Tag: economics

Mailvox: Eurosclerosis and collapse

Eilonwy asks about RGD:

I’m reading The Return of the Great Depression, which I bought at full-price at the Wall Street Borders. I’m only a quarter through it, since I have to call my securities-analyst brother once a day to make sure I understand the concepts. In short: it’s slow, but worthwhile, going for me.

One question I have for you, and maybe it’s answered later in RGD is: when? I get this sense from reading your blog and Mr. Denninger’s, that the center cannot hold much longer and that we are tottering on the brink of a Greek-style collapse. Then I read on Yahoo Finance that Social Security has moved permanently into the red and that the debt we will accrue paying SS benefits will hurt our AAA rating, moving us yet further into debt. As Ed Morrissey states, “the wheels have begun to fly off the entitlement bus.”

What I don’t quite understand is how the welfare states of Europe cruised along – functionally – for 60 years, with entitlement programs far more progressive than what we have here, before facing the crisis they find themselves in now. Whereas (at least when reading you and Mr. Denninger) it doesn’t seem our economy will be able to hold it together for five years, and we haven’t even socialized medicine yet!

I think my question is twofold: 1) are we really bordering collapse, or could we limp along a la Britain and France, with a soft-totalitarian welfare state, and remain semi-prosperous for a decade or three before all the bad decisions we’ve made and are making really come back and whallop us? and 2) if we are bordering collapse, why do we find ourselves here so quickly?

The main reason that Europe has been able to limp along with heavier social outlays is because the European nations have virtually no defense budget. Since 1962, U.S. defense spending plus defense-related interest on the debt has amounted to around $2,500 per year per capita. If you consider that full Social Security benefits at the average income amounts to around $12,576 per retiree, it’s not hard to see where Europe has been finding its additional social spending.

In answer to your first question, yes, we really are bordering upon collapse because our total debt level is over 500% of GDP when all of the unfunded, off-balance sheet debts are included, as they must be. This is completely unsustainable even if we ended all defense spending today. Which, of course, we’re not doing anyhow. In answer to your second question, this is a rather binary problem. You can get by one way or another right up to the moment that you can no longer do so. While some still think it’s possible to hyperinflate out of the problem – which is really just a means of buying stability a little time if you consider the eventual fate of most countries that hyperinflated – there is a very serious timing problem even if the peculiar U.S. debt-money system permits such rampant inflation.

Once the fleets of money helicopters are sent aloft, it’s game over for the global economy, for everyone with savings, and everyone holding debt. That’s assuming it even works; if it doesn’t work then it’s an instant game over for geopolitical stability. So, Washington and the Fed don’t dare to issue the order until the very last minute… which means that when the next default crisis hits, there is a very good chance that they will not react quickly enough and the financial system will collapse in a catastrophic manner beyond the ability of even hyperinflation to help it limp along.

Perhaps the financial wizards who created this situation can find a way out of it, but I do not see one nor have I read anything by anyone that offers what I consider to be an even remotely credible solution. And while it’s true that these events always take longer to develop than anyone ever thinks, when they finally come to pass they tend to unfold much faster than anyone expects.

Mailvox: Deflation vs inflation

JB inquires regarding the matter:

Congratulations, it looks like you’re right about deflation vs. inflation. I thought based on the historical example of other systems going belly up that inflation was always the final scenario. But your grand graphs of credit implosion are everything a rubbernecker could wish for in twisted limbs and crashed clunkers.

I’m still not clear on what’s going on, and I’d like to run a few questions by you. Credit contraction is ~ to GDP contraction, yes? So if deflation is keeping pace with reduction of goods and services, then prices should remain constant, right? Consumer goods are a subset of that. Are you predicting deflation from the consumer’s perspective, and if so, why? What I’m getting at is that even though the credit bubble’s magnitude dwarfs all other considerations, its implosion doesn’t logically necessitate consumer deflation, as far as I can understand. I guess your main reason there won’t be inflation, besides the impossible magnitude of the credit bubble, is that the Fed is private and won’t order the whirlybirds aloft. Why do you think a legal technicality like that is going to stop the Fed’s big brother, the US Federal Government? Given the trend, shouldn’t we be more surprised if any banks at all manage to remain private?

