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
- It will take a long time
- Until then we will experience deflationary forces
- No rising inflation, let alone hyperinflation
- Most important, we are in the fourth wave of a cycle
- 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.
- A picture of the post-WWII debt supercycle, 26 September 2008
- Important: Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
(2) Until then we will experience deflationary forces.
- Important: The geopolitics of inflation, an introduction, 17 June 2008 — Rising energy & food prices are deflationary today.
- The Coming Global Stag-Deflation (Stagnation/Recession plus Deflation), 28 October 2008
- 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
- 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.
- Can Obama turn America into something like Zimbabwe?, 22 February 2010
- The Fed is not wildly printing money, as yet no hyperinflation, we’re not becoming Zimbabwe, 2 March 2010
- Why the U.S. cannot inflate its way out of debt, 15 March 2010
- We can try to inflate away the government’s debt, but we’ll go broke before succeeding, 16 April 2010
- Inflation is coming! Inflation is coming!, 7 February 2011
- More invisible signs of looming US inflation!, 22 February 2011
- Inciting fear of inflation in our minds for political gain (we are easily led), 28 February 2011
- 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,
- Important: About the US economy. Where we are. Where we’re going., 17 February 2010
- 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.
- 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.
- A lesson from the Weimar Republic about balancing the budget, 10 February 2010 — Zombie economics, bad advice repeated each generation
- Keynes comments on our new-found love of austerity, 21 June 2010 — Lessons from the past which we refuse to learn
- About the morality of saving, 28 July 2010 — No, it’s not always a good thing.
Recent articles about Europe’s austerity policies:
- “Fiscalization Watch“, Paul Krugman, blog of the New York Times, 25 August 2011
- “Is austerity killing Europe’s recovery“, Washington Post, 1 September 2011