Beyond Human Capacity
“The United States of America, right now, has the strongest, most durable economy in the world,” said President Obama, in his State of the Union address, on Tuesday night. What performance metrics he based his assertion on is unclear. But we’ll give him the benefit of the doubt.
Photo credit: Natacha Pisarenko / AP
Maybe this is so…right now. But it isn’t eternal. For at grade, hidden in plain sight, a braid of positive and negative surface flowers indicate an economic strike-slip fault extends below. What’s more, the economy’s foundation dangerously straddles across it.
Actually, it probably isn’t so – the Atlanta Fed’s GDP Now measure, which has proven surprisingly accurate thus far, indicates that the US economy is hanging by a thread – and the above chart does now yet include the string of horrendous economic data released since January 8.
Something must slip. A massive vertical rupture is coming that will collapse everything within a wide-ranging proximity. It is not a matter of if it will come. But, rather, of when…regardless of what the President says.
Here at the Economic Prism we have no reservations about the U.S. – or world – economy. We see absurdities and inconsistencies. We see instabilities perilously pyramided up, which could rapidly cascade down. We just don’t know when.
Comprehending and connecting the infinite nodes and relationships within an economy are beyond even the most intelligent human’s capacity. Cause and effect chains are not always immediately observable. Feedback loops are often circuitous and unpredictable. What is at any given moment may not be what it appears.
Not Without Consequences
For instance, the Federal Reserve quadrupled its balance sheet following the 2008 financial crisis, yet consumer prices hardly budged. Undeniably, the Bureau of Labor Statistics’ consumer price index is subject to gross manipulation. We’re not endorsing the veracity of the CPI.
We’re merely pointing out policies have been implemented that have massively increased the quantity of money, yet we can still get a hot cup of donut shop coffee for less than a buck. Obviously, the effects of these policies have shown up in certain assets…like U.S. stocks. That’s not to say they won’t still show up in consumer prices. They most definitely will.
One should perhaps not be too surprised that most prices are far from declining – even when measured by government methods that are specifically designed to play price increases down in order to lower the growth rates of so-called COLA expenses (and leaving aside the fact that the so-called “general level of prices” is a myth anyway and actually cannot be measured) – click to enlarge.
The point is no one really knows when consumer prices will rapidly rise. The potential is very real. Like desert scrub tumbling along a highway edge, one little spark could send prices up in a bush fire. Moreover, the longer the Fed can seemingly get away with their efforts to inflate in perpetuity, the greater the disaster that awaits us.
In the meantime, their policies are not without consequences. Price distortions flourish to the extent they appear normal. Nevertheless, upon second glance, apparent incongruities greet us everywhere we look.
The sad fact is an honest day’s work has been debased to where it’s no longer rewarded with an honest day’s pay. At the same time the positive effects of productive labor, diligent savings, and prudent spending now take a lifetime – or more – to fully manifest.
Conversely, the negative effects of borrowing gobs of money and taking abundant risks can masquerade as shrewd business acumen for extended bubble periods.
Even when deflated by the government’s own flawed “inflation” measurements, real median household income is back to where it was 20 years ago already. This is definitely not a sign of economic progress. In fact, this datum is testament to how much capital has been malinvested and hence wasted due to Fed policy-inspired serial credit and asset bubbles – click to enlarge.
During an economic boom, particularly a boom puffed up with the Fed’s cheap credit, madmen get rich. They borrow money at an artificial discount and place big bets on rising asset prices.
They don’t care they are placing those bets within a dangerous seismic zone. The rewards are too great. Eventually asset bubbles always exhaust themselves. Price movements reverse. They stop inflating. They start deflating.
Subsequently, as the bubble exhales, the risk taking beneficiaries of the expansion are exposed. The downside, no doubt, is less pleasant than the upside. Ask U.S. oil shale producers. Just 18 months ago they were raking in cash hand over fist. Lenders were tripping over themselves to extend credit for fracked wells.
But how quickly things change. Oil prices fell below $30 per barrel on Tuesday. Break-even costs for many producers are double that – or more. In other words, lenders and borrowers alike are staring the downside into the face now.
Sitting on a powder keg: oil-related debt has experienced staggering growth – reaching a new peak at what appears to be an exceptionally inopportune juncture, to put it mildly.
In fact, according to a report from AlixPartners, North American oil-and-gas producers are losing nearly $2 billion every week at current prices. Naturally, capital could only be misdirected to this extent under errant central bank policies of mass credit creation.
Several more slips like this one and the President’s strongest, most durable economy in the world could backslide into recession. On top of that, ‘the big one’ could rupture at any moment.
