By: Jeffrey Snider
Real Clear Markets
January 24, 2014
It is becoming more obvious by the month, even by the day, that standards for economic comparison are being as devalued as any debased currency. You see it everywhere and in nearly every form of account. Where growth used to be common, it is now seen as nothing more than a wellspring of hope, drawn to in times of less sober analysis as nothing more than a warm memory of better days gone by. For the most part this has become completely acceptable, certainly in the mainstream. It is actively encouraged by the current authoritative paradigm, that we should urge to experience lackluster and even downright grateful to the “heroes” in Washington that it is not worse.
Federal Reserve Chairman Janet Yellen made the comment recently that she hoped to see 3% GDP growth in 2014 – hoped, as if that were some standard of excellence in which we have fallen only just short. Economic recovery used to be far more than unspecified reasoning for optimism, it used to be obvious and unquestionable.
The most recent summation of the holiday shopping season, once a bastion of blatant consumerism, has been relegated to the creative spin of modern economists. According to the Census Bureau, retail sales combined for November and December 2013 were 3% above the same months in 2012. It sparked celebration inside the economics profession, tinged with commentary over the resilient consumer, the same specious appeal to resiliency six years ago that governed similar expectations for salvation from the Great Recession. At least in 2007 such “resilience” was at least worth 5% retail sales growth during Christmas – and that included one month officially part of the Great Recession itself.
The holiday season in the darkening days of the dot-com bust was even better than 2013, with 4.1% growth in November and December 2000, only a few months from the start of that recession. Yet 3% now passes for something upon which a recovery foundation is built. In the decidedly non-recessionary years of 1999, 2004 and 2005, holiday retail sales advanced 9.7%, 8.4% and 7% respectively. Somewhere the context of economic growth was either willfully discarded or has been simply forgotten through the elongation of this most recent “cycle.”
It is not just retail sales, either, as the business investment segment of the economy continues to suffer under the regime of QE. In what has become so typical of this new age, firms from General Electric to IBM have seen revenue growth drop to zero or worse. In the case of IBM, revenue has been contracting steadily since the second quarter of 2012, a seven-quarter unbroken string, far surpassing the duration of the Great Recession itself. While there were certainly European and global travails included in those results, revenues from the Americas have shrunken along with the rest, shining a very skeptical light on the element of recovery in the conventional narrative. How can it be consistent that such major businesses, proxies for business fortunes themselves, can be under such negative strains while the major part of economic accounting looks for better fortunes only just ahead (this time they really promise)?
IBM is so very typical of exactly this kind of dichotomy. Revenue “growth” for the full year of 2013 was -5%. Net income growth was -1%, but EPS was up 4% (7% on a non-GAAP basis, which is increasing in popularity among corporate management; just another case of devaluing the standards of judgment). Free cash flow for the company, the truest measure of economic performance for any business, declined by a rather nasty $3.2 billion to $15 billion for the calendar year. What did IBM do with its declining fortune? The company “returned” $18 billion to shareholders in 2013, meaning that it had to dip into accumulated cash or borrow in order to do so; welcome to the corporate end of the QE paradigm.
I wish that were the end of the malaise, but it extends into every crevice of the economic system. Even employment, the one hope upon which every optimist rests his or her taper love, has seen diminishing expectations melded with this “new normal.” This past summer, the FOMC was using job growth of two hundred thousand per month shown in the Establishment Survey from the Bureau of Labor Statistics as evidence the economy was recovering sustainably. A real recovery would have seen double that pace, if not more once population growth was factored. But since employment has been the true restriction on fortunes outside of asset inflation, two hundred thousand will have to stand in as the new standard of recovery.
The connection here between reductions in what is deemed acceptable to define recovery in employment and the corporate results of the IBM’s, GE’s and WalMart’s of the world is direct and obvious. IBM, for example, with declining cash flow rates, will have to redouble its already unnatural focus on its cost structure lest its EPS growth rate slip further to zero, or head into negative. The stock price must be upheld over any other consideration, and so, given the billions needed for repurchasing, there can only be further reductions in headcounts rather than the labor utilization expansion Janet Yellen hopes to harness in reaching that miniscule 3% GDP mark.
By alternate measures, employment has been far less than even lackluster. Where the Establishment Survey stumbled badly in December, the Household Survey has been running at a third of the pace going all the way back to October 2012. Worse than even that, the official measure of the labor force shrunk year-over-year for the second month in the last three. The only time you ever see the labor force decline is recession.
