Reflections On Recession Are A Very Real Affair
Alhambra Investment Partners, LLC | Nov 15, 2016 12:10AM ET
Where are we in history when the avowed Socialist (capital “S”) from Vermont is the only voice of reason for the Democratic Party in the aftermath of last week’s election? I don’t intend to make this some kind of political screed against one party or the other; I am on record numerous times claiming the America we live in of 2016 is a massive bipartisan scandal. But having seen the final margin of victory swing to Donald Trump from among a solid rust best collection of states cannot be lost on anyone, let alone Democrats as they begin to question what went wrong.
This is more than the Presidency, as populism makes its way on all levels of government and not just in the United States. But so far the response from that side has been predictably lamentable, with the epithets of racist, sexist, and especially xenophobia filling out too many score cards. And so it is left to Sanders to sound the voice of reason to try to register in what should have been easy to see and understand all along:
It is not good enough to have a liberal elite. I come from the white working class, and I am deeply humiliated that the Democratic Party cannot talk to the people from where I came from.
It’s not a question of what happens in the last week. The question is that she should have won this election by ten percentage points. The question is, why it is that millions of white working class people, who voted for Obama, turned their backs on the Democratic Party, and I think a lot of people do not think the Democratic Party is standing with them. That has got to change.
I would criticize Sanders for a lot of things, but he at least in this instance is standing for clarity and fact. On the other end are people like Paul Krugman who, in his emotional state , actually claims to be the spokesperson for not just the left but also now, suddenly, the center and right (some of).
So what do we do now? By “we” I mean all those left, center and even right who saw Donald Trump as the worst man ever to run for president and assumed that a strong majority of our fellow citizens would agree.
He goes on to argue that the US is doomed because of Trump, listing all of the ways in which he is absolutely sure (it’s math) that America just became irredeemable. Krugman even writes without any self-awareness, “we could see a slightly covert form of Jim Crow become the norm all across America.” Though he apparently has a crystal ball with which to soothsay the entire future of this country now set in stone, what also makes his list? The economy.
What he writes on that subject though is all future tense, with a little less emotion since last Tuesday. “My own first instinct was to say that Trumponomics would quickly provoke an immediate economic crisis, but after a few hours’ reflection I decided that this was probably wrong.” What Sanders, the socialist, knows that Krugman, the Nobel Laureate, clearly does not, indeed cannot, is that there is already an extended economic crisis and it is the one that put Mr. Trump in the White House. There is no need to scare Americans about what Trump would do to the economy when it is clear to them it has already been done.
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To Krugman and the legions in the media like him, this election was the failure of their opinions to sway voters to see the vast future of goodness that they have in store for everyone (at least for those who vote the “right” way). That has been the problem all this time, the economists who cry recovery at every instance who now wonder why voters don’t just vote the way they are told. For every grand economic scheme and plan, there is a Hollywood ending out there in the future, one in which the math is absolutely sure about – yet can’t ever seem to calculate the date of its arrival. The rest of America, and the world, has to eat and can’t cash a check delivered backward in time from some unscheduled future growth path.
It isn’t even as much a problem of projections as it is a steadfast refusal to account for our reality since 2007. Nine years is more than enough for whatever that will work should have long before now. From my perspective, the American people have been unbelievably patient, giving first Ben Bernanke the benefit of the doubt that he so clearly (to me anyway) had not earned and in fact should have led directly to his dismissal on the spot for 2008. The problem is and remains Economics (capital “E”).
In very basic ways it starts with very basic concepts. Still referring to the Great “Recession” as a recession is one of the first facets that must change. A recession is a temporary interruption in economic growth, a fact that almost every layperson easily understands with no need for formal regression mathematics. But even Economics has insidiously redefined recession so that the current definition no longer fits the word. Very quietly, behind the scenes, every orthodox institution from the IMF to the Fed to the CBO has pared back economic “potential” such that it is a literal fraction of its former path.
To an economist like Krugman, that is a mathematical result that only changes the formula for how to produce a recovery; for people like Sanders and Trump, it is a very real disaster that because of the mainstream redefinitions goes undiscovered and certainly unexamined. Economists and the politicians who rely upon them keep saying it will get much better if everyone just lets it play out when even their math says the people are right.
This is far more than semantics about the word recession; it even goes deep within markets, including some places where the agents that operate within them should know better. Some months ago I presented a chart from a presentation given by Larry Summers earlier this year that even now when I see it I cannot help but still be astounded by it. It shows the forward OIS curve and its history throughout the aftermath of the “recession.”
The best that can be said of what you see above is how markets may be fully efficient, but in order to reach that conclusion it would mean these markets were betting over and over on just how stupid and wrong the FOMC and economists would be.
What the history of the OIS curve shows is that what happened in 2008 was clearly not a recession, but that insisting it was had very real and distortive effects that still reverberate in important ways (stocks). It has the practical effect of shutting off the necessary inquiry into what is really wrong here, which is what the OIS curve actually displays in all its damning detail. As I wrote back in June:
It speaks directly to the idea of “efficient markets”; how can money markets, the very basis of the wholesale financial system, continue to be so wrong? The answer is that QE and the view of bank reserves as money for use in the real economy is and has always been mistaken. Therefore, the upward sloping OIS curve (the one that finds normalization “always” 6 to 9 months into the future) is a bet on bank reserves as money; the eventual shriveling of it is the same as we find everywhere else, from German bunds to US treasuries to eurodollar futures – monetary contraction.
But that leaves us with another contradiction that can only continue so long as the word “recession” remains the primary description. In other words, Dr. Summers wrote that it was “aggressive” policy action on the part of the Fed especially that saved us all from a 1929 repeat; but then later in his same presentation he shows another chart where the current economy is on track in just a few years down the road to underperform the 1930’s! They saved us at the one end, but we are doomed anyway at the other?
And the response from the likes of Paul Krugman is “just give it some more time” without, apparently, appreciating that time is not just the X-axis on these charts, it is a huge cost that accumulates exponentially. The clock struck down to zero long ago.
The word “recession” does not apply, and removing it from the vocabulary of current economics (small “e”) will have the effect of what the American people demanded of this campaign – the start toward honest answers. Everything about the last decade has been monetarily screwed up, starting with “subprime is contained.” Economists have been making these promises at every important juncture but still do not ever account for failing to deliver. “Trust us” is no longer a workable arrangement and no amount of “it’s for your own good” will restore such faith.
Ridding ourselves of the Great Recession is actually a step in the right direction, as small and pedant as it sounds. It would announce what a majority of Americans already know to economists who won’t so long as they define all our terms. In my view, socialism would be an even greater disaster (Europe anyone?), but at least the socialists are more advanced than the economists. They at least know what the problem is and seek to exploit it; economists can’t even be honest about it, as if we let them down somehow by not blindly accepting their view. After all, their dynamic equilibrium models check for heteroscedasticity and you likely don’t even know what that is. But while they narcissistically preen over their elegant creations, you don’t need to know what it is because you already know quite well it is wholly, irredeemably useless.
This is why the recovery is political. So long as politicians turn to Krugman and Janet Yellen for answers because they sound technically proficient, we will never get any. They still think the problem is the “right” mix of “stimulus” to overcome hysteresis or whatever demographic linearity they spit out of their regressions. Meanwhile in the real world, Americans are under no such illusions. They have to take care of their families, and they are fed up waiting for Paul Krugman to be right about how all his numbers remain so certain. The only number that truly matters is -$2.2 trillion, and that is the lower bound (below) cost of technocratic incompetence.
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