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Meet The New Recession Cycle——Its Triggered By Bursting Bubbles, Not Surging Inflation

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http://davidstockmanscontracorner.com/meet-the-new-recession-cycle-its-triggered-by-bursting-bubbles-not-surging-inflation/

We are now in the month of April—–so the Wall Street Keynesians are back on their spring “escape velocity” offensive. Normally they accept the government’s seasonal adjustments in stride, but since Q1 is again hugging the flat line or worse, it seems that “bad seasonals” owing to an incrementally winterish winter explain it all away once again. Even today’s punk jobs number purportedly reflects god’s snow job, not theirs.

What’s really happening, they aver, is that jobs are booming, wages are lifting, housing prices are rising, consumer confidence is buoyant, car sales are strong and business is starting to borrow for growth. In fact, everything is so awesome that one Wall Street economist quoted yesterday could hardly contain his euphoria:

“Consumers have emerged from the winter blues. If they spend anywhere as great as they feel right now,
then this economy is going to roar over the next few months,”
said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

Since Rupkey has been expecting a roaring economy for several years now it is tempting to dismiss his latest fantasy as just the institutional cluelessness which emanates from the pitiful behemoths which pass for Japanese banks. But with only slightly more enthusiastic bombast, Rupkey is simply braying from the generic Wall Street script.

Since these people get paid a lot, have PhDs and might even be smart, how is it that they are so wrong, and have been now for five years running? There is a simple answer: They are operating on a business cycle model that is utterly erroneous and obsolete; and which therefore distorts and obfuscates the ‘in-coming’ data and the inferences and forward expectations that they derive from it.

In a word, their father’s business cycle model was premised on a “clean balance sheet” world driven by main street borrowing. In fact, however, we have now passed through the “peak debt” horizon and are in a bubble finance world driven by Wall Street speculation. That passage changes everything.

To be sure, the old fashioned main street cycle was the work of the Fed no less than today’s. After all, the business cycle itself is essentially a product of central banking.

Indeed, central banks function akin to the 12-year old who killed his parents and then begged the court for mercy on the grounds that he was an orphan. That is, they inherently generate credit inflations and the resulting economic boom and bust—–only to then claim indispensability in reversing the recessionary slump and avoiding a plunge into depressionary darkness.

..

Most importantly, back then household balance sheets were relatively unleveraged, enabling a robust response to changes in the price of credit and a consequent mobilization of consumer spending. By contrast, for 80% of today’s debt saturated household balance sheets, spending is essentially constrained to current wages and income regardless of the price of credit.

The people are already maxed out on credit, many now rent a car for 3 or 4 years and will never actually own it. Perhaps if housing hadn't got so expensive they might be able to afford to buy a car on HP but as the majority of income is sucked up by servicing the housing loan there's little free income to spend. Shock horror the economy is sluggish, if only world worked as the models predict.

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if only world worked as the models predict.

The world must be faulty :)

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Seems to essentially be making a Keynesian point viz govt must support consumption at the zlb whilst the private sector deleverages.

Not sure he understands thats what hes saying however, which isnt a surprise either

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His conclusion


The bottom line is therefore straight forward.

The credit channel of monetary policy transmission is now broken and done. The impact of ZIRP and QE never leaves the canyons of Wall Street——meaning that it functions to inflate financial assets rather than main street wage and prices as it did during the era of inflation in one country.

But that makes for both a considerable irony and an incendiary danger. Today’s clueless Keynesian central bankers essentially believe that they can keep the pedal-to-the-metal until a 1970’s style inflationary spiral arises.

But none is coming because the worldwide central bank money printing spree of the last two decades has generated massive excessive capacity and malinvestment all around the planet. What is coming, therefore, is not their father’s inflationary spiral, but an unprecedented and epochal global deflation.

So the central banks just keep printing, thereby inflating the asset bubbles world-wide. What ultimately stops today’s new style central bank credit cycle, therefore, is bursting financial bubbles.

That has already happened twice this century. A third proof of the case looks to be just around the corner.

"An unprecedented and epochal global deflation".

"bursting financial bubbles.

That has already happened twice this century. A third proof of the case looks to be just around the corner."

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Seems to essentially be making a Keynesian point viz govt must support consumption at the zlb whilst the private sector deleverages.

Not sure he understands thats what hes saying however, which isnt a surprise either

The Keynesians are the ones who don't understand what they're saying. They're the ones responsible for the third global asset bubble in fifteen years. This time, however, there's no-one left to pass the bag to.

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The Keynesians are the ones who don't understand what they're saying. They're the ones responsible for the third global asset bubble in fifteen years. This time, however, there's no-one left to pass the bag to.

ET?

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