Charts by: Atlanta Federal Reserve, St. Louis Federal Reserve Research, Wall Street Journal
Chart and image captions by PT
M N. Gordon is the editor and publisher of the Economic Prism.
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- A Striking Chart
The Economy and the Stock Market As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth. What's left of the Brooklyn Domino Sugar Refinery. Photo credit: Paul Raphaelson Contrary...
- Trump and Putin Narrowly Escape Assassination Attempt
The Gloves are Coming Off First a little bit of recent history. Readers are probably aware that some questions about the occasionally malfunctioning Deep State android... no, wait, we'll start again. Questions have recently been raised about the health of presidential candidate Hillary Clinton by various “alt-right” tinfoil hat-wearing conspiracy theorists, such as this one. The monsters are normally hiding under Hillary's bed, but lately they have come out into the open...
- US Economy - Curious Pattern in ISM Readings
Head Fake Theory Confirmed? This is a brief update on our last overview of economic data. Although we briefly discussed employment as well, the overview was as usual mainly focused on manufacturing, which is the largest sector of the economy by gross output. Pepsi factory in Baltimore, 1956 Photo via pinterest.com Readers may recall that we have pointed out for some time that there was quite a large gap between the data reported in regional Fed manufacturing...
- A Convocation of Interventionists, Part 2
Pleas for More Deficit Spending We continue with our Jackson Hole post mortem – including remarks that were made by economists and monetary bureaucrats shortly before and after the pow-wow and seem to be connected to the discussions there. Assembled central planners (we're not sure if this picture was taken at the conference, but most of the people in it were there). Photo credit: Getty Images We should preface the following with a Mises quote, as the...
- Why the Fed Destroyed the Market Economy
What Have You Done for Me Lately? Swing voters are a fickle bunch. One election they vote Democrat. The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon. The primacy of the wallet. They don’t give a rip about questions of small government or big government. Nor do they have any druthers about the welfare or warfare state. In effect, they really don’t care. What’s important to the...
- How is Real Wealth Created?
An Abrupt Drop Let’s turn back to our regular beat: the U.S. economy and its capital markets. We’ve been warning that the Fed would never make any substantial increase to interest rates. Not willingly, at least. Groping in the dark, Yellen-style Each time Fed chief Janet Yellen opens her mouth, out comes a hint that more rate hikes might be coming. But each time, it turns out that the economy is not as robust as she had believed... and that a rate hike isn’t...
- Janet Yellen’s Shame
Playing Politics In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers. In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers...
- Get Ready for a New Crisis – in Corporate Debt
Imposter Dollar OUZILLY, France – We’re going back to basics here at the Diary. We’re getting everyone on the same page... learning together... connecting the dots... trying to figure out what is going on. The new three dollar bill issued by the Apprehensive States of America. We made a breakthrough when we identified the source of so many of today’s bizarre and grotesque trends. It’s the money – the new post-1971 dollar. This new dollar is green. You...
- A Convocation of Interventionists – Part 1
Modern Economics - It's All About Central Planning We are hereby delivering a somewhat belated comment on the meeting of monetary central planners and their courtier economists at Jackson Hole. Luckily timing is not really an issue in this context. Central bank headquarters: the Fed's Eccles building, the ECB's hideously expensive new tower in Frankfurt, and the BOJ's Tokyo HQ (judging from the people in the foreground, it may be a source of noxious fumes). When...
- Hanjin Marooning in San Pedro Bay
Global Trade Reversal Expansions and contractions in global trade have played out over long secular trends for thousands of years. The Silk Road, for example, was established by the Han Dynasty of China in 130 BC, and allowed for continuous trade between East and West for nearly 1,600 years. In addition to economic trade, the Silk Road was also a conduit for culture and knowledge among its network of civilizations. A map of the main ancient Silk Road - click to...
- John Maynard Keynes’ General Theory Eighty Years Later
The “Scientific” Fig Leaf for Statism and Interventionism To the economic and political detriment of the Western world and those economies beyond which have adopted its precepts, 2016 marks the eightieth anniversary of the publication of one of, if not, the most influential economics books ever penned, John Maynard Keynes’ The General Theory of Employment, Interest and Money. The mere fact that the book is lauded by TIME magazine on the cover should give everyone...
- The Economy, the Stock Market and the Fed
John Hussman on Recent Developments We always look forward to John Hussman's weekly missive on the markets. Some people say that he is a “permabear”, but we don't think that is a fair characterization. He is rightly wary of the stock market's historically extremely high valuation and the loose monetary policy driving the surge in asset prices. The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but...