Tuesday, July 9, 2013

The signature of incipient depression (take 2)

I almost titled this, “It’s the distribution, stupid,” but there’s more to it than that.  A while ago I published a piece called The signature of incipient depression that pointed out the similarity of the current period (still applies, two years later) to 1929, pre-The Great Depression:  namely, the very high total nonfinancial debt to GDP, and the extreme inequality of the income and wealth distributions.  Today I can add declining real incomes for the ~90+ percent as the third leg of the stool.

In a consumer-based economy, effective demand collapses when most people’s real incomes are falling, as they are now.  I’m putting up graphs of the three main elements of this signature of incipient depression, mostly in response to a stupid piece in Quartz from someone “refuting” Reinhart and Rogoff (here).  Not that they’re wrong, or that the No Exit situation that the fiscal authorities are in won’t prevent them from blowing the biggest debt bubble in world history over the next six years as posited in When will the financial singularity occur? ~2020.  Another six years might seem like a long time to kick the can down the road, but it would make this episode of ZIRP approximately as long as the previous one (1934-1946).

It is always possible for an economist—an ideological cheerleader—to miss the forest for the trees.  The most powerful fiscal remedies available to us now are steeply progressive income and wealth taxes, and a program of food and shelter and basic medical care in exchange for work for the dispossessed, who may be expected to become numerous if present trends continue.  Or perhaps a negative income tax with the elimination of the minimum wage.  And put health insurance on a hybrid single payer system so that everyone gets at least some coverage.

The point being:  The US economy still sports the signature of incipient depression.  As the focus ostensibly turns to fiscal policy for the remainder of the decade I suppose the best advice is to try to get on the gravy train if you can.  The next decade will be the Depression 2.0 decade, in all likelihood, the true test of democracy vs. fascism—we’re not there yet.  And given how piggy the 1 percent are world-wide we might not see much inflation until about 2020 either—except of course that rolling through asset markets.  My best guess is that the Feds will tase the labor market with a little more monetary tough love (also part of the “wash and rinse” cycle in the stock and metal markets, one for the Gipper, so to speak) so that the big boys can get nice and levered up for the big ramping up in asset markets to come in the second half of the decade.  Ordinary working people are hosed pretty much everywhere, it seems.  Just my guess.

The debt situation is worse if you look at all nonfinancial debt:

Here’s a longer-term picture of household income:

And that’s using the government’s phony hedonically adjusted inflation measure.

Friday, July 5, 2013

‘Animals spirits’ update: The Ben vs. Barack

With U = 7.6, same as last month, the topping process in animal spirits seems to be underway.  The adaptation level of U is 8.5, down 0.1 from last month.  I am assuming that U will stabilize for a few months and then shoot up as self-organized criticality in the labor market kicks in.  The interesting thing about this cycle, like the one in the early Seventies, is that consumer sentiment as measured by the Michigan index seems to be looking through the next slump to the next expansion already.


The political economy of the situation, in my read, is as follows:  Obomba would be better off to take his recession now so that the economy is coming back in 2016 for Hillary or whoever.  But the Congressional elections next year could swing radically Republican if the economy is in recession (as I expect it to be).  If Ben continues to taper, he may help the Democrat in 2016, but it may hardly matter, as the Congress will have gone to the Republicans and the people may be convinced that the Democratic (and democratic) agenda has failed, and they will opt for a “strong leader.” 

The one thing Republican administrations are really good at is shutting the economy down (reference).  But would be consistent with their ultimate agenda of bringing feudalism back to the Western world, IMHO. 

And since Ben is a servant of Wall Street, which today favors the Republicans, he will continue with the taper, executing a “wash and rinse” cycle on the stock and bond markets similar to that of the early Seventies.  The inflation gets going in a few years, along with a perhaps MMT-validated increase in deficit spending (see Warren Mosler’s profile in the NYT here), which is all of course consistent with my and others’ hypothesis of a credit super nova yet to come, as the sovereigns, slaves to the banks (at least in the West), compete in a race to debase.  We have Sornette’s forecast of the date for the phase transition in to what can only be a world-wide deflation as about 2020.  And all this is consistent with the very prescient prophecies of Strauss and Howe in the The Fourth Turning.

Interesting times. 

P.S.  I am still unemployed, so anyone knowing of opportunities for a non-derivatives oriented finance geek, please let me know.

Tuesday, July 2, 2013

When will the financial singularity occur? ~2020

Didier Sornette has some great stuff out now.  See his Ted talk and this white paper, “The Illusion of the Perpetual Money Machine,” in which he he pretty well demolishes the con game that the economics profession—slave to Wall Street—has been playing at the great expense of the people of the world.  I’ve written previously about the faster than exponential growth theory of singularities, financial and otherwise (see here).


The bad debt will be cleared.  Sornette indicates that his models show that the anticipated phase transition out of the growth era, originally forecast for 2030-2060 in his work with Johansen, has begun.

Andrew Jackson’s last words before dying were, “I killed the Bank!”

Where is our Andrew Jackson?