About That "No Recession" Call... (October 12, 2012)
Metrics of real economic growth are plummeting, and are about to drop through the "line in the sand" indicating recession.
Wise decisions, prudent adaptation and real progress all require facing reality: yes, the channel you can't change. While the global economy melts like an ice cream cone in mid-July Death Valley, the official murmurings reassure us the U.S. is in "slow but steady growth, not recession."
Courtesy of longtime contributor B.C., here is a chart that combines key metrics of real growth into one line and plots it against real GDP (gross domestic product). GDP is the blue line, and the black line depicts gross private investment + wages less debt service/M2 less the monetary base.
OK, that's a mouthful, but what it combines are key measures of economic activity: private investment, net earnings minus debt service, i.e. what the household has to spend, and the money supply (M2) minus the monetary base.
What that measures is how much money (M2) is actually entering the economy after the Federal Reserve added $2 trillion to the nation's monetary base since late 2008. If most of that is dead money sitting in reserves, then we'd expect actual money in circulation (M2) to stagnate.
OK, on to the chart:
The usual definition of a recession is GDP goes negative. But this isn't necessarily true. Notice that GDP never went below the zero line in the 2001 recession. Dipping close to zero was good enough.
The more interesting line is our composite of economic activity. Note that every break of the red "line in the sand" drawn on the chart resulted in recession. That composite line is dropping and is perilously close to piercing the line that has signaled recession over the past 40 years.
We can pose the "recession" question in this way: if real investment, net earnings after debt service and M2 money are all puking, how can the economy be "growing slowly but steadily"? Based on what? Free money from the Martian Central Bank? If the Martians were being generous, we'd see increases in M2 and earnings as money flowed into the real economy. We see no evidence of either, so we have to scratch the "free money from the Martian Central Bank" theory.
While we're at it, let's also dump the Fed's "reverse Robin Hood" policy (stealing from
the middle class and giving the loot to the bankers) and the Keynesians'
Cargo Cult (borrow and blow, borrow and blow, squawk!). Both have demonstrably failed,
despite unprecedented sums of stimulus and "free money" being thrown into favored fiefdoms
Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
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We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.
If this recession strikes you as different from previous downturns, you might
be interested in my book
An Unconventional Guide to Investing in Troubled Times (print edition)
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computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.
The solution in one word: Localism.
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