Do you look at our economy and see a world of wonders? If not, look here for a clearer picture…

Larry Kummer, Editor

13 years ago

Summary: Among the many goals for the FM website, two are perhaps the most important. First, we are too often lost in the now. Buried in the daily multimedia tide we lose sight of our track — the trend of events, which we see only by frequently looking backward along the path. I believe the FM website does that well. Second, the posts here show that we live in an age of wonders. Things that the news presents as mundane — like QE3 — are in fact experiments of a kind and scale seldom attempted in history (that is important to conceal about QE3, since the priors are mostly failures, often disastrously so). The comments show no success at this. Here’s another attempt.

This is a the third in a series about the Fed’s decision not to taper, an event highlighting the extraordinary nature of current economic policy. Other chapters in this story:

Wind the tape back back to January 2011. Twenty-one months after the trough of the crash, months of slow recovery. Most economists were still looking for the “V” shaped recovery, including those at the Fed. The Fed Forecast of January 2011 (when they started posting their forecasts) was for 2013 GDP growth of roughly 4.1%, — a rate last seen in the glory year of 2000 (the Fed annual forecasts are Q4 YoY, not the usual calendar year YoY).

Fast forward to the Fed Forecast of September 2013: During those elapsed ten quarters real GDP has grown at a rate of 1.95% (slightly below the 2.0% stall speed), hence the repeated rounds of fiscal and stimulus during this time. The current forecast for 2013 GDP has fallen to 2.1%. This is a marvel, deserving your contemplation:

From article by Scott Minerd of Guggenheim Partners, 19 September 2013

But these disappointed hopes and failed predictions are not the interesting aspect of our situation (few mainstream economics have been much more accurate). Hope is cheap and errors are common. Consider what has been expended in this so-far failed attempt to get economic liftoff. What has the government done to get that stable but slow growth of 1.95%:

the Federal borrowed and spent $2.6 trillion, an increase of 22% — at an annual rate of 10.2%,
the Fed boosted the monetary base by $642 billion, an increase of 24% — at an annual rate of 11.7%

Strong medicine, indeed. With small results. Now we see why the Fed responded to the stalling of growth in 2012 Q4 (near-zero GDP) with the extraordinary QE3; the conventional tools were failing as we slid towards a recession.

Do not interpret this poor result to mean that US economic stimulus was in vain, as conservatives often do. Imagine if your daughter lies in a hospital bed with a serious illness, and the doctor reports that the treatment resulted in a slow improvement. Do you fly into a rage and demand that the treatment end — since there should be no treatment unless its provides a fast cure? Of course not.

But this modest result despite intense medicine shows the seriousness of the “illness” that infects our economy. Our leaders hide this from us because they see their job as building “confidence”. It’s a strategy used by adults to manage children, an aspect of our increasingly dysfunctional political apparatus.

It must inevitably fail as we (eventually) learn to regard our leaders as compulsive liars — a process well developed today among both conservatives and liberals. See the widespread skepticism about the government’s economic data, and the increasingly contemptuous attitude towards our supreme economic manager: the Fed Chairman (appointed, and hence inherently a low-legitimacy figure despite his vast powers).
This behavior fundamentally corrupts the relationship of citizen and representative. Leaders will have contempt for people they manipulate. Citizens cannot participate in governing when the information they rely upon is false.

Another important detail

In January 2011 the Fed believed long-run growth of 2.4% – 3.0%. Now they have smaller expectations of 2.1% – 2.5%. Only 1/8 slower. But such small differences add up over time, and point to a disturbing question. What if the long-run trend continues to darken? Are we becoming Japan, with one lost decade following another?