First of all, let me say that the question is far from settled. I understand the inflationary case and it is a perfectly reasonable one, albeit based on general principles that I do not believe apply in the specific case of the peculiar U.S. monetary system. I’m going to address the matter in more detail in a column and explain why I expect the debt-money supply to decrease to a certain, specific level at a minimum. However, the easiest way to achieve a basic understanding of the issue is to look at this chart which incorporates the latest Federal Reserve flow of funds account of total debt outstanding.

The red line amounts to the case for inflation. This is the Federal spending that the inflationistas assume can grow indefinitely and has, in fact, increased by $2 trillion since the third quarter of 2008. However, even this 35% increase in 18 months has not been sufficient to counterbalance the ongoing credit contraction in the household, financial, and state & local government sectors. Moreover, that Federal spending increase is now coming to an end even as the contraction in the financial sector doubles its speed and state & local spending hits the insolvency wall.

In answer to your questions, GDP contraction is not equal to debt contraction even though debt is a primary factor in sustaining GDP growth. Because GDP is disproportionately weighted towards government spending and because the G component of GDP is dependent solely upon the growth in government debt rather than overall debt, GDP can increase even in the face of overall debt contraction. But it cannot do so for long, as the chart above indicates. As far as the banks go, because they are insolvent by every meaningful accounting measure, they have already been quasi-nationalized because although their profits remain private, their losses are charged to the public.

The end of entitlements and the occupations

After looking at the books, do you still think democracy in Iraq and Afghanistan is a priority?

50% of the federal budget right now goes to entitlements.

This last month we posted a record $220.9 billion budget deficit. We took in $107 billion but spent $328 billion.

Isn’t that special. We only funded 32% of expenditures?

Remember – entitlements were half of that $328 billion.

So let’s see if we can do the math here.

Entitlements were about $164 billion last month in spending. The rest was, of course, the rest.

But we only took in $107 billion.

So even if we eliminated all entitlement spending we still did not have enough money to cover the rest.

The insane thing is that the only pressure from the American people to date is to fight entitlement reduction even though eliminating all entitlements isn’t enough to stem the financial bleeding. One certainly can’t say they aren’t going to get what they deserve. Correct me if I’m wrong, but my impression is that even the Tea Partiers don’t want to cut back on military spending.

Mailvox: Smith vs Ricardo

LS emails a 2003 essay by R.B. Calco published in the American Conservative. Here’s an excerpt:

The Father of free trade was no globalist.

Adam Smith is commonly regarded as the father of modern economics. Free traders claim he is also the father of free trade and credit him with the first systematic attack on government regulation of trade ever written. This is true as far as it goes. This is not to say, however, that Adam Smith was a free trader in the same sense that the term is promoted today. Since David Ricardo and the Austrians took hold of it, the term has acquired a dimension and a purpose that was, to paraphrase Smith, no part of his intention. Or, in any event, it was no part of his definition. Smith’s argument for trade was rooted in what economists today refer to as “Absolute Advantage”; it was left to the crafty mind of David Ricardo half a century later to invent a justification for trade on the basis of the far more subjective “Comparative Advantage” that today the economists tell us we need to consider instead.

While the dull, pencil-headed, pocket calculator logic of Comparative Advantage works fine for the textbook laboratory example f two nations and two products, it falls apart entirely the minute real-world constraints or considerations are introduced. It becomes absurd when you attempt to factor “comparative advantage” across three nations and three products, let alone the hundreds of nations and millions of products of the real world. Try it – you will lose your mind.

