Tuesday, July 14, 2015

US Economic Recovery - The Myth of the "Lagging Indicators"

Revisiting the 2008 Republican Disaster
Send the children into the living room to watch tv...

One interesting way to view the Great Republican Economic Catastrophe of 2008 is to, well, follow the money. Of course "following the money" becomes a fiddly business when, at least at first glance, the money seems to have "just evaporated." Adding to the "depth of the quandary," the amount of "evaporated money," it turns out, is immense. Further, it seems that the calamity wasn't even all  denoted in US dollars. There were plenty of losses in other countries and in other currencies as well.

The following article offers a remarkably complete account of the grisly story. It is especially well suited for inclusion here because it contains "facts and figures" only derived recently which can scale the immensity and complexity of the losses.

First, however, a few "basics:"

Wealth never simply "evaporates," although the propaganda version explaining or excusing such losses will inevitably imply precisely that it does. Wealth moves. It "moves" from where it was to where it will be "after the move." "Looting" occurs when this "moving" of wealth is not consistent with the traditional model of "this for that," -- the "looting" model is "this for nothing." Additionally, looting is never what one might consider "efficient." Looting wastes much of the prize it has targeted while still delivering the remainder -- in this case a gigantic sum of wealth -- to the perpetrators.

The Crisis of Wealth Destruction
Roosevelt Institute, May, 2011.
[Excerpted. Read the entire article  here - ROOSEVELT INSTITUTE]
Henry C.K. Liu

The financial crisis that first broke out in the US around the summer of 2007 and crested around the autumn of 2008 had destroyed $34.4 trillion of wealth globally by March 2009, when the equity markets hit their lowest points. On October 31, 2007, the total market value of publicly-traded companies around the world reached a high of $63 trillion. A year and four months later, by early March 2009, the value had dropped more than half to $28.6 trillion. The lost wealth, $34.4 trillion, is more than the 2008 annual gross domestic product (GDP) of the US, the European Union and Japan combined. This wealth deficit effect would take at least a decade to replenish even if these advanced economies were to grow at mid single digit rate after inflation and only if no double dip materializes in the markets. At an optimistic compounded annual growth rate of 5%, it would take over 10 years to replenish the lost wealth in the US economy.

In the US where the crisis originated in mid-2007 after two decades of monetary excess that encouraged serial debt bubbles, the NYSE Euronext (US) market capitalization was $16.6 trillion in June 2007, more than concurrent US GDP of $13.8 trillion. The market cap fell by almost half to $7.9 trillion by March 2009. US households lost almost $8 trillion of wealth in the stock market on top of the $6 trillion loss in the market value of their homes. The total wealth loss of $14 trillion by US households in 2009 was equal to the entire 2008 US GDP.

As the financial crisis broke out first in the US in July 2007, world market capitalization took some time to feel the full impact of contagion radiating from New York which did not register fully globally until after October 2007. In 2008 alone, market capitalization in EAME (Europe – Africa – Middle East) economies lost $10 trillion and Asian shares lost around $9.6 trillion.

While not coarsely rushing to further embellish the horrific details, we should still review just these two sentences [from above].

"US households lost almost $8 trillion of wealth in the stock market on top of the $6 trillion loss in the market value of their homes. The total wealth loss of $14 trillion by US households in 2009 was equal to the entire 2008 US GDP."

US middle class families watched helplessly as their individual total wealth dropped by 40% in a matter of three weeks. The Owners of the Republican Party had opened the cash drawer and handed everything directly over to the billionaires. The cash register was empty -- so empty that even the "Puppet Masters of the Universe" operating the automaton in the Oval Office were freaked. In fact they were so frightened that they "eagerly" rushed to do what was, at the time, commonly considered [for them] the "unthinkable."

They ordered the printing press to full speed, and they actually began spending government money to come to the aid of people who didn't even have lobbyists!

Soothing Lies About Bail Outs,
Prosperity and Stability
If you're still edgy, you need to try harder.

Now, if one were to ask a random citizen on the street "how much" help these altruistic patriots intended to provide for individual Americans, the likely answer would be $800 Bn. However, that answer would wrong. Quite wrong. Wrong by orders of magnitude.

$800 Bn was the figure the obedient corporate media kept repeating in every "news" story about the collapse, but $800 Bn only amounted to a "shoe shine tip" compared to the actual total.

