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The recovery we are embarked on has a schizophrenic quality about it; it is typical and it is anything but typical, the diseased roots have been cleaned out and the diseased roots remain very much in place, central bankers have matters in hand and central bankers are clueless, economics offers sufficient explanations and economics is in crisis.
We believe that the distinction between normal cyclic processes and deeper level long term processes will offer clarification. The hidden layers, one might say, are generally obscured from view behind (an often politically convenient) smokescreen of day to day and week to week noise processes which drive the media cartoons that pass for informed discussion.
To begin with, we must look at Total Public Debt, which unfolds in three acts. The first shows a rising debt through the eighties until the late nineties, until it began to slow and level off going into the 21st century. This was a period when the world was expecting a reduction in military expenditures and a globalized neoliberal trade arrangement.
When the attacks of 9/11 occurred, and the American project was suddenly recalibrated as the GWOT, the Global War On Terror, the public debt surged at about a fifty degree angle between 2001 and 2008. During this phase, the equity value of the defense sector increased fourfold, by 400%. There was a phenomenal boom in real estate. Credit became absurdly convenient and absurdly lax.
Oddly, very oddly, the entire credit for this seismic shift was given to innovations in the lending and loan securitization markets. No mention was made of the stimulative effects of ramping up a militarized economy which was, in effect, shifting future growth into present hot expenditure. We would argue that it was a combination of massive public borrowing during a low interest rate boom that produced the extreme overshoot in multiple asset classes in the late 2000s.
Then, with the collapse of the private sector in 2008 the Total Public Debt exploded by about 3 trillion dollars in one final vertical surge. With very little clear idea as to how this debt will be paid down, or even how the annual interest on this debt will be paid off.
Even at 3% per annum for the aggregate debt, we’ve got to come up with a 360,000,000,000, that’s three hundred sixty billion dollars per year in interest, for a very long time. We’re basically sticking future American generations with a long term multiple hundred billion debt obligation to pay for the current generation’s missteps.
A phenomenal, unsustainable debt obligation that will hit us hardest precisely as the baby boom generation becomes most dependent on public solutions to long term health care problems. As it stands, the Congressional Budget Office has calculated that the United States will experience a significant output gap (enforcing deflationary pressures) between now and 2015. We believe that this problem has been greatly understated.
One critical factor not to be overlooked is the progression of the American demographic. In 1956 the future of the country was literally in its infancy, and following a long decline in the birth rate during the Great Depression and WWII, there was a massive population surge. This baby boom would define many of the dominant characteristics of both our economic operation and our cultural and political tastes throughout its life cycle.
As the Baby Boom outgrew its’ younger, more radical student phase in the Viet Nam era, with drugs, lifestyle experimentation and protest, and then embarked on adult concerns and a rightward drift in their political tastes, the financial culture of the United States also morphed from a Great Depression inspired risk averse way of thinking into the New Thing, which fetishised theories like the Efficient Market Hypothesis, Neo-Classical economics, Monte-Carlo simulations, Gaussian probability distributions, and the salutary effects of unrestricted capital flows.
The Baby Boom had grown into financial power and drifted away from its youthful political radicalism, slowly but surely into an airlessly dogmatic sense of the revealed truth, while retaining its elemental characteristics, what Freud referred to as Die Anlage, the “essential blueprint”, the idea that reality could be remade by the imposition of a theory. One could say that the fate of Cuba and the fate of a business school worldview had a common spiritual ancestor.
This generation would exchange radical theories of society for radical, very typically for that generation, academic ideas that were prized more for their elegance than their practical conformation with reality. This avaricious, indulged, entitled, theory and model loving generation would, combined with global changes in finance and technology, unleash the long wave that ran from 1982 until 2007.
The final denouement coincided with the beginning of the end of the Baby Boom driven cultural cycle and the ascendancy of Generation X, the air pocket behind the Baby Boom, whose first major representative is Barack Obama. We feel that whatever his imperfections, far too much has been imputed to the person of President Obama, and far too little to the mass dynamics of one asymmetrical generation leaving the stage, with all of their self serving narcissism, with all of their sense of being owed, with their irresponsibility and shallow thinking, and being replaced by another generation whose worldview is based in a very different relationship to advantage and opportunity.
As of this writing, year 2010, the US population is yet again 10 years older, with the maximum age cohort from 45 years to 54, now in their positions of senior management and positions to direct policy. The absolutely essential point to grasp is that this generation will be in their last stages of public involvement within the coming decade and there will be a wholesale shift from the Baby Boom mode to the Generation X mode, of whom Barack Obama is but a stylistic harbinger.
There will be an accelerating shift toward health and medical expenditure, a much lowered interest in foreign involvements, and a phenomenal amount of debt outstanding.
We note with some alarm that the Dallas Fed’s in house measure of inflation and deflation pressures, the Trimmed Mean CPE inflation rate, which we take as a more reliable indicator as to what the Fed really thinks versus the popular CPI numbers that are sops thrown out to give talking heads something to mumble about, is diving quite nicely into deflationary territory.
Dallas Fed t.m. inflation rate
Deflation implies staying put, real estate sells with less vigor when inflation isn’t there to justify price increases, the arguments for wage increases are less convincing, and yes, we’re stuck with an awful lot of debt to service. Inflation may ultimately reduce debt service real costs, but the path there as rates increase can get painfully expensive, painfully quickly.
The Fed, the Treasury, Congress and the President must feel as if they’re walking on a razor’s edge. Maintaining a slow, steady, low growth posture risks plunging into a deflation spiral and attempting to use inflation as a way of ultimately evaporating the debt risks a hyperinflation spiral. It will be exceedingly hard to find the Goldilocks wonderland that gave the late 1990’s their “end of history” quality. The 2010s are sure to be a “history is back, with a vengeance” epoch.
As we can see from the Rectified Unemployment chart (total unemployment minus five week and less), serious unemployment has just barely turned the corner, but we feel that this unprecedented destruction of work opportunity has been so cauterizing that it will leave scars on the public psyche long into the future.
Rectified Unemployment
