Hark! Hear the buzz?
It’s the sap of the economy stirring.
Animal spirits are back on the prowl.
Just this week, a Schwab analyst argued that the recovery would be much stronger than expected.
Down in the federal maternity ward you can hear the squall of new life as Team Obama slaps cold flesh and breathes life into clammy infant lips.
Recovery is abornin’
How Green Are Our Shoots!
Thus say both Chairman Ben Bernanke and Treasury Secretary Tim Geithner. And the public believes them. How come?
It all began in March. In the first televised interview by any sitting Fed chairman in 20 years,1 Bernanke used the term, “green shoots” for the first time. He pointed out that the Dow Jones index had recovered from 12 year lows in 2008 and the banking system had stabilized. No more big banks would fail, he predicted.2
Two months later, His Timness echoed Big Ben. Geithner cited reduced spreads on corporate and muni bonds, the reduction in costs in credit protection at the big banks, and smaller risk premiums in the interbank market. He too said the economy was recovering.3
In June, World Bank President Robert Zoellick joined the ‘shooters.’
Zoellick is a former US trade representative notorious for forcing US government subsidies and trade policies inimical to small farmers onto emerging markets. Zoellick noted “signs of global recovery,” but cautioned that they might be killed off if protectionism were adopted.4
Translation: foreigners had better not object to US government-managed trade policies…or the global recovery will fold.
Put out… or look out.
Zoellick added his own revealing metaphor to the shooter lexicon: “Right now there is a low-grade fever; it isn’t full influenza, but we need to keep a close watch…” [my emphasis]
Oddly, Zoellick’s own employees at the World Bank contradicted their boss’s assessment in a report only a couple of weeks later. (See “World Bank Global Economic Outlook” below.)
By then billionaire hedge-fund manager George Soros was also seeing green. And in July, chief wonk of the Obama economic team Lawrence Summers detected greenery in remarks to the Peterson Insitute for International Economics.
Green shoots were now being sighted by everyone:
- In July the International Monetary Fund published its World economic outlook update. The Fund revised expected global growth in 2010 upward to 2.5%. The main source of the improvement, it claimed, was a brightening outlook for Asia.
- Simon Johnson, IMF economist–turned-Peterson-Institute-spokesman-turned green-shooting-star even went on PBS to announce, “we are turning some sort of corner.” (August 20, 2009)
- Surveys of economists and business leaders in the summer showed that, in contrast to only a few months earlier, slightly more than half thought that the economy had bottomed.
Question: How can a depression heralded as equal to or worse than the Great Depression, a depression described as a ‘reckoning’ for over a quarter of a century of economic misdeeds, correct itself in less than a year?
Answer: It can’t.
Yet, by mid-year, that’s exactly what pundits were telling the public. And that’s exactly what the public was beginning to believe. Not surprisingly, by mid-year, stock markets the world over had rebounded sharply.
White Hats and White Lies
But the economy hadn’t really turned any corners. What was unfolding was a giant sleight-of-hand. The “good guys” of the liberal corporate-state were pulling a fast one, doing two contradictory things at the same time.
On one hand, Team Obama had to admit the enormity of the crisis, in order to justify the size of its own rescue efforts. Thus Tim Geithner in his statement to the banking committee in May took care to note the following:
1. The economy had lost 2.1 million jobs from December to February ’09, the largest three-month decline since 1945. (the second-largest three-month decline in 1975 was only half as big).
2. GDP fell at an average annual rate of 5.9 percent in Quarter 4 ’08 and Quarter 1 ’09 — the fastest six-month rate of decline since 1958.
3. Even before policy changes, the Congressional Budget Office was projecting a budget deficit for 2009 well in excess of a trillion dollars because of the weak economy.
4. The US faced economic problems of such a “unique character” that Congress had had to adopt the largest fiscal stimulus package in the nation’s history, at 5% of GDP.
On the other hand, Team O also had to pretend that the rescue had improved things dramatically or people would ask what the point of it was.
The Obamites managed to pull this off with a slew of white lies.
Some of the biggest ones:
Fudge One: Goldman Sachs had a great quarter, making a profit of $3.5 billion and the government made $1.4 billion on its investment in Goldman Sachs. The government also got a 15% return on its investment in the eight biggest banks.
Truth: Goldman had a great quarter only because it moved its reporting calendar to cut out December 2008, when it had a loss. And the goverment only made a profit on the TARP money it gave to Goldman because
- It funnelled more money via the bail-out of insurance giant AIG to AIGs counterparties, including Goldman (which took in $13 billion of the AIG money).
