Sunday, August 23, 2009

On the Odd Nature of the "Recovery" and Krugman's Failure to Understand It

Paul Krugman writes:

The real problem here is that the standard language doesn’t make much allowance for the kind of gray zone we’re now in; that’s because in the pre-1990 era recessions tended to be V-shaped, so that jobs snapped back as soon as GDP turned around. I don’t think what we’re going through is good news — but GDP is almost surely rising, so the recession, as normally defined, is over. ...But the economy is not recovering in the most crucial area, job creation ...
Krugman gets this correct. However, because he doesn't understand business cycle theory, he doesn't understand why this is occurring. He doesn't understand that money flows to specific sectors and not the aggregate, "the economy".

Here is what is going on. When Bernanke stopped printing money in the summer of 2008, he turned the break in the sub-prime market into a full fledged recession, thus, causing a spike up in unemployment, especially in the capital goods sectors like housing.

Normally what happens at this point is the Fed panics and starts printing money that flows back into the capital goods sectors, and hiring resumes in those sectors. Bernanke did panic in September of 2008 and started to print money, but instead of putting the funds out through the banking system, the money went to prop up the banks themselves, i.e., the favored banks and investment banks, e.g. Goldman Sachs.

So whereas in the past the Fed printed money and it was spread throughout the capital goods sectors, and hiring began anew, this time the money has ended up in the hands of the favored banks through "trading profits," so there is no new hiring, since Blankefein and crew already have their jobs. The money is just split up amongst the already employed Goldman type players. It's all recorded as revenue and income, though, thus boosting GDP.

Eventually, this money will work its way through the system, but the failure for new jobs to develop while GDP is strengthening points to how manipulated and phony this recovery is. There's no other explanation for what is going on. The money is going into the hands of the still employed, specifically the Goldman Sachs and JPMorganChase employed.

Yeah, its a recovery, for the Goldman Sachs/JPMorganChase economy.


  1. "Summer of 2008..." Is that right? I thought it was much earlier than that. Perhaps 2006?

  2. Money supply growth didn't slow until the summer of 08, prior to that it was a sub-prime crisis. The first, straw that broke the sub-prime's back was the announcement in February 2007 by the Federal Home Loan Mortgage Corporation (Freddie Mac) that it would no longer buy the most risky subprime mortgages and mortgage-related securities.