Saturday, March 03, 2007

Feel the lapping waves

Do you feel the waves lapping against the boat as you lie there snug in your berths, buoys and gulls? Soothing, isn't it? D.J. Tice says it's just the reassuring motion of the business cycle.

Here is link to a chart that I heartily commend to all Big Questioners as an antidote to one of the most common misunderstandings in American economic debate. Call it the Business Cycle Fallacy.

Find the chart in question on page 4 of the Census Bureau report. The chart tracks the growth of real (inflation adjusted) median household income over the past 40 years.

What it reveals is an undulating wave pattern, in which incomes fall with each recession and — here is the key point — keep falling after the recession is over. Incomes do not return to the level of the previous pre-recession peak for a number of years.

This is the way business cycles work. Recessions reduce employment, slow wage growth, shrink business profits and dividends, let air out of the stock market, and in many other ways cut incomes. Each downturn has a ripple effect that takes time to play itself out.

Most measures of economic well being follow this same undulating pattern.

Yet it is remarkable how often the press and advocates report on multi-year declines from peak levels in this or that economic statistic without the slightest hint that this is part of a predictable pattern.

What does D.J. want you to conclude from this? D.J. thinks that it is unfair to blame George Bush and the clot of Republicans in Congress for the ever-widening income gap in the United States:

The Business Cycle fallacy is tempting because we are all over eager to find political causes for economic facts — to dish out blame or credit to certain politicians. But your antennae should go up anytime someone compares a current economic statistic with the past without making some attempt to account for the stage in the economic cycle that those numbers come from.

According to D.J., the fact that median incomes have been down for several years is a consequence of the last recession. (Never mind that Alan Greenspan predicts another one, maybe this year.) It would be unfair to attribute the decimation of the middle class to, say, more regressive tax policy, or diminished protection of workers, or the tearing of the social safety net, or, well you get the idea.

You know, boys and girls, D.J. is a little like the global warming deniers. They say that the current warming is just part of a millennium-long oscillation in the climate. Never mind that some pretty important variables have changed since the year 1000. D.J. wants you to think that things are going to get better all by themselves, boys and girls. Que sera sera!

For a little more, er, pessimistic view of our economic future, Spot recommends Jim Kunstler and his recent blog post Singing the vegetable opera.

The jive-finance economy had a few acidic burps last week -- or, at least, that's how it may seem in the days ahead as the equity markets finally upchuck the toxic notional junk "money" they have been gorging on in recent years. Has there ever been a financial collapse with brighter or louder warning signals?

I suppose the expectation (or hope) is that the quasi-mythical "plunge protection team" -- a "working group" of federal reserve officials and bankers -- will jump in and administer some soothing pepto-bismol, but frankly I don't see how that's possible this time. The poison at the bottom is a fetid mass of "non-performing" mortgages, billions upon billions of loans that strapped borrowers are not paying back, loans which, in the meantime, have been rolled over, rebundled into jive "securities" (ha!) and sold, and rolled over again and used as "leverage" for massive exotic bets and bloated arbitrages involving mere abstract figments of electronic digital pulses completely removed from any reality-based productive investment activity.

What Jim is telling us, boys and girls, is that we are riding a wave that it about to become seriously discontinuous. No more gentle waves lapping on the hull. Sometimes things intervene and make predicting wave behavior irrelevant.


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