Prepared Now 🔴 Governments And Central Banks Create A Crisis In Feb 2019

Will Policy Makers Turn A Global Economic Slowdown Into Economic Crisis?

Governments and central banks create a crisis from a moderate and completely healthy slowdown by denying economic cycles and, even worse, by…The recent macroeconomic data of the leading economies point to a widespread slowdown. What is more concerning is not just a logical moderation in the path of growth, but the acceleration in the weakening of economies that were supposed to be stronger and healthier. It is even more concerning that this aggressive worsening of key leading indicators in China, the EU, and most emerging economies happens at the peak of the largest monetary and fiscal stimulus in decades.

It is easy to blame this widespread weakening on political headlines, trade wars, and — of course —Trump, but it would be disingenuous to believe those are the real factors behind the negative economic surprise.

The pace of global recoveries since 1975 has been slower and weaker, consistently, according to the OECD. Recoveries take longer and happen slower. At the same time, periods of crisis are less aggressive albeit more frequent than prior to 1975.  Another interesting evidence of the crises and recoveries since 1975 is that almost all economies end the recession period with more debt than before.

These factors are all concerning, but the evidence also shows that economic progress has continued regardless and that the main factors of wellbeing have improved dramatically. I had the opportunity of meeting Johan Norberg, author of “Progress” and we discussed all the positive elements we have seen in the past decades. In the same period, from 1975 to 2018, extreme poverty has been reduced to all-time lows. Hunger, poverty, illiteracy,  child mortality… all those terrible problems have been dramatically reduced to the lowest levels in history. That is the positive.

However, recognizing the positive is important, but ignoring the risks is dangerous. Global debt has ballooned to all-time highs, more than three times the world GDP. For those elements of progress to continue improving, we must stop the race of perverse incentives created by the wrong analysis of the origin of crises and the solutions that are often proposed in mainstream economics and politics.  I agree with Johan Norberg that the two main factors that have driven the phenomenal progress we have seen are free markets and openness. The freedom to innovate, experiment, create and share must come with the right incentives.

For decades, governments and central banks have always identified the problems of the economy as demand problems, even if it was not the case. If there was a crisis or a recession, governments immediately believed that it must be due to lack of demand, and subsequently decide that the private sector is not willing or able to fulfill the real demand needs of the economy, even if there was no real evidence that companies or citizens were investing or consuming less than what they needed. The entire premise was that companies were not investing “enough”. Compared to what and decide by whom? Obviously by central planners who benefit from bubbles and overcapacity but never suffer the consequences.

Governments and central banks never perceive risks of excess supply and even less predict a bubble. Why? Because most central planners see debt, oversupply, and bubbles as small collateral damages of a greater good: recover growth at any cost.

Behind the mistake in diagnosis is the obsession to maintain or grow Gross Domestic Product (GDP) at any cost. GDP is relatively easy to inflate. I always explain to my students that GDP is the only economic calculation in which you add what you spend with what you earn. GDP can be inflated through government spending and with higher debt-fueled expenditures. Debt is not a problem when it serves its purpose, which is to finance productive investment and allow the economy to grow, while efficiency, innovation, and technology allow us to be more productive and receive more and better goods and services at cheaper prices. It is a virtuous cycle.

The virtuous cycle of credit turns into a vicious cycle of unproductive debt when we incentivize malinvestment and prevent technology substitution by implementing massive government stimuli and liquidity injections.

Central banks justify their actions saying they do not cut rates, it is a market and private sector demand. Really? How and when did they survey that? What private sector? Crony or obsolescent companies? Highly indebted ones? Furthermore, if low rates and liquidity injections are a market demand, why not let the market set rates and liquidity instead of central banks?

Those same governments that feel the need to “increase inflation”, something that no consumer has demanded ever anywhere, do so because they benefit as the first recipients of newly created money and the only sector that truly benefits from inflation. Not even crony sectors fully benefit from inflation, the tax of the poor. Those suffer higher costs and import expenses.

By always making the same diagnosis, mistakes are repeated and accumulated. No wonder the pace of recoveries is slower, weaker and more indebted.

• First, governments believe the problem is lack of demand and name themselves as the solution, using savers to finance it, via taxes and inflation. The best way to boost GDP? Massive white elephants, enormous infrastructure projects that generate a short-term boost to the spending side of GDP. Infrastructure is needed, of course, but the difference is when countries decide to use it as a subterfuge to disguise growth. Build anything at any cost. This leaves behind massive debt and a less dynamic, not stronger economy.
• Second, demand-side policies perpetuate those sectors that are in process of obsolescence at the expense of savers, salaries and productive sectors. Governments will always subsidize and support the inefficient at the expense of the efficient because their objective is to maintain what they believe works and keeps jobs. It is not due to bad intentions or evil objectives, it is simply to perpetuate the past that they live off.
• Third, massive liquidity injections and low rates are exactly the equivalents of indirect subsidies to the inefficient. The earliest recipients and most benefitted from “unconventional monetary policies” will, by definition, be the most indebted and least productive. This is why productivity growth and money velocity stall during periods of government-led monetary and fiscal excess.
• Fourth, the benefits of the short and long-term credit cycle are broken. Creative destruction is all but eliminated, malinvestment is promoted via unsustainably low rates and liquidity is absorbed by financial assets and unproductive sectors.

