' represents is that the speed, the rate of acceleration of the decline, may have slowed in some areas for a brief period, or positive spins on negative figures. In all cases the statistics are being measured against horrendous bases, and in all cases there is no signifier of a new upward trend, just isolated statistics.

Having said this, it does occur to me that, at some point, all of the newly printed money being pumped into the world economy must have an effect. I have long discussed the inflationary effects of the surge in money printing, and at some point this must feed into a sustained rise in asset prices. However, this will not be a rise based upon an increase in the value of the assets, but rather a price rise due to the devaluation of money. In the event that this takes place before a $US collapse, expect to see such inflation portrayed as a signifier of recovery. The fact that such a 'recovery' will be a precursor to massive or hyper inflation will, no doubt, pass the optimists by.

I suspect that what we are seeing at the moment is 'bad news fatigue'. The bad news over the last year has been relentless, and I think that what we might be seeing is the start of a reaction against this. Perhaps it is simply a case of, in the broadest sense, people just becoming tired of hearing negative news, and are simply looking for any sign that might be hopeful.

Note 1: Acrobat 747 commented on my article on the RMB as the new reserve currency, suggesting that the Chinese economy is too small. A commentator 'Novice' responded by pointing out the problems of measuring GDP, and I would agree with that point. One of the themes of this blog is that GDP is a flawed measure of the wealth in an economy.

Note 2: Tiberius posted a very interesting link, which describes the US government undertaking economic 'war games'. The following is a quote from the article:
In the end, there was sobering news for the United States – the savviest economic warrior proved to be China, a growing economic power that strengthened its position the most over the course of the war-game.
This 'game' may well have ramifications in US policy making. It is one of those articles that could easily be passed by, but which may have reported something with profound influence on future policy. It is only possible to speculate on how much influence it may have, but it is quite possible that, just by playing out the scenarios, the US may be forced to confront its inherent economic weakness. To quote Tiberius:
Whatever happens, I don't think the US will take it laying down.
I think that he may be right. The US government must now be painfully aware of the vulnerable position of the US economy with respect to China. One way or another, they will have to confront the challenge posed by the rise and rise of China. We can only hope that the response is appropriate, as I can see no other way than directly addressing Chinese quasi-mercantilism directly, and that is a scary path.


  1. I have, on and off, discussed the potential for social unrest in China. There are many articles that deal with this, and I have seen peasant protesters being dragged away during my time in China. I recently found this report from the FT:

    I would not usually post a link to an emotive report on the blog, but it gives a flavour of some of the simmering anger that threatens stability. The first of the videos is probably the most interesting.

  2. Despite the mood music of the media, I think we're beyond the dinner party schadenfreude stage of this crisis, and into something much darker and more confusing.

    The media is dimly aware of the challenge this presents to their authority and is, belatedly, trying to prop up the ancien regime. Too late! The bloggers and their commentators are setting the pace, and the tale is wagging the dog.

    I must say I find this unravelling alarming and fascinating in equal measure.

    Who is in authority in these circumstances? In the UK the politicians, the wealthy, the media and even the police seem to have extinguished their residual entitlement to any deference.

    The phrase 'uncharted territory' seems to crop up a lot at the moment, but I believe it best applies to this unprecedented authority vacuum... How will the Mcgeneration respond?

  3. I know it's easy to say this, but I think it is fairly clear now (and to me was from the beginning) what has happened and is happening is a fundamental crisis of capitalism itself.

    What also is self evident is the 'powers that be' TPTB haven't a clue how to fix it.

    There are so many spinning plates that have to be kept going it's difficult to see where it is all going.

    Read a piece in today's Guardian on line by Eric Hobsbawm to get an idea of what the real problems are.

    Hobsbawm says in the last century both Socialism/Communism and free Capitalism were tried and failed. Back to the future with mixed economies.

    TPTB are furiously pulling on the lever as on a fruit machine, in the hope something will drop.

    What is there left to try?

  4. Current US Unemployment Rate

    On the issue of what the state of the economy is at the monent, you can go to and get a much better estimate of the current US Unemployment Rate.

    At the moment, it's about 19.8%

    The highest rate in the US during the Great Depression was 25%, so the US is not far from that in terms of unemployment.

  5. Regarding differing interpretations of statistics, two concurrent headlines from April 7th:

    UK industrial production falls at fastest rate in four decades
    Industrial production in Britain is falling at its sharpest annual rate since 1968, with carmakers particularly hard hit. Official figures out showed that nearly all sectors of industry are suffering after a collapse in world trade.

    Decline in manufacturing 'eases'
    UK manufacturing output fell for the 12th consecutive month in February, but the rate of decline appears to be easing, official figures have shown.

  6. Cynicus,

    Most of the MSM is living in cloud cuckoo land. I find the Times of London to be the most deluded news site in the UK. The Telegraph have been the best but even they are getting caught up in the G20 spin.

    It is in the blogs that one finds realism and analysis.

    I think the market needed a bear rally. It was oversold, then the FEDs started engineering a rally with a batch of policies.

    It will probably last 2 to 4 months.

