EDITOR’S COMMENT: The fundamental facts are that 40% of our GDP is pure vapor and the world knows it. That is the amount that the financial sector “contributes” to the measurement of our economic activity. What does that mean? It means that Where Wall Street once had climbed to the dizzying heights of 16% of GDP, it is now around 3 times that amount. It means we are counting trading paper as “productivity.” And if you watch the numbers like I do, the truth is inescapable: Wall Street is allowed to exist as an engine to provide capital for innovation and growth. Instead it now exists for itself, across international boundaries, existing for itself and contributing virtually nothing to world or national commerce. It is turning pornographic — having no socially redeeming value.


Keeping the Good News in Perspective


The most recent batch of economic data has been quite positive. On Thursday alone, three different reports showed that initial jobless claims had fallen, housing starts and the issuance of building permits had both risen and a Federal Reserve index of manufacturing activity rose too.

But before getting too excited about these trends, let’s think back to the early part of this year. Back then, initial jobless claims were falling. Housing starts and the issuance of building permits were rising. A Federal Reserve index of manufacturing activity was rising too.

And then what happened? The recovery stopped. Some people blame the debt crisis in Europe (which, of course, has not ended). Others think we’ll never know exactly what stopped the recovery, because the aftermath of a financial crisis tends to be difficult.

That last point is important. Yes, the latest data has been good. But the economy remains both weak and vulnerable. The notion that a couple of weeks of decent news should cause the Fed to proclaim victory and halt its campaign to lift growth — a notion you’re starting to hear — seems misplaced.

Here’s the thoughtful Bernard Baumohl, chief global economist of the Economic Outlook Group, in a note to clients:

Clearly, the economy continues to move in the right direction. What troubles me is that the Federal Reserve doesn’t fully realize the nuanced relationship it has with the bond market as this critical
stage in the recovery….

[I]f the declarative goal of the Fed is to use the $600 billion in QE2 simply to lower the unemployment rate even as an economic recovery is underway, then it risks agitating the bond market who fear the central bank may overshoot by adding yet more money when the financial system is already flooded with excess reserves. Such anxieties will drive market rates higher, raise the cost of capital, and ultimately undermining the Fed’s own goals.

These are legitimate concerns. As Mr. Bauhmol suggests, the Fed needs to make sure that bond investors know it stands ready to withdraw its support for the economy — and let interest rates rise — as soon as the recovery seems assured. Otherwise, the bond market will get spooked about inflation and send long-term rates up on its own, thereby putting the recovery at risk.

But there are no free lunches here. If the Fed immediately halted its efforts to lift growth (like the bond-buying program known as QE2), the recovery might die out, just as it did earlier this year. The Fed’s job here is to judge the relative risk of various problems. So far, the bond markets show little sign of being agitated. Read Martin Wolf, Mark Thoma or Jeremy Siegel for more on this point: the recent rise in rates isn’t really about inflation worries.

On the other hand, the recovery remains nascent and vulnerable. Any number of factors — Ireland, Spain, a post-holiday consumer pullback in the United States — could cause problems. Given all this, the Fed would seem to be taking a bigger risk by ending QE2 than by continuing.

Put it this way: When the last monthly jobs report showed a gain of only 39,000 jobs, far less than needed to keep up with population growth, economic weakness still appears to be the main reason for concern.

6 Responses

  1. What real evidence is there that we ever came out of the recession? All we have is manipulated government data.

    The economy is worse now than any time that I can remember since the early 50’s.

    Future generations will call this the second ‘Great Depression’.

    The banks have control of the country, as long as that is a fact, we are not even on the road out of the mess. The dirty deeds and the actual status of our financial institutions are covered up with lies.

    Until we somehow wrest control of the country away from the TBTF institutions, we are just dealing with further uses of smoke and mirrors to ‘fix’ the problems.

  2. Have to agree with the A Man–the recession is still here, and it is going to get worse. Frankly, I like the hole-in-the-bucket theory of economics. We fill the bucket with money and watch it trickle out through the hole in the bottom of the bucket. If the money going into the bucket does not exceed the money coming out through the hole, we will soon have an empty bucket. The fact that our paper money is being created from thin air and that bank accounting techniques hide their real assets (which are much less than we think) the hole in the bottom of the bucket is much bigger than we think. The bucket is almost empty and if draconian measures are not taken, our country will not produce enough to overtake the debt. This is part of what happened to the Soviet Union (when it was fighting in Afghanistan), and the soldiers walked home to Russia. There was no more money to pay them or even to transport them. The Federal Reserve and our shadow banking system need to be terminated. http://www.challengingforeclosure.com Sirak@challengingforeclosure.com

  3. […] This post was mentioned on Twitter by kim thomas, Max Alter. Max Alter said: ON THE EDGE: THE REAL RECESSION CONTINUES « Livinglies's Weblog: EDITOR'S COMMENT: The fundamental facts are tha… http://bit.ly/f5ORRx […]

  4. The Recession has not started yet. We are in Pre Recession.
    The real Armagedon has not started.

  5. Please add me to your email list.

  6. Please add me to your email list.

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