- Warren Buffett made a pre-TARP financial investment in Goldman.
- Goldman got the benefit of exceptionally low interest rates from the government at the expense of savers and to the benefit of borrowers.
- Goldman was issued FDIC-guaranteed bonds.
Without that extra welfare thrown at it, Goldman would actually be broke, not showing a profit. Ditto for the other banks.
Fudge Two: The labor market is getting better because jobs are growing. The unemployment rate fell from 9.5% in June to 9.4% in July.
Truth: That number only shows a slowing in the growth of unemployment. And even that small improvement has been offset by other aspects of the labor market that are worsening quite sharply:
- The duration of uemployment is increasing.
- Temporary jobs are declining.
- The percentage of the eligible population receiving unemployment insurance has increased (0.1 percentage point to 4.7%. by September).
- The four-week moving average of initial claims has moved to its highest level in a month5
Even when jobs have been added, they’ve been created by government spending and they’ve been in areas like education, health, and government. In the purely private economy, in manufacturing, construction and retail, job losses have been huge.”6
Note: Recent improvement in the ISM (Institute of Supply Management) Index that signals expansion of production (and thus hiring) also needs to be discounted against the huge price inflation an increasingly pressured dollar will entail. That’s beside the effects of a hike in the Federal Funds rate that’s bound to follow a dollar crashing scenario.
Note also: The ISM is a leading indicator of executive expectations for future productions, orders, inventories hiring, and deliveries.
Fudge Three: Increases in real personal income in April and May will increase consumer spending.
Truth: The increases were caused by tax-rebates and unemployment benefits kicking in, and most of it was saved, not spent (80 cents on the dollars). There was a temporary lift in consumer spending, but it petered out quickly. And as unemployment rises, benefits decline, and credit tightens in the future, consumption will decline even further
Fudge Four: The bank stress tests came out better than expected.
The bank stress tests led Ben Bernanke to conclude that nearly all of the banks had enough capital to absorb higher losses should the economy worsen, and that the Treasury stood ready to provide more.7
Truth: The bank stress tests used an unemployment figure of 10.3% (the most adverse case). But unemployment is likely to be 11% and above by next year. If you take into account discouraged and partially employed workers, some economists suggest the figure is more likely to be 16%.
Another point. The stress tests overlooked all the other ways in which the government was paying for the banks, through FDIC guarantees and cheaper loans, for instance.
Fudge Five: The housing market is improving.
In July, the Pending Home Sales Index was up 3.2%.
Another improvement was in the value of U.S. homes. In the second quarter that number fell year-on-year (the 10th consecutive quarterly decline), but it fell by a smaller amount than in the previous quarter, for the first time since 2007.
Truth: The improvement in home sales has been mostly in the lower end of the market and it largely reflects foreclosure sales and government credit, not real improvement in the market.
The slow-down in price decline has been offset by negatives in other areas:
- 23% of all homeowners owe more on their mortgages than their houses are worth.
- 22% of all home sales nationwide in June were foreclosure resales.
- 29.2 percent of all homes sold in June were sold for less than the owners originally paid.8
Loan problems aren’t confined to subprime. Prime mortgages are going underwater too.
Meanwhile, the market also has to deal with the decline in commercial real estate, which is undergoing one of the greatest contractions in retail in decades. Rents, even in the best urban shopping districts, have been declining.9
Beyond commercial real estate, there are also all the other plagues about to visit us, when personal loans, auto loans, and student loans tighten over the coming years.
Bottom line? There is no real basis for sustained optimism about the economy yet. Simon Johnson’s relatively upbeat assessment reflects only temporary inputs:
- the government’s reflation effort (that created cheaper credit)
- business write-downs (that created better balance-sheets)
- the business cycle (that leads to restocking and inventories rising)
Johnson cites low inflation as another positive factor. However, with all the money pumped into the economy (including the latest cash-for-clunkers scheme), that’s also unlikely to be anything more than temporary.
This harsh reality is reflected in the World Bank Global Outlook Report of June 22, 2009. It notes the following for 2009:
- Global growth is set to fall by 2.9%
- World trade is likely to shrink by nearly 10%
- Industrial production in rich countries will drop by 15% from August 2008
- Developed economies will contract by 4.5% in 2009 and grow only in 2010 and 2011
- The US economy will decline by 3%
- Private capital flows to developing countries are likely to be halved, from $US 707 billion (2008) to $US363 billion (2009)
- Industrial production in developing countries, excluding China, is set to fall by 10%
- GDP growth in developing countries will fall from 5.9% (2008) to 1.2%.