Government Bailouts, Stimulus Packages and Jobless Recovery

As a result of over $20 trillion of government bailout/stimulus commitments/spending that began in 2008 worldwide, the critically impaired global equity markets finally began to show tenuous signs of stabilization only two years later by the end of 2009. Yet total world market capitalization was still only $46.6 trillion by the end of January 2010, $16.4 trillion below its peak in October 2007. The amount of wealth lost worldwide in 2009 still exceeded 2009 US GDP of $14.2 trillion by $2.2 trillion. The NYSE Euronext (US) market capitalization was $12.2 trillion in January 2010, recovering from its low at $7.9 trillion in March 2009, but still $4.4 trillion below its peak at $16.6 trillion in June 2007.

US GDP in first quarter 2009 fell 6.3% annualized rate while fourth quarter of 2009 surged 5.7% mostly as a result of public sector spending equaling over 60% of annual GDP. The US government bailout and stimulus package to respond to the financial crisis added up to $9.7 trillion, enough to pay off more than 90% of the nation’s home mortgages, calculated at $10.5 trillion by the Federal Reserve. Yet home foreclosure rate continued to climb because only distressed financial institutions were bailed out, but not distressed homeowners. Take away public sector spending, US GDP would fall by over 50%. This is the reason why no exit strategy can be expected to be implemented soon in the US.

It took $20 trillion of public funds over a period of two and a half years to lift the total world market capitalization of listed companies by $16.4 trillion. This means some $3.6 trillion, or 17.5%, had been burned up by transmission friction. Government intervention failed to produce a dollar-for-dollar break-even impact on battered markets, let alone generating any multiplier effect which in normal time could be expected to generate a multiplying effect of between 9 and 11 times. In the mean time, the real global economy, detached from the equity markets, with the exception of China’s, continues to slide downward, with rising unemployment and underemployment.

[Note from MeanMesa: Although the US "news" has been locked on the Greek story, China is no longer an "exception." The autocrats on the State Council delayed the inevitable for as long as they could, but the Chinese economy has just cratered this week {article 6-6-2015} -- "evaporating" $3.25 Tn, mostly from small investors. DailyKOS_China's_Market_Crash

Of course this recounting of the specifics of the 2008 debacle has now become little more than a painful dose of "yesterday's news." Still, with respect to this post, there is a point.

No matter what anyone might [prefer to] think, we remain firmly entangled in this. Again, from the  2011 article:

"This wealth deficit effect would take at least a decade to replenish even if these advanced economies were to grow at mid single digit rate after inflation and only if no double dip materializes in the markets."

They groaned, they stirred, they all uprose, 
Nor spake, nor moved their eyes.
The Rime of the Ancient Mariner [image]
We are still in that "decade" mentioned in the article. It has been six years since the Republican looting trashed the US economy. Unhappily, the "advanced economies" of the world have not been "growing at mid single digit rates." To date the "double dip" event has only occurred as a series of sporadic, subtle nuances, but even with that good news the economies of the entire world remain depressingly  -- and quite suspiciously --  "becalmed."

Let's turn our attention to "The Myth of the Lagging Indicators."

Happy Days Are Here Again!
Even if the "happiness" is "a little patchy..."

Naturally, once the most violent and destructive parts of the "eye of the 2008 hurricane" had withdrawn, normal folks began looking for evidence of pre-collapse jobs returning or any sign of the pre-collapse prosperity they fondly remembered. In almost no time it became abundantly clear that for anyone with less than six digits in their portfolio, none of those things were destined to reappear any time soon -- if ever.

The "stock" response to the complaints of these impatient, unemployed voters was that restoring the more or less normal unemployment rate [traditionally +/- 5%] would, indeed, happen but only after most of the rest of the economy had already shown signs of recovery, that is, healthier employment numbers would be a "lagging indicator."

This propaganda line effectively installed the idea that once employment picked up, everything would be in place for "happy days to be here again." Unfortunately, this media scam left out any reference to more than a few important "gears" in the "rebuilding mechanism." What citizens should have been interested in was not the level of employment, but the wages which would be paid to those workers returning to work.

It turned out that the "not having a job" part of the "unemployment problem" actually did start resolving itself, but it also turned out that the amount of wage-value-money these new jobs were putting into these employed workers' pockets was to remain stuck at a level significantly lower than those before the collapse. Another one of those overlooked "gears" was that the value of the dollars representing those wages had also taken a serious hit.

There was stimulus, but there were also about a zillion nasty little schemes to make "third parties whole" and other ugly, stinky little counter party "arrangements" designed to get America's reckless plutocrats back on their feet as quickly as possible. Even after most of the blood had been eaten by the crows, the Treasury was still interested in a few heavy doses of "quantitative easing" and a couple of other schemes which could have been copied from Ayn Rand's FOUNTAINHEAD.