Inflation does not rise as much as central planners want because technology and efficiency are unstoppable even if they try, and because overcapacity is perpetuated through constant re-financing. Massive liquidity and low rates make zombie companies soar. The percentage of companies that cannot pay interest expenses with operating profits balloons despite ultra-low rates and alleged “growth-boosting” plans.

For decades, demand-side policies showed diminishing but not lethal results, but now the world has repeated the same policies so many times that there is simply exhaustion. Rates are unsustainably low, liquidity is excessive and there is no real fiscal space in governments that have all but consumed their ability to extract wealth from savers.

The more we hear from governments that we need to spend more and save less, the weaker the response from economic agents.

Governments and central banks create a crisis from a moderate and completely healthy slowdown by denying economic cycles and, even worse, presenting themselves as the ones that will revert them.

The current global slowdown is not due to lack of stimuli, but the excess of them. When central planners decide to “correct” it, they create the seeds of the crisis. Malinvestment reaches unsustainable levels and bubbles burst, affecting all aspects of the real economy.

There is no evidence that companies or citizens are investing or consuming less than they need, it only happens in the mind of those that expect excel-spreadsheet-style results from demand-side policies in the real economy.

The global economy is close to recession, but a full-blown crisis is still unlikely. If central banks and governments present themselves, again, as the “solution,” they will create the next crisis.

Government Economic Statistics – The Bureaucrat’s Weapon

By adding a cup of water to a cup of milk, govt claims to produce two cups of “milk”. Two cups of watery milk are not two cups of milk…The government “shutdown” enters its second month.

But today we raise a celebratory cheer…

A cheer for the temporary unemployment of one subset of furloughed federal employees.

We refer to the government statisticians who collect, sort, analyze, worry, torture and weaponize economic data.

That is, those who throw false weights upon the scales in support of government policy x or government policy y.

For without statistics the government is all thumbs, a plodding doofus… a fumbling cyclops speared through its one and only eye.

This beast forms a greatly reduced menace to American liberty.

Explains the late libertarian economist Murray Rothbard (with a polite tip of the cap to old Daily Reckoning hand Gary North):

Certainly, only by statistics, can the federal government make even a fitful attempt to plan, regulate, control or reform various industries — or impose central planning… on the entire economic system. If the government received no railroad statistics, for example, how in the world could it even start to regulate railroad rates, finances and other affairs? How could the government impose price controls if it didn’t even know what goods have been sold on the market, and what prices were prevailing? 

More:

Statistics… are the eyes and ears of the interventionists: of the intellectual reformer, the politician and the government bureaucrat. Cut off those eyes and ears, destroy those crucial guidelines to knowledge and the whole threat of government intervention is almost completely eliminated.

That is, without statistics the government could not “govern” us as it would.

And to be governed, noted 19th-century philosopher Pierre-Joseph Proudhon:

Is to be watched, inspected, spied upon, directed, law-driven, numbered, regulated, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded… registered, counted, taxed, stamped, measured, numbered, assessed, licensed, authorized, admonished, prevented, forbidden, reformed, corrected, punished… drilled, fleeced, exploited, monopolized, extorted from, squeezed, hoaxed, robbed… repressed, fined, vilified, harassed, hunted down, abused, clubbed, disarmed, bound, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed, derided, outraged, dishonored. 

We might file additional torts… but we operate on a strict word count.

And the federal government presently lacks an entire bucketful of data to govern us…

MarketWatch reports the current cataclysm may delay the following economic reports:

Durable goods orders (Jan. 25)… core capital equipment orders (Jan. 25)… new home sales (Jan. 25)… advance trade in goods (Jan. 29)… housing vacancies (Jan. 29)… gross domestic product (Jan. 30)… personal income (Jan. 31)… core inflation (Jan. 31)… construction spending (Feb. 1).

We prefer to be uninformed rather than misinformed.

We therefore relish the prospect of going uninformed about the latest GDP numbers, for instance.

Government at all levels is credited with a thumping 36% of U.S. GDP spending.

But assume the government pays a fellow to dig a hole. Assume further it pays him to refill it.

By the official telling, you have just witnessed an increase to the gross domestic product.

Imagine further that the charade was financed through debt.

In its GDP calculations, the Bureau of Economic Analysis suggests debt-financed government spending adds authentic oomph to the economy.

But financial advisory firm Baker & Co. says money government borrows must eventually be repaid.

Thus, it is not income. It is “artificial stimulus.”

Subtract the artificial stimulus, Baker argues… and real GDP has declined an average 7.45% each year since 2007.

On a similar note…

A fellow by the name of John Williams captains the website ShadowStats.

His stated purpose is to expose and analyze “flaws in current U.S. government economic data and reporting.”

The government adds a cup of water to a cup of milk, for example. Thus may it claim to produce two cups of “milk.”

Williams penetrates the shim-sham — two cups of watery milk is not two cups of whole milk.