This is a problem wholly different from the participation dysfunction that is now a fully accepted part of the reduction in economic standards. The unemployment rate can decline to 6.7% because population growth suddenly since 2009 no longer corresponds to the labor market and the professional economists of the world collectively shrug. But this is different – the decline in the labor force itself means that those that actually have made it into the official statistics as part of the jobs market have started giving up. It is one thing to be outside the labor force and become discouraged, but something far more sinister to be a member of the labor force, give up and exit. Prior to June 2013, the labor force itself was growing modestly, but certainly nowhere enough to absorb overall population growth. Since June, it has shrunk by an enormous three quarters of a million people. Again, such results are only associated with recession.
By any objective measure with any sort of wider context, the economy is either barely growing or recessionary. But because of the fact that we are now five full years into ZIRP and several QE’s later, we are led to believe this is the best there is; that the economy cannot possibly do any better. And worse, again, we should be grateful for it, because the fate of the economy might have been far worse had the philosopher kings of monetary mavens not stepped in heroically. Outside of stock prices, there is little empirical evidence that that is actually the case. And, as Venezuela is about to prove again, stock prices and economic fortunes can madly disassociate when currencies are in the throes of instability.
There are, of course, more than a few echoes here of the 1930’s. While the growth rates then actually do seem impressive by themselves, the truth is that from 1933 to 1937 the economy had barely any recovery from the sheer collapse post-1929. Context matters. Of all the major countries suffering depression, only the United States and France were so far from their 1929 peaks by 1935. Total industrial production in Britain, for example, was 14% above the 1929 top by 1935; Italy had just regained that level; Germany was nearly there. The United States, by comparison, was still at only 79% gross production in 1935. Indeed, despite years of the New Deal, 1929-levels of employment were not achieved until World War II. Again, the statistics of the age do not match what is (or should be) commonly perceived of a healthy and recovering economy.
But that did not stop the Roosevelt administration from “taking all the credit”, not the least of which was the dollar devaluation. FDR is still largely believed to be the hero of the Great Depression; Hoover its villain. Never mind that it was Hoover that broke with all tradition and doubled the rate of government spending, including the encouragement of unemployment insurance to 18 million, created the RFC and the Home Loan Banks, Hoover was to be cast as a “do nothing.”
Hoover himself traced this narrative back to the 1944 election where FDR sought to paint Thomas Dewey and the Republicans as similar, a mouthpiece of “Hooverism.” It mainly stuck and has become the convention for all cursory examination of the age.
What really struck Hoover about this scapegoating was that from his perspective the economy was, by mid-1932, on its way to recovery. There is, of course, dispute over this potential counterfactual, but there is no dispute that the collapse period of the Great Depression featured a “double bottom”, with the first occurring right where Hoover begins his allegations. The usual caveats apply here in that Hoover is far from an impartial source of economic espousals, particularly since this line of inquiry concerns his ultimate legacy, but that does not mean there is a dearth of evidence; far from it.
The third, final, and perhaps most damaging wave of bank failures began in December 1932 and ended a few months later in early February 1933. Again, convention has it different to where the bank panics suddenly and magically ceased once FDR took office in March 1933, proclaiming the national bank holiday. That convention comfortably fits the idea that Hoover did nothing while FDR was a champion of action, but Hoover himself placed blame for that third wave of failures on FDR’s implicit dollar agitation. He claimed that FDR had promised on the night of the election he would not “tinker with the value of the dollar.” Yet there were public pronouncements and debate about whether that would be a part of the new administration, with FDR remaining conspicuously (alarmingly for some) silent (in public) on the matter.
Such dollar agitation acted, for Hoover, like the silver agitation of the 1890’s, to create an air of monetary instability, coming so close to previous waves of panic, that could not help but ignite further travails. As coincidence would have it (or maybe not), the Democratic Party platform for 1932 included both a reference to defending sound currency “at all hazards” but also, contradictorily, a call for an international conference to consider the “rehabilitation of silver.” Maybe that was pandering, but what truly mattered was if the public believed dollar agitation serious, or, for that matter, what it all signaled about the coming overhaul of the economic and monetary paradigms.