The point here is that those huge monetary numbers mentioned in the ROOSEVELT INSTITUTE article's description of the antics employed to restore the world after the collapse are, in fact, quite meaningful to a middle class American worker's finances. Everything the planet's governments did in their attempts to bring the economy back to life was financed by undercutting the value of currencies and market wealth.

Prior to the 2008 "heist" [The actual crime began years earlier.] there was a tremendous amount of wealth "saturated" into the US economy. The massive block wealth which was extracted from this pool was consumed in these frantic attempts to prop the thing back onto its feet. However, that was then. What we have now is the aftermath of that extraction six years after the collapse. Yes, more people are working, but wages are low and the economy is quite stagnant. There is simply not enough wealth remaining in the government or held by individuals to speed things up sufficiently to spark the economy into the activity level to which we had become accustomed.

These efforts got the "patient" off life support and out of the ICU, but the "emergency investments" had been so large that now the hospital itself had little left besides empty shelves and broken windows.

The US economic picture - 2008 to 2015[ image - NakedCapitalism]
Have a look at the blue line. We have been told -- over and over -- by the economic experts that the "malaise" of the middle class consumer can be explained primarily as merely a complaint about the slow pace of the restoration of pre-2008 conditions. The blue line is "real growth," and the red line is what is called "nominal growth."

Here's a bit of the descriptive narrative which accompanied this graph.

While the red line (un-adjusted income) shows nominal improvement, the inflation-adjusted numbers are terrible. The median income, the exact middle, fell to nearly –10% after the 2008 crash, then “recovered” to only –7.5%. The middle income earner has lost a lot of buying power since the 2008 recession, and she’s still very much under water. No recovery there. No wonder Sears is closing its flagship Chicago store, while Nordstrom’s business is booming.

I wonder — how far above the 50% line do you have to be, for your blue line to have climbed back simply to zero? Short doesn’t say, but I suspect it’s close to the top-20% mark.

Short’s comment on this information:

[This] chart is my preferred way to show the nominal and real household income — the percent change over time. Essentially I have taken the monthly series for both the nominal and real household incomes and divided them by their respective values at the beginning of 2000. …

The stunning reality illustrated here is that the real median household income series spent most of the first nine years of the 21st century struggling slightly below its purchasing power at the turn of the century. Real incomes (the blue line) hit an interim peak at a fractional 0.7% in early 2008, far below the nominal illusory peak (as in money illusion) of 27.2% six months later and now at 27.8%, just fractionally off its new high of 28.7% set in September. In contrast, the real recovery from the trough has been depressingly slight.

The point is simple enough. Does this blue line look like the main problem is simply "lagging?" Is there anything in the graph which suggests that the solution to this "lagging" is merely a matter of somehow "catching up?" The current standard of living for almost everyone in the US oligarchy -- that is, for the middle and lower classes -- is in the toilet, and it's looking as if the planet's oligarchs are quite determined to make that situation eerily durable and permanent.

We are staring at the foundation of a perpetual US oligarchy in the eye. If the US oligarchy manages to reach its full measure of "vibrant adulthood," it won't be lonely. The oligarchs have been "at work" in every nation and every economy -- both the poorest and the richest.

The Not Particularly Delicious
 2015 Standard of Living, Real Wages,
Unemployment, Imaginary
Economic Recovery Casserole
Harvesting the currency's "good reputation"
Don't forget to dice the Spam.

Any visitor here with roughly the same years of experience as MeanMesa cannot, while patiently viewing today's economy, shake that lingering suspicion that something is not quite right. Something is, somehow, dangerously different than it has ever been before.

Such a conclusion can hardly be considered a mere "flash in the pan" considering that this day is being compared to seven decades of days in the past. There have been good times, war times, plagues, absolutely terrifying times [Cuba?], violent, destructive, social mayhem and all sorts of other things, but no matter how horrid all these might have been, none of them has had that sickening, undefined smell pervading the country now.

People are poorer than MeanMesa has ever seen them. Having a job no longer means that one will be "less poor," either. People are in debt deeper than could have even been imagined three of four decades ago. The country's government has been taken hostage by those without any interest in the country.

There is not so much as even a "glimmer" of policies which might begin to undo the damage already inflicted on the Republic since the years of Reagan. There is not so much as a single whisper about repairing the damage that began in 1981, and there is not so much as a whisper about finally repairing the damage inflicted in 2008.

There is an election approaching.

Make it count.

MeanMesa is sending Sanders another ten bucks.

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