Monday, November 26, 2012

Is This Recovery "Self-Sustaining" or Merely a Mind Trick?

Perhaps the "recovery" is a Mind Trick played on the weak-minded.


Those with vested interests in the Status Quo tout data that supports the claim the "recovery" is now "self-sustaining," meaning that the economy is now expanding fast enough to fuel new growth. In this view, the Federal Reserve's extraordinary policy interventions (zero interest rate policy, $23 trillion in support provided to the global banking system, 3.4% mortgage rates, etc.) and the Federal government's unprecedented fiscal stimulus (borrow and blow $1.3 trillion a year) have done their job; the economy is now "self-sustaining," meaning that it can continue growing as Federal deficits shrink and the Fed trims its quantitative easing policies.

The data favored by the Status Quo interests are GDP (which rises when the government borrows and blows trillions of dollars), housing sales (still low compared to 2006, but better than 2011) and consumer confidence, which is hitting multi-year highs. Consumer confidence is a quasi-quantitative measure of the critical "animal spirits" that Keynesians look for to drive more borrowing and spending: if you feel wealthier for whatever reason, that confidence arouses your "animal spirits" to rush out and buy something, preferably a house and a car.

Those looking at fundamentals such as household income/debt and sales see more of a Mind Trick being played on the weak-minded. If you can convince me the economy is expanding and inflation is rising, I will be more likely to risk borrowing and spending more than I can afford. The "real" economy might be sputtering, but my belief in the "recovery" will support my confidence in the wisdom of leveraging more of my (shrinking) income into debt-based consumption.

This debt-based consumption (according to the Keynesian Cargo Cult) will spark so much "growth" that the expansion will become self-sustaining. Corporations will see the rise in sales and become confident enough to make capital investments and hire more workers, who will then spend their paychecks consuming more stuff, and so on.

So the task of the Status Quo shifts from actually expanding the economy to persuading us the economy is expanding. If the Mind Trick works, then maybe the unleashed "animal spirits" will actually spur real-economy growth.

It appears a certain number of buyers are convinced housing has bottomed, and this confidence (misplaced or not, no one yet knows) has persuaded them to buy real estate. This has indeed fueled a self-sustaining growth cycle in some areas, as people waiting for the bottom are jumping in, pushing prices higher and drawing in more converts.

On the other hand, if household incomes continue weakening, then the confidence of all those real estate investors in rising rents and 100% occupancy might not align with reality as well as they anticipate.

All debt and consumption is based on income. Consider these charts:


Notice that the only age bracket with rising incomes is the 65 and over cohort; everyone younger than 65 has seen their income slashed.

As I have observed many times before, the middle class filled this gap between rising costs and stagnating wages with debt.


Income for every age group other than 65+ seniors has declined sharply:


The income of those in their peak earning years 45-54 have been slammed:


With debt levels still high and income sagging, where is the higher income needed to support higher debt and spending? Lowering the interest rate has enabled higher debt, but now that interest rates are negative (below the rate of inflation),they can't go any lower: the Status Quo has run out of "stimulus" and now must rely on manipulation and artifice--Mind Tricks--to persuade people a stumbling, stagnant economy is growing robustly enough that they should risk their future prosperity on debt-based consumption in the present.

Self-sustaining recovery or Mind Trick? We may not know for some time if the Mind Trick worked or not, but the real economy could rise up and shatter the illusion at any time. 



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Thank you, Lance C. ($20), for your wondrously generous contribution to this site--I am greatly honored by your support and readership.

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