As the renewed banking panic engulfed a wide spectrum of institutions, Hoover called upon FDR to join him in developing policies of counteraction (again, contra the established Hoover-villain narrative) but only with the explicit promise from FDR to adhere to the gold standard and a balanced fiscal budget. FDR, while not taking any established public position at all, refused on both accounts. Without any external event or shock to offer an explanation for this third wave, Hoover’s position remains more than plausible, particularly given the timing of the panic wave – just after the election. Further, given that FDR actually did devalue and almost immediately, is it not likely that suspicions of such would have become common ahead of time? Whether or not it was the proximate cause of those failures and renewed panic is unknowable, but there is more than enough to make such a suggestion and have it reasonably countenanced.
What the Keynesian/underconsumptionist paradigm cannot fathom is the element of monetary instability that undercuts any potential for economic advancement; at least one without that insidious credit component. Modern economists assume that people always act rationally, defined as such only in the manner of some number on a spreadsheet. If the practitioners of Keynesian monetarism change an economic input, the public is expected to respond according to the formulaic path transcribed by their elegant math. That people respond via emotion is contrary to the limits of that misguided sense of “rationality” and math, so such problems are simply ignored. And when economic agents as humans do respond as humans tend to, they are decried as “hoarders” or “sufficiently hypnotized by the metropolitan press.” Elitist intervention is always positive.
To get past this subjective simplicity requires more than a little massaging of the narrative. If, for instance, the Fed injects trillions in monetary instability units upon the economy, explicitly extolling and cajoling them in asset prices, and the economy fails to reach the expected value on the spreadsheet, there must be something wrong with the economy since it cannot be the spreadsheet approach. As such, economists invent all manner of absurd excuses, such as a negative natural interest rate, in order that the economic paradigm upon which their livelihood rests is preserved. A full part of that is lowering the standards of what constitutes acceptable economic function.
As much as these specialists of economic canon project their abilities as something like science, the reduction of economic benchmarks for success shows that it is nothing more than ideology, more closely operating as religion than science. Science is observation, leading to predictable and replicable results. Everything about the past five years is the opposite for the orthodox economist. Everything about the Panic of 2008 was as well – there was no predictability nor replicability in any of the orthodox models or theories. It is all blind faith.
The economy is falling apart, not recovering as you hear from every mainstream outlet. It is a false narrative given cover by the fact that the very definition of recovery has been altered into something that only a few years ago would be easily recognizable as dire malfunction. Even in the highly adjusted statistical economic accounts that show as such are now couched as if they are representative of the opposite, as their meaning has been subverted by this ideology. And where measures of economic accounts clearly diverge from that narrative, such as the labor force participation and the more recent decline in the labor force itself, it is ignored as irrelevant to the heroic monetary chronicle.
It is hard to believe but we are now three and a half years past former Treasury Secretary Tim Geithner’s warm welcome to the summer of recovery, and yet are still looking for it. Every year that sentiment is rehashed in the idea that “this will be the year.” And, like clockwork, it never is. On the political front, there is the same FDR-type spin that the Obama administration “saved” the economy and is responsible for its fortunes hence. The only way that becomes valuable or even viable in terms of politics is if you so reduce the standards of economic judgment to be so easily surpassed by even recessionary conditions. But that is all expected as a part of politics.
What is extremely unsavory is that there is no Hoover. Certainly the vilification of Hoover lives long past its usefulness; history is written by the victors so the “lessons” of bucking the conventional tide in political terms has led to the opposition engaging in self-castration. There is no one now who will forcefully stand up and reject this reduction of economic standards and challenge the orthodoxy that sprung up from that very age. The Fed and its monetary policy are as owned by the left as the right, as if there is no alternative to such statism. Sure, there are some Republicans that decry the decrepit state of the economy, but not in such force as to deny its legitimacy and the means that got it there. Republicans are as captured by the allure of economic “science” as any other generic brand of the political class, largely because it is wholly self-serving and self-reinforcing throughout.
This is not to say that Hoover was right in what he had tried, a miniature version of the New Deal. Orthodoxy in the economics profession is not just accepted uncritically by both sides of the political aisle, it is accepted, suspiciously perhaps, by the American public. At the very most, or the highest form of dissention from it, lies only apathy. In November 2013, Rasmussen conducted a poll in which they extrapolated that 74% of adults “favor auditing the Federal Reserve and making the results public.” Discontent to be sure, but to what even minor effect? Maybe Americans can see through the transparent attempts to redefine the economy, but that is as far as it gets right now. The only real hope is that such widespread disfavor becomes channeled into true retribution when the next crisis ravages the system, as it surely will without any real opposition now to stem the cresting tide. Maybe that will even occur before, pace Orwell, recession is redefined as recovery.
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