According to the Business Cycle Dating Committee of NBER, the recession which began in December 2007 has been declared officially over as of June 2009. Before one gets too giddy and the champagne corks start to fly, let us remember that while an end to a recession occurs when there is a trough in economic business activity, the ensuing expansion can take considerable time to develop.
So I guess this leads me to ask if the economy has stabilized. This is a contentious point of debate amongst many economists who are calling for a double dip recession. I happen to be in the ‘things-have-stabilized’ camp, but also find myself disturbed by some stubborn signs of systemic macro-economic weakness. Below are two charts that I regularly check for confirmation signals of a sustainable recovery:
1) The first chart (see below) represents two indexes which I have created. The green line measures the ratio of M1 vs. the monetary base of the U.S., which we can easily see is downward sloping. Despite all the Fed’s efforts to stimulate, money remains hostage to commercial banks which are able to borrow at near zero interest rates and earn interest on virtually risk-free U.S. government securities vs. the alternative of other types of investments. This is not a bad deal at all and the hyperbolic slope of the red line reflects the “make-hay-while-the-sun-shines” disposition of big banks.
2) Another chart (see below) that I find useful is a snapshot of gross federal public debt as indicated by the red line. Based upon history, the mantra of “when in doubt, whip it out” seems to apply to both Republican and Democrat administrations. (Note that “it” refers to the U.S. government’s very own sovereign credit card.) Despite both massive spending and tax cuts, M2 velocity, a vital component in the GDP equation, has failed to expand significantly over the last two recessions. As a result, our economic policies have failed to produce nothing more than inflated bubbles instead of creating real wealth. (Hey, if this is a proven fast track for re-election, why worry when the only ones who have to endure the hangover are the next incumbent administration and the American taxpayers.)
At some point, the banks will begin to re-allocate their holdings in U.S. government securities into other income generating vehicles, e.g. business and consumer loans for customers who have managed to sufficiently deleverage their balance sheets. Ironically, with FOMC policy inclined towards more QE (quantitative easing) and continuation of ZIRP (zero interest rate policy), incentives for lending could remain suppressed.
When banks recommence lending on a normal scale, then both M2 velocity and M1 supply should increase and the economy will embark upon a legitimate expansion phase with potential for creating new jobs to resuscitate America’s legendary consumers.
During the absence of the above confirmation signals, there is still a lot of hype about corporate profits growing at their fastest rates. With regards to large-cap multi-nationals, there is some truth to this as a weaker U.S. dollar, compliments of Uncle Ben’s QE recipe, gives such companies a competitive currency advantage.
Do not be hoodwinked. This pile of newly minted “Monopoly” money will represent nothing more than Fed flatulence reflating a deflated stock market bubble. If this scenario actually plays out, and I suspect that it will, then perhaps enough voters with jobs will be distracted long enough to forgive and forget the fact that many of their middle class brethren have fallen by the wayside.
The bottom line is that no jobs equals no recovery for a nation dependent upon consumers generating approximately 70% of its GDP and a recovery in the stock market does not necessarily translate into an economic recovery. For the record, I am bullish on stocks over the intermediate term and neutral on a sustainable economic recovery.
Originally published at hillbent.com and reproduced here with the author’s permission.