Wednesday, June 1, 2016

Typical Confusion About the Nature of the Business Cycle

At my post, U.S. Single-Family Home Prices Soar in March, where I write:
Have I mentioned that the idea  the 25 basis point hike by the Federal Reserve in December would crash the economy is appearing to be an increasingly absurd belief?
Guy Noir leaves the below comment which is a perfect example  of the confusion that is demonstrated by Austrian-lites and many others:
Ok. Today in the real economy: Dallas Fed 17 months of contraction, Consumer confidence 10 month low, Chicago PMI back in contraction 6 out of last 12 months.
I would request more of a balanced commentary and less reliance on the bubbles. For instance, you could address what's happening to the middle class as the economy slips into recession.

There is this incredible tendency by Austrian-lites to attribute every negative number in the economy to  a business cycle downturn in the economy, that is, a recession. This is what Noir is doing.  He is looking at specific data and going "Aha, the recession is here!"

You can't just look at data points and declare a recession because some numbers are down. You must understand what is driving changes in the numbers.

Let's take a look at what Noir writes:
Today in the real economy: Dallas Fed 17 months of contraction, 
Most of the downturn in the greater Dallas region is the result of the contraction in the oil sector, which is the result of supply and demand factors specific to the sector and not and overall collapse in the economy.

A business cycle downturn, as Murray Rothbard has noted,  is a cluster of errors in the economy. It is not about a specific sector problem.

Noir goes on:
Chicago PMI back in contraction 6 out of last 12 months.
The purchasing managers index, when it has declined, can be directly traced back to the oil sector and to export declines, which are directly related to US dollar strength on foreign exchange markets (which is now reversing). Again, not a general decline.

Noir then writes:
Consumer confidence 10 month low,
Consumer confidence is a very complex number and, currently, there are mixed readings from different confidence indexes. Confidence indexes can decline for a variety of reasons. The indexes that are declining at present are doing so because the gasoline prices are climbing once again. Apparently, many consumers are very sensitive to gasoline prices, when prices are falling, like they were, they are confident about the economy, when they are climbing they are less confident.

There is absolutely no reason to believe that a downturn in this number has anything to do with a recession each and every time it declines (Though during some periods, it reflects the downturn in the economy).

Noir then provides us with this:
 For instance, you could address what's happening to the middle class as the economy slips into recession.
As I have written many times,  the economy is a very complex place. There are many factors causing all kinds of movements in the economy. Part of what is driving the split between the middle class and elite is because of crony capitalism government regulations. As terrible as this may be, it has nothing to do with recessions and business cycles.

Most curious about this Noir statement is that it reflects a lack of understanding of economic history. During recessions, the gap between the middle class and the upper class closes, since the upper classes are ver dependent on the boom phase of the business cycle continuing. An increase in the split in wealth between the middle class and the elite is indicative of the boom phase of the buisness cycle.

Bottom line, Noir is in the dark on the fundamental nature of the business cycle. The business cycle is mostly about strength in the capital goods sector, e.g., real estate and the stock market.

Thus, when he writes that I should get my coverage of the "recession" correct tjis way:
I would request more of a balanced commentary and less reliance on the bubbles.
He fails to understand that the bubbles are the boom in a Fed manipulated economy and it is the eventual collapse of the bubbles that is the recession.

I repeat, there  can be many things wrong in an economy, mostly the result of government interference, but these non-monetary interferences have nothing to do with the Fed-created boon-bust business cycle, that is, a recession.

When the next bust phase of the business cycle is upon us, it will be readily evident with crashing real estate prices, a crashing stock market, and soaring unemployment. We are not in this phase now. The boom is on. It won't last, but to read a recession into down turning data that has nothing to do with the nature of a general bust phase is confusion typical of Austrian-lites and others.



  1. Great post! It took me some time to realize that you're right, we are in the boom phase.

    Again, great analysis.

  2. I too fell into the trap of the perma-doom crowd. Listening to them leads to bad investing and taxes the soul. Also, sign up for the EPJ Alert, your portfolio will thank you.

  3. I think most "Austrian-lites", as you have referred to them, are seeing things a bit differently from you, Robert, because you are viewing this as just another ordinary business cycle boom. In other words, they are seeing an economic end-game ahead and you are not. What if we never see a meaningful decline in housing prices, housing sales, or consumer spending because the Fed's easy money policy never ceases to any significant extent? Are you going to continue saying we are in a Fed induced boom phase if the median price of a home in San Francisco reaches $50 million? There comes a point where the boom is actually nothing more than the seeds of the crack-up-boom. When a country is experiencing hyperinflation, is it in a boom simply because the price of capital goods and consumer spending is rising, or is it in recession? It's semantics.

    Greenspan held the Fed funds rates at 1% for one year before raising it to 5.25% and managed to inflate a housing bubble so big that it almost destroyed the economy in a deflationary collapse. We now have held the Fed funds rate under 1% for over seven years, and a bunch of QE on top of it. The Fed cannot afford another bust phase. They may continue to raise the Fed funds rate, but not enough to actually be considered a tight monetary policy. They are always looking for a way to avoid the bust phase, and that means raising rates slow enough to keep asset prices elevated. This is why many see an end game here. What are they going to do; allow the bust phase to play out this time? If that is your position, then I think you may have been in San Francisco way too long.

    1. Hey, if the Fed never ceases it's easy money policies, the boom never ends! Everything IS awesome!

    2. What makes you think they will be able to stop the next bust phase? That is Keynesian thinking. It reminds me of Fisher ( I don't know if I spelled that right) that declared the economy was in a "permanent plateau" a year before the '29 crash.

    3. It's not Keynesian thinking, it's common sense. When you have control of the printing press you can always keep prices nominally higher if desired. I didn't say the economy wouldn't collapse, just that the prices of capital goods might not collapse. Austrian-lites do not necessarily equate rising prices in capital goods and increased consumer activity with a booming economy. Nor do Austrian-lites necessarily equate low unemployment, rising wages, or increased hiring activity with a booming economy. Did you know that the Soviet Union always had 100% employment? Do you know how many Americans currently work for a government entity, government contract company, or government-subsidized private business or organization? Probably more than 60% of Americans working full time do.

    4. You can? Venezuela has a printing press. To call their price controls and inflation "avoiding the bust phase" because they keep prices "nominally higher" is odd. There are not always ways to avoid a bust phase, even if you have a printing press.

  4. That is a nice post but I think you fundamentally misunderstand my position. I'm concerned about the real economy on Main Street. What about the 15,000 people losing their jobs in Sports Authority goes bankrupt? What about the lost jobs in the oil patch? What about the unsustainable debt keeping Main Street afloat being student loans and auto loans?

    If you do want to cover the risk assets of the Rich and Famous, please write about the inventory of luxury real estate piling up in New York and Miami. Is that sustainable? If so, for how long? How about the earnings prospects for Tiffany's, Nordstrom, or Sotheby's?

    My point is I think you're missing the forest for the trees in focusing on high-end risk assets as your judge of how the economy has been doing. Even now, some of these high-end risk assets are deteriorating and you're not seeing it.

    1. He is not saying it is sustainable, just that right now we are in the boom phase. Nobody cares about sports authority because 15,000 jobs is tiny and most of them will find employment elsewhere. Sports authority lost out to competitors like Walmart, Target, Amazon, etc.

  5. Housing prices in metro Detroit jumped 6.2% in March compared with last year, putting prices back to fall 2007 levels, according to the latest Standard & Poor's/Case-Shiller Home Price index released Tuesday morning.