All Comparative Advantage amounts to, reduced to its essential components, is a sophistic argument for international division of labor — for global economic union — without dealing with any issues of political union. It is the economic equivalent of living in sin, so to speak. For whatever intuitive sense it claims to have, this argument relies on a fundamental confusion between trade — economic activity between economic systems — and division of labor — economic activity between individuals in a single economic system.

At bottom, this argument is a bait-and-switch for a global system, not a plan for any one nation to become wealthy, least of all the United States, which, according to the law of equilibrium, would be forced under a free-trade regime to sustain massive losses of jobs and wealth to pull all other nations up in the new global wage and price structure.

There is little question that global free trade tends to raise the overall level of global wealth. But what consequence-blind Ricardians stubbornly refuse to understand is that Comparative Advantage simply does not work on a macroeconomic level. The falsity of their assumptions is easily determined both logically and empirically; in RGD, for example, I show how the historical trade statistics prove that the Smoot-Hawley tariff could not possibly have played a major role, let alone a causal one, in causing the Great Depression.

The important logical question that the Ricardians have to answer is this: Does the level of rising global wealth come at the benefit or the expense of the wealthiest nations? The important empirical question is this: What is the rate of increase in U.S. national wealth per capita compared to the rate of increase in global wealth per capita? Those who are intellectually honest enough to contemplate answering those straightforward questions of applied theory instead of retreating to the safety of the abstract will soon recognize that the Comparative Advantage is a fundamentally incorrect doctrine and the Ricardian case for free trade is strictly dependent upon circumstances that do not apply to many situations, presently including that of the United States.

Those who disagree are certainly welcome to answer those two questions so long as they provide an amount of reason and evidence in support of their answers. And it is worth keeping in mind, as Joseph Schumpeter pointed out, that David Ricardo was first and foremost a political creature and an ideologue, he was not an intellectual driven by a natural interest in the truth of the matter. This is not to argue that what is known as the Ricardian theory of Comparative Advantage is incorrect on an ad hominem basis, I am merely pointing out the historical fact that his case was a political one with a specific policy objective in mind. It is also worth noting that the this case was not even original to him, as the idea of Comparative Advantage was first introduced by Robert Torrens in An Essay on the External Corn Trade two years before Ricardo published On the Principles of Political Economy and Taxation.

Productivity and deflation

Karl Denninger reaches a conclusion:

The Labor Department reported Thursday that productivity jumped at an annual rate of 6.9 percent in the fourth quarter, even better than an initial estimate of a 6.2 percent growth rate. Unit labor costs fell at a rate of 5.9 percent, a bigger drop than the 4.4 percent decline initially estimated.

In the real world this means:

Work harder and get more done. Get paid less. Suck it up, don’t complain, or you’re fired. That’s all.

And by the way, reduced pay per unit of work spells DEFLATION.

That’s not necessarily so. Inflation and an increase in the supply of labor can lead to reduced pay per unit of work; real weekly wages haven’t increased in the USA since 1973. But in general, declining labor costs do tend to point towards deflation, especially if they are nominal as well as real. Productivity up and costs down is a good thing for corporations; whether that is good for the smaller number of workers working and the reduced pay they are receiving may not turn out to be good for an economy already facing widespread defaults. Especially if those corporations happen to be foreign corporations sending those profits overseas.

Exploding government debt

Carlton has a nice series of charts providing a graphic representation of the rapid growth of U.S. debt over at the RGD blog:

Even more striking is the annual percentage change in the debt. Between 2002 and 2006 there is a surge in growth, presumably to fund the wars in Afghanistan and Iraq, peaking in 2003 at around 9%, but the growth begins to slow down again until 2008, when it surges over 11%, and then in 2009 it jumps to almost 19%.

Needless to say, the recent post-2007 surge is in direct contradiction to the 10% contraction in private debt that has taken place over the same period.