Here is how official GDP stands against ShadowStats’:

Revealed is a roughly 4% difference.

Which data do you believe?

Redirect your attention to the inflation rate…

Last year the official consumer price index (CPI) indicated a 2.44% rate of inflation.

But if you measure inflation as the government measured inflation in 1980… a different sketch emerges.

By the standards of 1980, CPI increased not 2.44% last year, says ShadowStats — but 9.6%:

Go here should you seek additional light about ShadowStats.

Again, which do you believe?

Perhaps ShadowStats stretches the figures some. No cloak of infallibility surrounds it.

They nonetheless perform a capital service in our estimate:

Exposing the government’s statistical myths.

So today we hoist the black flag of anarchy… and raise three cheers for our liberation from the government statistician, however temporary.

“The only good bureaucrat is one with a pistol at his head,” said the irreplaceable Mencken.

We would add but one detail:

Be sure it’s loaded…

Trump Administration Warns Economy May Not Grow At All In 1st Quarter Of 2019

The shutdown is really starting to take a toll on the economy, and the Trump Administration is beginning to quantify that toll. Here are the details…This government shutdown is really starting to take a toll on the U.S. economy.  On Wednesday, the chair of the White House Council of Economic Advisers made an absolutely stunning admission.  We all knew that the global economy was slowing down, and we all knew that U.S. economic activity was beginning to sputter, but up until this week the Trump administration had always insisted that we are not heading for a recession.  Well, all of that changed on Wednesday when Kevin Hassett publicly admitted that we could end up with zero GDP growth during the first quarter of 2019…

A top economic adviser to President Donald Trump told CNN on Wednesday that the US economy may show no growth in the first quarter if the federal government shutdown lasts much longer.

White House Council of Economic Advisers Chairman Kevin Hassett said in an interview with CNN’s Poppy Harlow that he was not overly worried about the long-term effects of a government shutdown. But after Harlow asked him if the United States could wind up with zero GDP growth this quarter, he conceded that it was possible. “We could, yes,” he said.

With much of the government currently closed, and with no end to the shutdown in sight, it is inevitable that the economic numbers for the first quarter are not going to look as good as they could have been.

But if this shutdown lasts for the entire quarter, that could easily push us into an economic contraction, and that would send shockwaves all over the planet.

And at this point there is definitely a possibility that this shutdown could go on for a couple more months.  Neither side intends to give in, and things are starting to get very personal.  On Wednesday, Nancy Pelosi made it exceedingly clear that she will not allow President Trump to deliver the State of the Union address at the U.S. Capitol until the shutdown ends under any circumstances…

House Speaker Nancy Pelosi dug in Wednesday on her call to delay the State of the Union address even after President Trump vowed to proceed with the speech next week, sending a curt letter making clear she will not allow the event to take place during the government shutdown.

Reacting to Pelosi’s letter, Trump told reporters at the White House “we’ll do something in the alternative,” suggesting a speech of some kind will still happen next week.

This truly is unprecedented.

Donald Trump is the very first president in all of U.S. history to be “disinvited” from delivering the State of the Union address.

And the hundreds of thousands of federal workers that are not receiving paychecks right now are really starting to get restless.  A lot of them have been living paycheck to paycheck, and so missing a couple of paychecks is a really, really big deal to those people.  As Marketwatch recently noted, some of them are actually “turning to food banks to feed their families”…

Within just a few weeks into the government shutdown, people are struggling to cope. We hear stories about people turning to food banks to feed their families. We hear stories about people who are in dire straits because they can’t get loans. We hear stories about people who can’t pay their mortgages. That’s not even one month into the shutdown.

If something this minor can cause such widespread pain and suffering, what would we see if a real crisis actually hit this nation?

Of course the truth is that most Americans are simply not prepared to handle much of anything, and this is a point that Mac Slavo made quite well in one of his most recent articles…

Almost 60% of Americans have less than $1000 in savings for a rainy day fund or an immediate emergency. It’s been ten years since the Great Recession left many Americans jobless with no money, and it appears most have learned nothing. The government shutdown serves as a painful warning and preview for what will happen once unemployment rises from 50-year lows.  Americans are far too dependent on others, including the government, for their survival.

For now, many that are struggling financially due to this shutdown are trying to bridge the gap by going into more debt.

And if the shutdown doesn’t last too much longer, that might work for a lot of people.

But it is very dangerous to go into too much debt, and a large portion of the country has already crossed that line.  For example, one recent survey discovered that approximately a third of all Americans are “afraid they’ll max out their credit card when making a large purchase”…

Despite the dangers of high-interest loans, more consumers are testing the limits of plastic.

To that point, more than 1 in 3 people —or 86 million Americans — said they’re afraid they’ll max out their credit card when making a large purchase, according to a new WalletHub credit cards survey. (Most of those polled considered a large purchase as anything over $100.)

The only easy way out of this government shutdown would be for one of the two sides to completely fold, and that would be politically disastrous for whoever decides to do that.

The battle lines have been drawn, and this political game of chicken is going to go on until somebody blinks.

And if nobody blinks for a couple more months, the economic consequences of this government shutdown are likely to be quite severe.