A Verbal Pandemic Infects the Economy
Given this underlying reality, the media’s success in manipulating market sentiment has been nothing short of astounding.
And all it seems to have taken was the viral proliferation of a single meme. Call it a verbal pandemic.
Go back to March, when there was a second rescue of AIG and Citi in the offing, the Madoff investigation was expanding, and the US had a face-off with China.10 Fear was widespread and consumer and business confidence were at multidecade lows.
To take one indicator, Google searches for “economic depression” were four times what they were before the crisis broke in 2008.
Then Bernanke came out with the phrase, “green shoots.” After he introduced it, it showed up 3,123 times in news articles that month. Compare that to 436 in February (according to Nomura Holdings Inc. research).
Bulls and bears both used it. It was applied to the Israeli-Palestinian conflict and to the Iranian demonstrations.
In four months, ‘green shoots’ had grown seven-fold. Today, a Google search for the meme fetches 3.31 million hits.
As the phrase spread across the media, Bloomberg noted that business and consumer confidence spread with it. Sentiment changed. People stopped panicking and started talking about buying opportunities. It was that change in mood that let administration economists build their flimsy case for economic recovery.
Take a look at Summers’ list of improving indicators in his speech at the Peterson Institute on July 17. You’ll see the proof. At least five of the metrics Summers cites relate to sentiment. I’ve highlighted the relevant words.
- Most businesses are now expecting better times, not worse, as they’d expected 6 mths earlier.
- Consumer sentiment is improving.
- Options are showing a less than one percent chance of the Dow falling below 5000 in 2009 (they were once showing a better than 15% chance).
- Private forecasters are expecting positive growth at the end of 2009.
- Google searches for economic depression are back to normal. (Yes, that’s on Summers’ list).
Let me repeat this.
It took two simple syllables, neither beyond the reading ability of a pre-schooler, for people to discount the hard evidence of the numbers and the harder evidence on the streets in favor of a sales pitch by the government.
We might even go a bit further. The stimulus by itself can have done no more than buy time for the banks and take the pressure of the interbank market. It’s taken sustained propaganda for banks and businesses to regain enough confidence to operate.
And they’ve regained confidence not in the economy, but in the government.
In brief, a story-line two words long shows up rational man of for a fiction and a fraud. Economic man, the maximiser of his self-interest, turns out not to exist.
Of course, outside economic text books, he had never existed. Man, as we find him in the world, adds up numbers as an afterthought to his feelings. When he feels good, he massages his numbers upward. When he feels bad, the numbers are downcast with him.
Economists who have caught on to this know that what they practice is no science of enlightenment. It is a black art. The knowledge keeps them humble.They stick to describing things the way things actually work. They look just ahead of their noses and count themselves lucky if they can balance their check books at the end of the day.
But government economists labor under the delusion of omnipotence. To a man, they believe they can make bull frogs sing in tune and bats bathe in the sunshine. It isn’t enough that their theories blew up the market. For that alone, lesser men would have cut open their veins or thrown themselves under a passing tram.
Now the delusion is they can fix it. And that is where the meme of ‘green shoots’ figures. It’s task was not so much to boost confidence in the markets as it was to boost confidence in the ability of government experts to fix markets.
For that, visible success.. or even marginal competence.. is no longer needed. The old rain-men had to make rain or they were fed to the lions. The rain-men of today can produce drought… or famine, or even plague and they become lions.
The more they fail, the more they are believed. When they have been completely refuted, they become Nobel laureates. They may not know what ails the market, but they know for certain it takes a village of economists to fix it.
Or, as economist Robert Samuelson put it in a sharp criticism of Summers’ speech at the Peterson Institute: “If the president and his allies claim often enough that their policies have succeeded, most Americans may believe them.”11
- CBS, 60 Minutes [↩]
- AFP, March 15, 2009. [↩]
- Tim Geithner, Statement before the Senate Banking Committee, May 20, 2009. [↩]
- Reuters, June 8, 2009. [↩]
- Thomson Reuters, September 3, 2009. [↩]
- Brown manure not green shoots,” Nouriel Roubini, Forbes, July 9, 2009. [↩]
- AFP, “Hope is alive for ‘green shoots’ as stress tests trigger optimism,” May 11, 2009. [↩]
- Portfolio.com August 11, 2009. [↩]
- Colliers International Spring 2009 Retail Report, May 14 2009. [↩]
- “Nightmare on Wall Street,” Lew Rockwell, April 1, 2009. [↩]
- “Summer’s Spin: We Did It,” Newsweek, July 17, 2009. [↩]