Mailvox: broken windows and the stimulus of WWII

CH asks about a common economic misconception:

I follow your columns so I thought you’d be able to answer this question for me, if you would. As you have stated, the Democrats are Keynesians and believe they can spend their way out of recession. Benanke cites the Great Depression as evidence of this. I know that FDR’s policies of spending didn’t lift us out of the Great Depression (they made it worse), but it is often noted that WWII did lift us out of said Depression. How can this be? How did that work? It seems to me that the militarization of our industries were funded by the Government. This put people to work and sent many to war equipped with the products of our industries and therefore operated as a large Government “stimulus”. I am trying to see Bernanke’s logic, if I am correct, that the spending the Government did to fund the war was what it took to get the economy going. This in effect is what the Dems are trying to reproduce by simply dumping money in the economy, putting people to work and creating a false demand, to bring us out of this recession. The war was true demand, sure, but wasn’t the war really a big fat stimulus? Government gave money to industries who put people to work, who paid taxes and spent money, allowing industry to produce more product, etc. I’m very confused how all this worked. Please set me straight!

First, let me note that it’s not only the Democrats who are Neo-Keynesians. Most Republican politicians are too; the monetarism of the Chicago School is little more than a Keynesian heresy that focuses on monetary policy and leaves fiscal policy out of the equation. Now, it is true that WWII helped lift the USA out of the Great Depression, but not for the reasons that the economically illiterate, historically clueless, and logically challenged usually cite. The stimulus involved in producing hundreds of thousands of ships, tanks, and airplanes and employing millions of men did not bring about the post-war economic recovery, it was the effective use of those men and materials in destroying the industrial infrastructure of Italy, Germany and Japan that did. While economists such as Henry Hazlitt and Thomas Sowell rightly cite Frederic Bastiat’s Broken Window fallacy and point out that there is nothing productive or wealth-generating about turning steel into a rusting hulk on the bottom of the ocean, they forget that destroying an economic competitor’s industrial infrastructure at no cost to your own, then providing consumer goods and the means of rebuilding that infrastructure is very productive and wealth-generating indeed.

Let us call it Vox’s Addendum to Bastiat’s Broken Window Fallacy. Or, if you prefer, the Broken Window Martial Motive. Bastiat’s parable goes thusly:

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

If, however, the shopkeeper happens to live in the next town over, his window is broken, and the house belonging to his neighbor the second glazier is burned down with the second glazier inside it due to the vagaries of violent inter-village relations, the six francs the shopkeeper will spend on repairing his broken window will be six francs that did not previously circulate within the first town’s economy, and which the shopkeeper, living in the second town, was never going to spend on shoes or books produced in the first town. Therefore, it is a good thing to break windows, so long as the windows are broken in the neighboring town at a cost that is exceeded by the benefit to be gained from fixing them.

“In short, he would have employed his six francs in some way, which this accident has prevented, [unless the accident happens to take place in the neighboring town. – VD]”

This means that while most wars are economically destructive, wars that offer the likely prospect of destroying the industrial base of one or more advanced economies without putting the nation’s own industrial base at risk are economically beneficial. By way of statistical evidence in support of this conclusion, note how the annual rate of commercial bank loan growth was much higher immediately after WWII – 25% in 1947 and 21.5% in 1950 – than it ever has been since.

Return of the Great Depression blog

One of the things I have wanted to do since the release of the book is to turn the RGD book site into a bona fide economic resource. However, I simply have not had the bandwidth. A number of people responded to my inquiry last month, and I selected two of them to act as my associate bloggers there.

Sam will be focused on Europe, Asia, and the Middle East. He has a great initial post on why the current economic crisis has not hit Israel as hard as might be expected. He’ll be paying particularly close attention to the Greek situation and to the Irish and Spanish reports since it’s looking like one of those three nations will be the flashpoint in the next round of European debt-deflation. But don’t count out China either….

