The U.S. Economy is about to grow explosively, or whatever
by Charles Hugh Smith
Originally posted February 7, 2011
Managing perception is the game plan, not fixing what ails the real economy. Why? Cui bono: it’s all about rescuing a politically sacrosanct and highly insolvent financial sector.
ACCORDING TO SOME ANALYSTS, THE “RECOVERING” U.S. ECONOMY is poised to enter a phase of explosive growth. Other analysts see evidence that the bogus “recovery” (all Fed stimulus “hat” and no organic growth “cattle”) is teetering on the edge of implosion from any number of causes: high inflation, declining home values, high oil prices, etc.
My view? Whatever. The real economy is so detached from the one presented by official data and the stock market that “growth”, explosive or modest, is a matter of managed perception, not reality.
As for the implosion, Central State intervention and massive spending/credit creation has already limited it to a decline heavily smoothed by extended unemployment, food stamps, zero interest rates, Federal Reserve purchases of Treasuries and mortgage instruments, and massive Federal spending on everything from fighter jets to Medicare.
The relentlessly managed perception is that the “spot of bother” circa 2008-09 is history, and the situation has been restored to normalcy, i.e. a rising stock market, super-low interest rates and unlimited Central State borrowing.
The key tools for managing perceptions are: 1) statistical evidence for rising profits, GDP, etc. and declining unemployment, and 2) the rising stock market, which supposedly triggers a “wealth effect” in the 10% of the population with enough financial assets to actually experience an increase in wealth.
We can see how the stock market has returned to “the good old days” after that “spot of bother:”
The reality is the “official account” of the real economy has near-zero credibility. Officially, there is no inflation in the Consumer Price Index. Officially, unemployment has plummeted to 9% – painfully high, perhaps, but an “improvement” that “augurs well for future growth”– blah, blah, blah.
As if a lack of “growth” is what ails the U.S. economy.
Meanwhile, on that distant island once known as reality, the factors at play include:
1. A potentially unlimited number of credit-created dollars is chasing a limited supply of tangible goods. How long that dynamic will endure nobody knows, but we do know the real world has limits, and credit creation does not.
2. The total number of employed people has barely increased in the past year, while the working-age population has risen. If official numbers actually reflected reality, then the unemployment number would be rising, not falling. The employment statistics are all a shell-game of switcheroo numbers, black-box guesstimates of robust job growth in phantom small businesses, and so on.
3. The economy is now totally dependent on Federal deficit spending to the tune of 10% of the entire GDP–a cool $1.5 trillion a year, borrowed and blown–and on the Federal Reserve’s creation of money to buy U.S. Treasury bonds.
Without the former, the tattered state of the real economy would be starkly revealed, and without the latter, the stupendous supply of new Federal debt might overwhelm demand, pushing rates higher.
Put very simply: the U.S. economy is now totally dependent on unlimited expansion of debt and credit creation by the Central State and its proxies. Withdraw those and the gap between the managed-perception economy (the propaganda facade) and the real economy vanishes: reality trumps perception.
As I have outlined here earlier, the Fed’s basic game plan is obviously to replay the successful recapitalization of the crippled financial sector circa the mid-to-late 1980s. Here is an FDIC paper on that previous debt crisis: The LDC Debt Crisis.
The game plan then was to enable the debt-crippled banks to write down their impaired/uncollectable debts slowly, and “earn” their way out of a hole via low rates, flimsy accounting rules that hid the true scope of losses, and new markets for their “products.”
The same plan is being followed today, only the losses are an order of magnitude higher. The Fed is two years into a multi-year plan to siphon off enough money from the productive economy to the financial sector so that its staggering losses in global real estate speculation can be written down slowly enough that profits will recapitalize the essentially insolvent banks.
But the Fed is playing with explosives that weren’t present in 1985: demographics (a fast-retiring Baby Boom generation which is pushing Federal spending into exponential growth), shortages of grain and other real-world materials, and a financial sector which has purchased control of the mechanisms of governance.
Given the extraordinary levels of Central State intervention, and the global bond market’s obedient acceptance of this intervention, then the game can continue for quite some time. As I have often noted, hyperinflation is fundamentally a political dynamic; political leaders can change the inputs.
Two things could upset the Fed/Treasury’s game plan to “fix” what they perceive as “the real problem:” that is, recapitalizing an insolvent financial sector which controls the political machinery of the nation:
1. The bond market could suddenly refuse to buy into the “story” that the Fed can buy trillions of dollars in bonds and mortgages with no side-effects whatsoever, and that the Federal government can borrow 10% of GDP with no side-effects whatsoever. If the bond market chokes, then the Fed will have to buy most of the new and maturing Treasury debt until doomsday. Otherwise, rates will rise, destroying the game plan of funneling free money to the banks via the zero interest rate policy (ZIRP).
2. Politicos could decide the Fed and Treasury plan is pure folly and upset the political apple cart.
How likely are either of these events? I have no idea. To date, the Powers That Be’s game plan is working smoothly: the stock market is rising, unemployment is falling (as per the managed perception campaign of statistical legerdemain), and the banks distributed $135 billion in profits–a hefty return on a paltry $3 billion invested in lobbying Washington D.C. politicos and players.
Thus my view toward any official pronouncement: whatever. The Status Quo is failing to address the real problems in the real economy, choosing a strategy I described in Survival+ as a simulacrum of “change.”
But managing perception is not the same things as fixing what ails the real economy. The difference between the two is lost on the Status Quo, which is pursuing the equivalent of Cargo Cult voodoo economics: if the people believe everything is fixed, then it is fixed. This is magical thinking at its finest – or worst.
Reality will trump managed perception, but nobody knows when. The entire Status Quo is completely dependent on sustaining the perception of “growth” and “recovery,” and we shouldn’t underestimate the resources and hubris they are bringing to bear on propping up the facade.