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Important information in today’s jobs report, telling us about our past and future

2 September 2011

Summary: Today’s jobs report has important lessons about the economic cycle that America remains locked in.  These are blindingly obvious lessons, which we refuse to see, which is why we remain locked in this cycle.

Today’s jobs report astonishes Wall Street because they refuse to see the nature of the processes that started in 2007. Many mainstream economists (e.g., Paul Krugman, Richared Koo of Nomura, George Magnus of UBS, those at the Levy Institute) correctly saw that we had started a process of deleveraging – a process fundamentally different than the business cycles of the post-WWII era.  But despite their consistently accurate forecasts, they’ve been ignored in favor of those who have consistently made incorrect forecasts (e.g., rising rates, inflation, sustained recovery).

Government stimulus programs treat the symptoms and buy time for reforms to address the underlying problems.  But we have made no reforms, due to political pressure from the financial sector and the Republican’s adoption of Lenin’s “the worse, the better” tactics.

The stimulus programs mitigate the pain but also slow the deleveraging process.  So we grind along.  Painfully and slowly.

Articles on the FM website  during the past four years have described and forecast this process. American’s inability to accept its inevitable consequences are shown by the response to these events (the incredulity and hostility seen in the comments).  My favorite is Glenn Reynold’s (the Instapundir) response to the recession: don’t prepare for the downturn, go shopping!  In effect, be a grasshopper, not an ant.  See  this post of his recommendations as we entered the second year of the recession and this post as we entered the third year.

The key aspects of this process

  1. It will take a long time
  2. Until then we will experience deflationary forces
  3. No rising inflation, let alone hyperinflation
  4. Most important, we are in the fourth wave of a cycle
  5. The most serious risk:  a large policy error

(1)  It will take a long time

It will run until the excess household debt is worked off.  That is, paid down, defaulted, shifted to somebody else (e.g., socialized) or inflated away.

(2)  Until then we will experience deflationary forces.

  1. Important:  The geopolitics of inflation, an introduction, 17 June 2008 — Rising energy & food prices are deflationary today.
  2. The Coming Global Stag-Deflation (Stagnation/Recession plus Deflation), 28 October 2008
  3. Economic theory as a guiding light for government action in this crisis, 10 March 2009 — Some economists of the Austrian school correctly understood this cycle
  4. All about deflation, the quiet killer of modern economies, 19 July 2010

(3)  No rising inflation, let alone hyperinflation

Despite the hysteria of the inflationistas, we will not see rising inflation let alone hyperinflation.   Since they are blinded by their ideology, they will continue to issue monthly warnings about the real soon coming apocalypse.

  1. Can Obama turn America into something like Zimbabwe?, 22 February 2010
  2. The Fed is not wildly printing money, as yet no hyperinflation, we’re not becoming Zimbabwe, 2 March 2010
  3. Why the U.S. cannot inflate its way out of debt, 15 March 2010
  4. We can try to inflate away the government’s debt, but we’ll go broke before succeeding, 16 April 2010
  5. Inflation is coming! Inflation is coming!, 7 February 2011
  6. More invisible signs of looming US inflation!, 22 February 2011
  7. Inciting fear of inflation in our minds for political gain (we are easily led), 28 February 2011
  8. Update on the inflation hysteria, the invisible monster about to devour us!, 15 April 2011

(4)  Most important, we are in the fourth wave of a cycle

Slowdown, fiscal and monetary stimulus, recovery, euphoria, stimulus effect fades, slowdown, fear, stimulus.  Each dose of stimulus is larger than the preceding one, has less effect, has a shorter duration.  We are in the fourth wave.  The Bush stimulus in early 2008.  The Obama stimulus programs of Q1 2009 and Q4 2010.  What happens if we do not apply another dose, or if it is delayed or small?  We might learn soon.

Perhaps the economy will muddle through.  Perhaps we will see positive feedback creating a downward spiral:  increased economic stress, breaking components of the financial system, rising stress, more breaks — then drastic government action.  Fear of this produced the first three stimulus programs,

  1. Important:  About the US economy. Where we are. Where we’re going., 17 February 2010
  2. We are following Japan’s path of decline. The real test comes later this year., 23 June 2010

(5)  The most serious risk:  a large policy error

Some economists of the Austrian branch (and their modern cousins, the Austerians) that “A depression is for capitalism like a good, cold douche.”  This belief hampered treatment of the Great Depression, with calls throughout for a balanced budget and lower government spending.  After a powerful recovery, their policies were implemented in 1937 — causing a deep relapse which was cured only by spending for WWII (the ultimate stimulus: borrow, build, blow-up).

