Me Hiding Me Head in the Sand
I learned of economist James Hamilton through The Oil Drum, which linked to his studies linking oil price spikes and recessions. Since then he has perplexed me by supporting construction of the Keystone XL Pipeline and by defending the flawed Reinhart-Rogoff report despite its justification of austerity policies. Over at Econbrowser, he posted, Another Solid GDP Report, which seems to tell us that we have to admit it’s getting a little better, all the time:
Fixed investment remains disappointing. But … there’s still lots of room for growth there and reasonable basis for expecting it’s still to come. Residential fixed investment is still way below normal when expressed as a percentage of GDP – added confirmation of Reinhart and Rogoff’s observation that recovery from an event like the U.S. has gone through takes a long time. Once housing makes a decent recovery, we might expect business plant and equipment and structures to follow.
On most websites, most comments are drivel and astroturfing, but a few of Econbrowser’s commenters improvise a discordant chorus in which it can get much worse:
JBH – The relevant perspective for businesses and investors who need to make real world decisions in a world of uncertainty extends far beyond last quarter. US debt-to-GDP is not far off its historic peak. That puts it far beyond optimal. Globally, the burden of debt has never been higher. The US is running budget and trade deficits. Net national saving since the crisis is lowest since the Great Depression. The housing market is in a modest bubble. The stock market is in a gigantic bubble. The 10-year trailing S&P PE ratio has been higher only a few times in history. Each culminated in a devastating bear market. Asset markets around the world are in bubbles. Yields are artificially depressed in a way never before experienced. The interest-sensitive arm of the market has been twisted out of joint. The Fed did not allow the recession to fully cleanse the economy of the malinvestment that accrued in the heady days of the Greenspan-Bernanke put prior to the crisis. Over the past 5 years, ZIRP and QE laid down a fresh new layer. Global investors, fed one QE after another like a Christmas goose, are on a quest for yield that has flatten risk premiums to nonsensical levels. In the current environment, this is an unmistakable sign that systemic risk is on the rise. NIPA is silent on the balance sheet consequences.
The US locomotive of the past 5 years – fracking production – is slowing and only months away from going into reverse. China, the locomotive of the global recovery, will slow much further. From 10% on its way to 4. As credit decelerates, China will surely experience a hard landing that will shake foundations. The eurozone is on the verge of a triple-dip recession. Syriza in Greece is the first-ever eurozone government with the common sense, courage, drive, and support of its citizens to take the anti-austerity battle to Brussels. The troika is staring at the beginning of its end. Euro-skepticism is on an exponential rise. Spain is next to change governments with general elections this year. This spells bank runs. Nearly 8 years later, the Stoxx bank index of the largest economy in the world is barely a third of its 2007 peak. And it’s been slowly rolling over the past year. Physical gold is flowing to Asia. Much of the rest of the world outside the US and Europe is fed up with US hegemony and the dollar as reserve currency. Amidst all its other troubles, having just become a trade deficit nation Japan is flailing about setting off destabilizing currency wars. Labor force participation in the US is on a downward trajectory. The implication is fewer workers to support the ever-expanding welfare class whose hands are out for a dole. Global elites are about to level another blow to the US middle class with the secretive (why?) Trans-Pacific partnership that will be every bit as pernicious to middle class workers as was NAFTA. The unintended consequences of ZIRP and QE have only begun to reveal themselves with the first signs in the oil patch.
These factors – most of which lie in the unexplored region of the Solow growth model which is deafeningly silent on the matter of prudent finance and sound balance sheet – are chiseling away at potential. The rope is being further frayed by the less perceptible, though still quite corrosive, acid-etching-away of potential by declining work ethic, falling test scores, stranglehold student debt incurred for increasingly worthless degrees, shrinking entrepreneurship, rising obesity, rising health care costs, increasing claims for disability, baby boom demographics, lopsided cost-over-benefit government regulation, diminishing faith in the political class, and so on and on. It speaks volumes that not one indictment was handed down for corrupt activity in the revolving door nexus of big banks, government regulators, politicians and officials. No longer an iota of difference between the two parties. The same vested interests rule both. This is not the America of the pre-Fed, pre-fiat era. We are in an epochal Era of Debt. With it will come sequentially greater financial crises. That’s a hard and fast prediction. It will be decades before the good times roll. In fact, they may never.
And in response to JBH:
BC – I suspect that most economists will be quite surprised by how quickly the US economy decelerates hereafter as a result of the energy sector bust, which, along with the energy-related transport sector, was overwhelmingly disproportionately skewing higher to an unsustainable rate the growth of industrial production and truck and rail transport since 2011-12.
Because of the nature of the faster rate of decline in the rate of shale extraction than conventional crude oil, the decline in US oil production by 3Mbd+ over the next 2-3 years and proportional decline in oil consumption of 2Mbd or more will catch most economists by surprise (at least publicly).
Real non-residential investment to real private GDP is decelerating to the rate the Fed went “all in” with QEternity and at the rate of the onset of the recessions in 2008 and 2001.
Moreover, China’s industrial sector is contracting, and the labor force and FDI are barely growing, if at all. The implicit FDI multipliers to investment, production, and exports with the industrial sector contracting suggest that China’s economy is growing no faster than 3-3.5% and 3% or slower real per capita. Moreover, China’s M3 is growing at such a rapid rate to GDP to imply velocity is in in collapse, increasing the probability of debt/asset, price, and wage deflation and a deflationary contraction hereafter. China is now at the point of experiencing peak demographic drag effects into the mid-2020s as Japan has experienced since 1998 and the US since 2006-07.
The global structural constraints per capita resulting from population overshoot, Peak Oil, peak demographics, “Limits to Growth”, debt and asset bubbles to wages and GDP, and wealth and income inequality are now fully and cumulatively entrained and will exert increasing drag effects on oil and food production, real GDP per capita, gov’t receipts and spending, and the 10-year rate of world population growth (which will achieve a first-order exponential decay by the early 2020s from the peak in the 1970s, implying population peak in the 2020s and decline by the 2030s), precluding growth of real GDP per capita, and certainly no acceleration, i.e., “escape velocity”.
The post-WW II and peak Oil Age epoch’s real growth of global GDP per capita is over. Unfortunately, there is yet no emerging alternative model to the oil-, auto-, debt-, and suburban housing-based model to permit us collectively to easily transition to the post-Oil Age epoch.