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 Briefing.com 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.