The high level of economic stress and increased partisan conflict about economic policy combines into a receipe for either policy gridlock OR bad public policy measures. The latter is likely due to the adoption by political leaders in the US and Europe of false economic beliefs about the causes of this deleveraging cycle (No, it was not too-large government debts or deficits. Nor was it bad mortgage lending by the government-sponsored enterprises) — and solutions (austerity does not help without currency devaluation and/or interest rate cuts). Bold but wrong steps can have awful consequences.

  1. Fetters of the mind blind us so that we cannot see a solution to this crisis, 1 April 2009 — Repeating the mistakes of the 1930s because we don’t remember them.
  2. A lesson from the Weimar Republic about balancing the budget, 10 February 2010 — Zombie economics, bad advice repeated each generation
  3. Keynes comments on our new-found love of austerity, 21 June 2010 — Lessons from the past which we refuse to learn
  4. About the morality of saving, 28 July 2010 — No, it’s not always a good thing.

Recent articles about Europe’s austerity policies:

  1. Fiscalization Watch“, Paul Krugman, blog of the New York Times, 25 August 2011
  2. Is austerity killing Europe’s recovery“, Washington Post, 1 September 2011
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5 Comments leave one →
  1. 2 September 2011 4:23 pm

    “But we have made no reforms, due to political pressure from the financial sector and the Republican’s adoption of Lenin’s “the worse, the better” tactics.”
    …….
    Timely FM. Nice summary. Enough links to fill a weekend of study. Good work.

  2. Breezy permalink
    5 September 2011 1:45 pm

    In regards to “large policy errors” (IE embracing austerity) ..
    Can you give me any reasons why Bernanke, a supreme student of the depression, would not push for stimulus? If the true lesson of the depression is to apply stimulus shouldn’t he be pressing for stimulus? This economy is on his watch, he owns it. You would think that if he believes that stimulus is the way he would at least be somewhat vocal about it. He would be correcting congress, he would be building public consensus for stimulus, he would be pushing the white house to demand stimulus.

    Instead, he has acted quite the opposite. His actons/inactions baffle me and the only reason I can discern from his behavior is that he has a different take on the lessons of the depression. Early in this recession/depression the Obama Administration was all about stimulus. Giethner and company were talking strong stimulus up openly, stating that we wouldn’t repeat the mistakes of the depression, of withdrawing stimulus too soon, yet here we are.

    Could it be that we haven’t reached the true tipping point yet because external events such as the EU problems have not yet played out?

    There seems to be an acceptance of “continued pain”, almost like a desire to have things get worse before acting.

    • 5 September 2011 2:24 pm

      Ben is Chairman of the Fed. He’s not King of the Fed. Continued monetary stimulus (the only kind under the Fed’s control) has strong opponents on the Fed Board and Open Market Committee. Also, the Fed has only weak legitimacy, a problem going back to President Jackson and the First National Bank. Opposition to monetary easing is strong among senior political leaders in Washington.

      This has been the story since the start of the crisis. As Paul Krugman explains:

      “So, austerity now now now — none of this waiting until recovery is well underway. And never mind concerns about deepening the slump – the confidence fairy will come to our rescue, and anyway, pain is good for the soul. What’s so striking about all this, from an economist’s point of view, is the absence of anything that sounds like a model. It’s all about virtue and vice, with just the assumption that virtue will be rewarded.” (source)

      “What gets me, always, is that there is nothing mysterious about this crisis; nothing is happening that someone who read Paul Samuelson’s original, 1948 edition of his textbook would find puzzling. And old-fashioned textbook analysis tells us quite clearly what we should be doing about it. Hint: not austerity.” (source)

  3. 6 September 2011 4:19 am

    “almost like a desire to have things get worse before acting.”

    More than a desire, much more. There is simply no turning back for these gents. I do not expect that they will “Act”.
    There is no mystery here. They have a plan and only one plan and if they truly wanted to see the base economy recover via a typical Stimulus we would have seen it way before now. No.

    These gents will print and attempt to re-inflate asset values until it happens. To NOT do so is to allow the Employers of the US Fed Reseve to face the reversion to the mean (or “deflation”) in all their asset classes.

    And when will Trichet reverse his course? Never until forced.

  4. Breezy permalink
    6 September 2011 12:32 pm

    Thanks for the replies Greg and Fabius. Sounds like we’re truly screwed by self interests even on the Fed board. I guess there really is no body with any power to do the right-correct thing. So austerity will continue to be the order of the day. Voluntary economic retraction.

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