    I found this piece of analysis by John Kay the British economist to be most stimulating:

    'Yet there is another, perhaps no less gloomy, way to draw parallels between the present crisis and the Great Depression. From this perspective, we are not at the start of the crisis but several years into it. The analogue of the 1929 Wall Street crash is not the 2007 credit crunch, but the bursting of the New Economy bubble in 2000. The follies of the 1990s resembled those of the 1920s, as Galbraith’s readers know. The underlying structural weaknesses of the world economy – US budget and trade deficits financed by Asian surpluses – re-emerged in 2000 after being disguised by the imaginary wealth of the New Economy.

    The difference between the years after 1929 and the years after 2000 is that the policy mistakes were almost opposite. This time monetary and fiscal policies were strongly expansionary from the outset. These measures led to a wide boom in asset prices, extended unsustainable credit levels and induced further growth of the fundamentally flawed financial infrastructure on which the 1990s boom had been based.

    In 1937-38, markets and business leaders came to doubt the durability of the business foundations on which partial recovery from the Great Depression had been built. In 2007-08, markets and business leaders came to doubt the durability of the financial foundations that had supported consumption and asset price growth after the New Economy fiasco.

    Our capacity to learn from the Great Depression is limited because we do not know how economies would have evolved after 1938 if politics had not supervened. Life, said Kierkegaard, is understood backwards but must be lived forwards.'

    Creates a deep void...


    Lotus Birth

  7. Lagan April 10, 2009 9:53 PM

    Excellent, excellent post.

    We are indeed in the battle(s) of the media. The media is in the vanguard of what's going on here and lo and behold they are finding themselves slipping behind the curve.

    Not only is the blogosphere way ahead but they are forcing the media to confront issues they (media) would prefer to avoid.

    It is the media who are perpetuating the endless myth of the NWO but are slowly but surely losing their vice like grip.

    The battle of the media against the British people is one we can sit and watch in the comfort of our own homes.

    To quote Langan,"I must say I find this unravelling alarming and fascinating in equal measure"

    Hear! Hear"

  8. Hello There,

    Nice & Interesting blog.Have a nice day,Thanks

    Best Regards,

  9. I Remember the 1970s some what.
    Inflation took off,we were selling tractors after 3 years work at thousands more than we payed for them,only to pay many more thousands for their replacements.The land price went from £300 acre to £2000 acre.The feel good factor was huge even though no one was better off in real terms.
    This is my concern,inflation will start takeing off the press will put a positive spin on this and brown will swan back in to Nr 10.
    None of the painfull issues will be dealt with and a bigger devaluaton of the pound will follow with more inflation higher interest rates and so on followed by another election in about 2012.

  10. I have to agree. Things just seem to be getting worse and worse from my standpoint.

    Its grim, grim, grim and showing no signs of getting better. The 'green shoots' nonsense is media and political spin. Nothing more.

  11. Back to the future.

    "The societies of the industrial world are human cultures, no better or worse than most; for a variety of reasons, they happened to stumble onto the reserves of stored carbon hidden in the Earth, and used most of them in three centuries of reckless exploitation; now, having overshot their resource base like so many other societies, they're following the familiar trajectory of decline and fall."

  12. Cynicus,

    Excellent post.

    I have noticed this same phenomena of 'positive news spin' also. In the last couple of days the tabloid over here in the UK have been talking up an Easter spending boom by British consumers in defiance of the recession and, just yesterday, on Sky News I caught a 'special housing report' suggesting that the market had bottomed out and post-Easter house prices were going to bounce (no mention of inflation though of course).

    However, there are some in the MSM who also remain cynical about a quick recovery:

    re "Alas, I actually believe that the author actually believes this."

    As you're probably aware, this is an example of Hanlon's Razor or "Never assume malice when stupidity will suffice"; it's one that I try and hold to also.

    With regard to the current crisis, there are many in the 'anti-NWO movements' suggesing that the whole thing has been deliberately engineered in order to set the stage for the global police state (I think the formula goes something like: First they make the world bank, then the world currency, then the world government, then we're screwed) and, while I don't personally subscribe to this theory, I am finding it harder and harder to imagine what would have been done differently if it were indeed true.

    I think it's always worth bearing in mind that Hanlon's Razor is, in the final analysis, nothing more than an article of faith.


  13. With Respect to the post by Lord Keynes on the US unemployment rate, very little is mentioned in the media on our expanding Black Economy and how it also distorts these figures. I should mention I live, or should I say have continued to live, in Flint, Michigan, USA these past 39 years and have become intimately familiar with economic downturns.

    On point, two examples of my closest friends. One, an aviation mechanic who has exhausted his unemployment insurance now currently being paid cash for a home health care job. Another in the same situation, albeit a Master Electrician, who gets by doing odd electrical work by word of mouth.

    I know personally of many, many more in similar circumstances but the point is that men such as these are no longer considered "unemployed" by the state. In addition, they pay no taxes to the state or federal governments. They are part of a ever-growing trend here whereby so many of our best and brightest are "off the grid", neither represented or reported.


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