Carlton will be focused on the USA and keeping abreast of the economic release schedule, particularly as it relates to significant indicators such as debt, New Orders, housing prices, and sales tax revenues. His introductory post is on the FDIC. The goal is to have daily updates on various economic statistics, but focused on those measures that I believe to be more significant and less susceptible to manipulation for political purposes. In keeping with this goal, I’ve added my own post showing annual GDP growth charted against total commercial bank loan growth from 1947 to 2010.

Any comments or suggestions for further improvements would be welcome.

Interview with John Williams

Vox Day interviewed John Williams of Shadowstats on April 26, 2009. As of February 2010, his alternate statistics reported -4.5% GDP, 9.8% CPI-U, 21.2% unemployment, and -2.5% M3 for the U.S. economy.

What is your basis for believing the official statistics underestimate unemployment and inflation?

I’ve been a consulting economist for more than 25 years. What I have found over time is that public perceptions as to what’s happening in the economy have tended to vary increasingly from the official reporting, generally moving away from the common experience. It appears to be moving towards generally weaker economic growth and stronger inflation than the government is reporting. I’ve used econometric models over time for forecasting a variety of economic variables and I’ve found the ability of the official numbers to predict what was happening to be also weakening over time. Some of the series are simply nonsense, they’re effectively political propaganda. I’ll state that very specifically in terms of the GDP.

But the reason you’ve seen this shifting sentiment of the quality of the government statistics is that there have been methodological changes over time that have built in upside biases to the economic reporting and downside biases to the inflation reporting. The changes that have been made often have had some academic basis for them. I would contend that most of the changes have been primarily academic and have very little relationship to the real world.

Your GDP chart appears to show that the USA has been in recession since 2000, with only one quarter of positive growth in 2001. That would make it twice is long as the Great Depression. Do you think that is really the case?

I think you’ll find that we’ve had longer and deeper recessions than have been officially reported by the government. What you see in terms of the year-to-year change is not necessarily the quarter to-quarter change. You’ll see this on some of the better series that are more relevant to the GDP, payroll employment, industrial production, and such, used for timing recessions. What is the official short-lived 2001 recession that has now disappeared from the GDP reporting probably began in late 1999 and dragged on into 2003. And again, you can see those patterns in industrial production and payrolls, we did not have recovery when they called the end of the recession. What we’re seeing now, in terms of the indicators I look at, is that the current recession probably started in the fourth quarter of 2006, that’s a year earlier than the National Bureau of Economic Research had it happening. With that short a span between what can be distinguished as two recessions, it’s really just one double-dip recession similar to what we saw in the early 1980s. The Great Depression was a double-dip recession too.

So yes, this is dragging out and this will likely be a longer downturn than any in the last century. I think there may have been one or two that were longer in the 1800s, but what we’re seeing is a structural change. It’s one that Alan Greenspan recognized and I think it’s one that’s generally recognized in Washington, but nothing that has been done in terms of stimulus will address it. This is going to be a particularly protracted downturn, particularly deep and generally unresponsive to most of the stimulus thrown at it.

Are European economic statistics more accurate? Because I’ve been reading in the German statistics, the British statistics, and the Japanese statistics, and all appear to be showing deeper recessions than the U.S. GDP statistics do.

I think they generally are. There have been a lot of efforts to standardize and institutionalize what the U.S. has done, some countries have gone along with it, some have not, but there is a lot of variation between the statistics in different countries. But I would say yes, not only are the European statistics more accurate, they’re also a little bit more open about their financial and banking problems. I think they also have a more realistic outlook as to what is happening in the United States because they have a pretty good sense as to how the system gets politically manipulated here.

Wouldn’t underestimating inflation also have a significant effect on real economic growth, and does your GDP chart take the effects of your CPI calculations into account or not?

Yes, it does. Real GDP growth, which is an inflation-adjusted GDP growth the way it is popularly followed, is an annualized quarter-to-quarter rate. I think is a silly way to look at it only because the error in the reporting is so large that when you raise the growth rate to the 4th power you exaggerate what is a very poor quality number. It’s not just CPI and it’s not just inflation. If you use artificially low inflation, that will give you artificially strong GDP growth once it’s adjusted for inflation. The CPI is not the same thing as the GDP price deflator; CPI is generally related to consumer spending, the deflator covers the industrial sector of the economy, imports and exports, etcetera. It’s not a one-to-one relationship, but I would say that CPI is the major modifier in the adjustments that are made there.

