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For accuracy, John Q Public beats the blue chippers

June 23, 2011

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A recent post from Calculated Risk begins

Just thinking out loud …

Fed Chairman Ben Bernanke argued that the recent slowdown was mostly due to temporary factors. From the FOMC statement: “The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan.”

I also think we will see some pickup in the 2nd half of 2011, although I think the recovery will remain sluggish and choppy.

There has been some progress on the supply chain issues, and oil and gasoline prices have fallen sharply since late April.

So when will we see some better economic news?”

Demand Side wonders why? Why will we see better economic news? Corporations will begin to hire again? Debt will be lifted? Yes, oil and gasoline are coming down, but because they triggered the next slump, as we said they would at the start of the year. The flock of black swans explanation for this so-called soft patch is not convincing. From the Demand Side there is no reason to expect better news. Those in power have chosen the madness of austerity. Those at home have to save as much as possible against uncertainty. Where is the demand that is the driver of the economy going to come from? Unless you can identify that, you cannot tell me why things are going to get better. It is just a languid hope.

Today on the podcast we will continue our gloating about predicting negative growth in the second half of 2011 and not last week, but at the outset of 2011. No, we won’t. True, we did predict that, and we’ll get back to the I told you so series as soon as we can muster up the interest. But there are two reasons not to be so … actually, there are three reasons … to be so full of our self.

One, nobody listens to the forecasts that are outside a conventional range, so there is the case of “If a tree falls in a forest and nobody hears it.”

Two, while Demand Side was right and the great swath of conventional economists were wrong, the usual suspects were also right – Roubini, Stiglitz, Keen, AND a good part of the educated American public. Yes, we have not done much better than the consumer confidence surveys of the broad population, which have hovered in recession territory stubbornly unconvinced by the happy talk from Wall Street and inside the Beltway.

Three, gloating about being right is not appropriate when you haven’t been right enough or effective enough in communication to affect policy. Policy has followed the blue chip consensus. Disaster has followed the policy.

Imagine what would have been done had policy-makers realized that the waning of the public works and revenue-sharing portions of the stimulus package would set the economy back into recession. They might have done what needed to be done to fix the problems.

The great John Kenneth Galbraith once said, “Politics is not the art of the possible. It consists of choosing between the disastrous and the unpalatable.”

In our case, politicians have chosen the disastrous because they did not realize it was disastrous because the forecasts they follow – from the IMF, to the Federal Reserve, to the orthodox blue chip consensus – told them things were going to get better.

The great irony of Baffled Ben Bernanke is that he championed the Monetarist line that monetary policy mistakes created the Great Depression. He has chosen to aggressively pursue another course. That course is turning out to be many times more dangerous.

Is it too late? Yes.

Politically the debate is over the non-issue of the deficit. Again, average Americans realize that the economy and jobs ought to be priority one, two, and three. But there is no jobs program in sight, there is no infrastructure or other public works program, there is no revenue sharing with our states and localities. There is only Mediscare and debt ceiling brinkmanship. Oh, and we almost forgot because it is such nonsense, hyper-inflation hysteria.

In terms of resources, while it is possible for the Federal Reserve to transfer trillions in support of banks, it is not possible for them to transfer a couple hundred billion to solve the unemployment problem.

In terms of institutions, the big banks are bigger, the regulations that might have helped have been mugged in the back rooms at the Capitol. There is no voice for the American people.

In terms of economics, the same stupid schemes that got us into the mess are the same stupid schemes that are being proposed now.

This last is the greatest failure of economics. It is not the housing bubble or even the Great Financial Crisis, it is the inability of economics to learn and change and come up with a workable plan. In spite of evidence and history, we are back in the same soup of 1932. And the debate is the same damned debate we had back then.

Why? A big part of it is that economic forecasts were taken as fait accompli, and non-solutions were thus taken as solutions. The ship ran aground, it was refloated, but the course was not changed, so it hit the same rocks. This is disgusting. It is scary. And it is about time somebody firgured out how to change the course.


The commodities bubble is again on the downward slope, as we noted on Monday.

Risk aversion trades are back on the market. Much was made of the major indexes breaking their six-week losing streak, but as David Rosenberg pointed out, two year Treasuries are still going higher. These are near cash. This is where the liquidity trap can be most clearly seen.

And here come the downgrades for Q2 2011 growth. Yes. I know. Q2 ends in ten days, but blue chippers are still forecasting it. Forecasting the past, we call it at Demand Side. Macroeconomic Advisers, the highly respected forecasting firm, lowered its Q2 forecast to 1.9 percent. It started the quarter out at 3.5. In February, it was 4.4. Goldman Sachs cut its Q2 forecast to 2 from 3.

Equally frightening, Ben Bernanke expressed optimism and Olivier Blanchard of the IMF called the downturn a bump in the road. Both raised their estimation of downside risks, however. This is so they can have it both ways. If growth rebounds, they can point to their growth numbers. If it collapses, they can point to their risk warnings. They have no clue.

Here is a cute finesse from Goldman economist Sven Jari, quote,

“At this point, we still expect a bounceback in Q3 and beyond, but will need to see significant improvement in the data over the next few weeks to maintain that view,” he said.

Another cute way of finessing incompetence is to couch it in precise numbers. 2.3 percent growth. 1.9. 3.3. Then there is a flurry around the release date of the preliminary data. And a month or two later, when that data is marked up or more likely down by 30 or 40 percent, no notice. We’re on to the next quarter’s growth to two decimal points. The number of importance is jobs. That number needs to be in the 500,000 range. It is in the 50,000 range and dropping. Of course other numbers are carbon in the atmosphere, average temperature increase.

There’s more to be said, but we can’t be heard over the babbling buffoons at the IMF, Fed, on Wall Street, inside the Beltway, at the EU and ECB. Will they be shut up by the next downturn? Who knows?

Check out our post of William K. Black’s short form of the dance of death being performed in the Eurozone right now, as the core countries demand bailouts of their banks by way of austerity from the periphery that will lead inevitably to non-payment on the debts the banks need for solvency.

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