Saturday, October 8, 2011

Economist Magazine Spots the Coming Manipulated Recovery

They, of course, don't call it manipulated and they have no sound explanation for the turnaround (such as business cycle theory), but they are the first, that I am aware of, that are noting an uptick in the numbers:

What matters at turning points is the second derivative, the change in the change. Nonfarm payrolls were less weak than expected, beating the consensus of 60,000. One upside surprise does not an all-clear make, but this is one of several: unemployment insurance claims were lower than expected, and automobile sales and the factory purchasing managers index were higher in September than expected.
Since they are just watching the trend, they have no clue about the exploding monetary growth that is turning the economy, so they have no idea about the price inflation that is going to accompany the economic data uptick, though they do note the uptick in long term bond prices:

The best filter for the newsflow is the 10-year Treasury yield. When it goes up, good news prevails. When it goes down, bad news does. (This relationship holds even though the Federal Reserve's quantitative easing imparts a downward bias to yields.) As the accompanying chart shows, good news now has the upper hand.


  1. Darnit, I knew Twist was meant to cool down M2 by forcing down long-term rates; they're trying to put out a fire that they ignited. It didn't work then (i.e. the original Twist) and it won't work now.

    I don't want to get too technical/theoretical, so I will give the "idiots guide" version of what I am thinking (never mind that I could be an idiot myself, thus rendering my explanation worthless). Here goes:

    In the standard Austrian BC theory you have an inflationary boom, usually indicated by relatively low interest rates, a general feeling of wealth and certain asset prices being pushed up beyond their sustainability. Most of this centers upon the capital intensive, long-term projects due to the low rate of interest for borrowing. When the central bank sees that things are becoming too hot, they begin with incremental rate increases (short-term). Over time, as the malinvestments of those long-term projects become visible, the yield curve tends to invert, thus revealing a disorganization of the time-structure of capital.

    In Austrian theory, if you have a disorganization in the time-structure of capital, then you have yourself a recession. The inversion of the yield-curve is only a symptom and/or an indication. It tells you nothing about what brought it about.

    What I see happening today is that the Fed used many tools to inject new money into the system in order to counteract the contractions (aka market corrections) over the past few years. Much of that money is now beginning to get out via the fractional reserve process, and considering how much base money there is (thanks to the Fed's increased balance sheet), this could get really ugly.

    So, the Fed is essentially stuck in a corner. They have rates as low as they can possibly get them. If they were to let rates rise naturally now then that would reveal the true economic problems; in other words, we would have a real market correction/recession. It would be ugly. They will never let that happen.

    Instead, the Fed wants to continue to keep rates down, but at the same time cool off inflation. So, their best idea is to bring about an indication of recession- they want to invert the yield-curve at a base of .25%.

    Sure, they may be able to cool off price inflation, but it will more than likely still be in positive territory (i.e. less than it would have been, but still climbing). But, even worse, they will further dis-coordinate the structure of production.

    Can they get another boom going? Maybe. I don't think it will happen, but it is possible. I rather think that they will get a mini boost in asset prices, and some investment and growth in certain sectors, but that it will peter out. What I am more worried about is how their pushing down of long-term rates will effect the process of savings/investment to build capital. Sure, the nominal prices of your wages and wares may be higher and/or steadily increasing, but if your overall efficiency of production is lower (due to the wasting of capital), then you're still falling behind on net.

    Something tells me that this IS the "mini boom" that we are living in right now, and that once the current policies reveal their consequences, we will face a stagflation that would put the 70s to shame. I certainly hope that I am wrong.

  2. That was certainly Not the "idiots guide" version.

    Thanks for posting your thoughts.

  3. JFetz-

    First off, that is one of the best, non-technical, easy-to-follow (if you have even a freshman grasp of ABCT) explanations that I've seen with regard to what is happening in the US economy today.

    It (necessarily) neglects the external influence of the EU/Jap/Chi issues, which are of the same disease (but with slightly different pathologies and treatments, at different stages of disease progress and therefore different side-effects...for now) and beautifully "breaks it down" for the average person.

    I've re-read it a few times, looking for any minor flaws, and find none. I hope BobW will chime in with his analysis.

    I think that the FED has fired the last bullet it can, and by trying to control inflation, growth and unemployment with the last of its ammunition it has instead engineered the final phase of a Misean "Crack Up Boom" that will make even Dr LVM weep from his grave.

    The next few months will probably see a big jump in the strength of the US$ and equities, and some economic numbers that show an "improvement" in the US economy, but they are ephemeral and appear to be "the last gasp" of the Central Bank system.

    That's scary. It means the last phase is upon us- either a slide into pure militaristic fascsim and war, or the slim chance that the Sheeple will "WAKE THE FUCK UP!" and demand a restoration of REAL money, REAL rule of law, and REAL freedom!

    Thank you for your analysis!!!


  4. @ anonymous 7:55

    It was as close as I could get to an "idiots guide" without taking up the entirety of the comments page. My comment was already too long for my liking. Any longer and I would have simply not posted here at all.

    @ anonymous 1:24

    Thanks! While there aren't any flaws, there are many omissions. I too would be curious as to Wenzel's opinion. I rather think that he would agree on some points, not all. Then again, he is an economist while I am just some guy that reads a lot.

    In any case, all that I wanted to really get across is that it appears to me that the Fed is trying to invert the yield curve to slow down inflation, but that in doing so they will further distort the time-structure of production, thus making a much larger problem. While I can see them getting some asset classes to get a boost (i.e. those that rely on longer term rates), I think that it will be short-lived due to the current distortions in the structure of production. And, that to attempt to invert the yield curve at a base of 0.25% will only exacerbate this while leaving them with fewer tools if they are successful in lowering longer term rates.

    I din't mention Jap/Chi/EU mostly because it didn't directly relate to what I was discussing. This is not to say that the actions of those nations and the consequences thereof have no bearing on the US (they absolutely do). But, I was trying to keep it simple. You are correct, leaving them out was necessary.

  5. JFetz-

    "...he is an economist while I am just some guy that reads a lot."

    Not as a slight to RW- who works his ass off to make sure that his readers and EPJ subscribers have the best up to date info in the world- but you "get" economics, and the broad impact better than many people here (and this is a SMART bunch!) and should never doubt yourself on that. I'm not an economist either (my economics classes in college- and I took a LOT of them, enough to double major- have proven invaluable only because they allow me to understand the terms and the obfuscation undertaken by mainstream economists and see it as the bullshit that it is) but thanks to my autodidactic work studying Mises, Rothbard and Hoppe (and their peers) I think (HOPE!) I have a better grasp of the underlying reality of economics than people like Krugman, Roubini and Bernanke.

    No, I KNOW I have a better grasp- they are statist shills, in love with their models and theories, and unconcerned with how their policy prescriptions and recommendations will affect the real world.

    I'm thankful that I've found people like RW, and LewR, and the guys at ZeroHedge and DailyBell that can help me make sense of a world where up is down, right is wrong and war is peace.

    When the trillion plus in $US that is sitting in the FED, sterilized due to the "extraordinary powers" Bernanke has conferred upon himself, explodes into the economy due to forces out of Bernanke's control (or any number of other Black Swans that are circling the world) we will be proven right. I just pray that the people that DO understand it have prepared themselves for the shitstorm that will follow...