Which of the three unemployment measures, U3, U6, or SGS Alternate, most closely track the economic statistics that are presently reported for the Great Depression?

The unemployment rates reported for the Great Depression were the creation of the academic community and the Social Security adminstration after the fact. There was no unemployment reporting during the Great Depression, that started in 1940. The Federal annual census did some measurements, but even there it wasn’t measuring unemployment, it was measuring what your general trade was versus whether or not you were actually employed. So it’s a best guess that was generated by political entities. I’ll contend that if you talk to an average individual and ask them whether or not they’re employed, they won’t hesitate to give you an answer. It’s the type of thing that they can tell you right away whether or not it happens to match the government’s definition of employment and unemployment. That gets to the crux of what I’m doing here with my numbers because I’m trying to look at them from a standpoint that has a basis in historical government surveying and yet at the same time reflect the common experience.

One thing that I’ve done is take the employment numbers from the old censuses and compare them to the total population figures. Then you just have a straight-up percentage of how many people are nominally employed. There are demographic issues that don’t factor in, but if you add the military, it gives you a much better picture. In 1944, the military made up eight percent of the population! How do you even begin to talk about unemployment when you’re ignoring eight percent of the population, all of which is of prime employment age?

That’s often why the WWII period is excluded from normal business cycle analysis. It’s outside the norm of what you would see with a standard business cycle. But to quickly answer your question on the unemployment measure, I would view that what came out of the estimates for 1933, taken as the peak of the Great Depression, where they had 25% broad unemployment and 34% unemployment estimated for the non-farm population, would generally be along the lines of asking people whether they were employed or unemployed. The closest to this would be the SGS Alternate. In terms of the unemployment rate in 1933, remember that something like 27 or 28 percent of the population was agricultural at the point. Today it’s less than 2 percent. If you’re trying to compare it to today, you have to compare it to the 34% non-farm rate. In terms of the unemployment series that the government publishes from U1 to U6, U3 being the most popularly followed at 8.5 percent, U6 is around 15.6 percent, and my SGS Alternate is around 19.8 percent. (NB: this interview took place ten months ago. U3 is presently 9.7 percent and SGS Alternate is 21.5 percent.)

That’s still a long way from the 34% non-farm in 1933.

It is. The only difference between my number and U6 is that I include marginal discouraged workers that the government defined away in 1994. But these are people, if you asked them if they’re employed or unemployed, they’d say they’re unemployed. A “discouraged” worker meets all the attributes of being unemployed, except they’re not actively looking for work because there are no jobs to be had. The definitional change that was made in 1994 simply put a time limit on that; if you were discouraged for more than a year you were no longer counted as part of the labor force. That removed several million out of the equation. I estimate a number that is still generally proportionate; I think something around 20 percent is probably pretty close. To put it in perspective, going back over the time between now and WWII, in the best of times you are down in the eight-to-nine percent range, which unsurprisingly matches the European experience. In terms of how bad is it now versus how it was… this is the worst since 1975, it’s not worse than the Great Depression yet.

If I understand correctly, your methodology typically involves adding a fudge factor as a correction to the official statistics. Is that correct? Is it possible to recompute the statistics using the formulas that were previously used or is the data simply unavailable?

It’s not available. And even if it were, it would be extremely expensive and time-consuming. My measures are not perfect, they are estimates to give you an idea of what things would look like under different reporting circumstances. In terms of the CPI, if you look at how things were calculated in 1980 you’re looking at a seven percent differential, versus the 1990 methodology where it’s a three percent differential. But if you look at that seven percent, five percent comes directly from the BLS’s estimates as to the impact each different methodological change had on the reported annual rate of inflation. Two percent comes from my estimates of factors that since 1990 such as the substitution effect, the weighting of the CPI index, as well as the shifting of retail prices and such. If you read my answer to the government’s paper on misperceptions about the CPI, you will see my arguments. The gist of it is that the way the CPI was originally used, the way most people believe that it is still used, is that it measures the change in the cost of living needed to maintain a constant standard of living, is not how it is being used now when it attempts to take into account presumed quality of life changes.

What, in your opinion, is the least accurate series and which is the most accurate?

The big three, CPI, GDP, and unemployment series that are so closely followed and are so important politically do tend to get the bulk of the manipulation. Of those three, the GDP is the least accurate, followed by CPI, and then unemployment. The CPI is probably the worst in terms of its negative real-world impact being misrepresented because people rely on it for financial decisions, the others are more informational. I generally prefer private series, such as the Purchasing Managers survey, the Conference Board’s Help Wanted advertising measure, although their newspaper index has taken some hits due to the Internet. Even allowing for that, it still telling you a very negative story on the employment picture. The interesting thing is that if you look at the current year-over-year changes in that index in the nascent online industry, Conference Board and Monster.com, you’re seeing parallel declines. That’s a series in transition, but the Help Wanted advertising is a good one. The Purchasing Managers survey, in particular the New Orders component, is a very good leading indicator. In terms of the government’s data, although you can have some monthly aberrations, the Retail Sales and the Industrial Production are reasonably clean. I look at them as being pretty good indicators of what’s happening and what lies ahead. Even the non-farm payrolls, once you get all the revisions in there, is pretty good. New claims for unemployment is another one, but you can’t use the week-to-week change, you have to use the year-to-year smoothed over 17 weeks because the government does not seasonally adjust well. They try, but they’ve never been successful at it.

There’s been a lot of talk of economic recovery beginning in late 2009 or 2010. What do you see?

I don’t see that. Even if there’s a change that would affect the economy, let’s say for example that the stimulus package was really effective, the economy does not turn on a dime. If the stimulus package were effective, you might expect to see something towards the end of the year, but the stimulus itself is really minimal in the first year and does not address the structural problems. I will contend that the recession is so deep that it’s going to absorb the stimulus package without the economy breaking the surface of the water. We had a circumstance now where there is a real problem for the consumer tied to his income growth falling short of the rate of inflation. If you look at the household income that was reported in the last poverty survey, both median and mean income growth, adjusted for the government’s own inflation numbers, has not recovered, they are still at pre-2001 recession levels. If you look at real average weekly earnings, they still have not recovered from the levels preceding the 1973-1975 levels. Average real weekly earnings are down 15 percent from where they were back in the early 1970s. This has been an ongoing, developing problem as higher-paying jobs in production have been shifted off-shore. As a result, we normally will see more than one breadwinner in a family while back the 1970s it would have been more common to only have one. The average family is not making ends meet, the average individual is not making ends meet, and there is the big problem for the economy. Unless you have a sustained growth in income that exceeds the rate of inflation, you’re not going to have sustained economic growth. You’re not going to have sustained GDP growth unless you engage in temporary measures such as debt growth.

Greenspan saw this. He was aware. It was obvious for many years. But particularly coming in in 1987, before the crash and the financial crisis that he would not let run its course, he took very deliberate action to encourage debt expansion over time which has been the primary fuel of economic growth over the last two decades. Now we’re seeing the debt collapse and without people making adequate income over inflation and without being able to borrow, there is no way to get the economy growing by 2010.

It sounds to me as if you’re saying that there’s not much choice except to accept this structural change and deal with it.

Over time the system will be self-righting. The ways of quickly addressing it would not be considered politically correct, such as to become more protectionist or rebuild the U.S. manufacturing base. And there’s nothing in the works that’s going to turn this quickly. Even if you started to do things like that, you’d probably be looking at a decade before you started to see results. What we have ahead of us, what we’re in now, will be classified as a depression. A decade or so back, I talked with the Bureau of Economic Analysis National Bureau of Economic Research about how they would define a depression in terms of how we look at things today, and came up with a consensus of sorts – it’s nothing official – of a peak-to-trough, inflation-adjusted contraction in GDP or broad economic activity in excess of 10 percent. A great depression would be in excess of 25 percent. If you look at series such as retail sales and industrial production, we’re seeing numbers that year-to-year are in the depression camp, durable goods orders and housing are in the great depression category. Even in terms of GDP, there’s a chance of seeing a 10 percent decline if they don’t fudge it too heavily. That would count as a depression. In terms of a great depression, I think we’re going to have one but that is going to be in conjunction with hyperinflation. You’re writing a book about the Great Depression, right?

It’s called The Return of the Great Depression, it will be out on the 80th anniversary of Black Tuesday.

That’s an interesting title because I’ll contend that what Roosevelt did in abandoning the gold standard, which freed him up to introduce the debt standard, really set us up for what we’re going through now. The debt standard is now collapsing and you don’t have anything supporting it beyond the printing of the money which is now looming. One of the other government statistics that I write about is the budget deficit based on GAAP accounting. And although they argue about whether or not they should include the unfunded liabilities for Social Security and Medicare, they do at least footnote them and there have been times when they’ve included them. If you look at that, last year you had a deficit of about $5 trillion. It’s averaged $4 trillion since they began publishing the combined numbers back in 2000 or 2001. That’s beyond containment. You cannot raise taxes enough to cover that even if you take all of everyone’s income. They’re still adding new unfunded programs, so there is just no way that the system survives. We’re facing a GAAP-based deficit this year of around $8 trillion and net present value of unfunded Federal liabilities of around $65 trillion. That’s bigger than the global GDP and even without the banking crisis, the country is effectively bankrupt and headed for debt-default, which I can’t see the U.S. doing. I think it’s more likely that they’ll go with the traditional solution which is revving up the printing presses and paying off the debts with a debased currency.

What’s happened with the current crisis is that the process has been accelerated. The key here is the dollar. You’ll start to see heavy dumping of the dollar, you’ll start to see very rapid inflation beginning with oil prices. If I’m right in terms of hyperinflation, which could start anytime between the end of this year and 2014, that would throw you into a great depression. If you look what happened in Zimbabwe, the hyperinflation there developed over a number of years but things still continued to function because they had a working black market in the U.S. dollar. We don’t have a black market backup. When it comes here, it’s going to be extremely disruptive and will probably bring normal commerce to a halt.

The unfalsifiable “science”

I couldn’t agree more with these commenters at Brad DeLong’s place:

I’d say the point is not that economists have come up with a lot of false hypotheses. That’s normal and just the way hypotheses are. The point is that the status of those so-called hypotheses is not reduced by empirical evidence. As noted by Quiggin, one problem is that they aren’t hypotheses at all but rather statements so vague that they can’t be tested. The other problem is that many economists draw policy implications of statements so vague that they can’t be tested.

Of course, economics isn’t the only “science” that begins with the letter E that suffers from these problems. What’s worse about economics, though, is that they already have at least three alternative hypotheses that work much better on both logical and predictive bases than mainstream Samuelsonianism or Efficient Markets.

None of the mainstream economists saw the financial crisis of 2008 coming. None of them realize that we are in a giant economic contraction now, not an economic recovery. None of them are paying any attention to the commercial real estate debt crisis or understand how that is going to affect the economy. (Here’s a hint: it could be bigger than the total Finance and Household sectors debt-deflation of $1.1 trillion to date and has the potential to take down up to 40% of the banking system in the next three years.) And despite some public tearing of hair-shirts, as per the famous article in The Econonomist, no mainstream economists have shown any signs of abandoning their failed hypotheses, policies, statistics, or econometric models.