Bubbling Up

We’re getting dangerously close to a head and shoulders pattern in both manufacturing output, and the S&P500:


What does this graph tell us? Well in the last ten years we have seen little net gain in either. Each of the two slowdowns has been preceded by a blowout top in the S&P. This is symptomatic of excessive credit creation in the financial sector. The resultant credit crunches coming out of these bubbles would seem to have dampened industrial production. Is that a result of the credit bubble damaging the economy? No; the aftermath of a bubble (so long as it is not accompanied by war, and riots, and famine — in other words, the explicit destruction of capital stock) does not necessarily damage anything other than lending and confidence.

Was it a case then that industrial production — which climbed significantly in the preceding decade — got ahead of itself, and that we were simply producing more than we could consume? It would seem so, and that would certainly explain why the exuberant first attempt to reinflate the bubble failed, and we were drawn into a slump. This brings my thoughts back to this:

Who needs 5 TVs? Well, nobody, and that is the level of consumptive, home-equity-fuelled demand that we were (and are) trying to sustain (and expand upon). For the record, I have 2 TVs, which in itself is probably excessive, especially considering that I rarely watch them.

Then again, there are millions of people in America who need healthcare who aren’t getting it, mostly because (for whatever reason) they can’t afford it. There are homeless kids whose parents have taken to eating rats. Surely that kind of demand would be more sustainable than another speculative stock bubble, another boom in consumption fuelled by home equity, and more TVs, McMansions, iThingies and vacations for urbanites and exurbanites?

I suppose it is that logic that leads well-meaning liberal politicians down the avenues of reflation: economic stimulus, as well as condoning the Fed’s money printing escapades. The problem is that the money always seems to end up in more speculative equity bubbles. I have shown empirically that the more money America has printed (both in terms of expanding the monetary base as well as in terms of fractional credit creation), the more unequal America has become.

This graph highlights the real outcome of all the Obama-Bush-Bernanke economic interventionism:


Corporate profits bounced back right away, while unemployment and underemployment are just as high as when the contraction “finished”. I have made a habit while writing this blog of badmouthing John Maynard Keynes, but at least under a genuinely Keynesian scheme the unemployed people are given jobs (albeit on borrowed money, and albeit not necessarily productive ones) and the unemployment rate falls. All we get today is platitudes about the unemployment rate being sticky; more hopium, more promises that if we just wait long enough and hope hard enough things will get better.

So all that the Obama-Bush-Bernanke interventionism has really produced is more slush for the corporatocracy. It’s just corporate socialism hidden behind a facade of pithy egalitarianism. There is no recovery, only superficial reflation bubbling over a stew of hurt.

And — like most head and shoulders patterns — this third top is even more unsustainable than the last two.

Want proof?


Credit creation has continued to expand above and beyond the productive capacity of the economy. That is a bubble, if ever I saw one.

So what next? Well — like most head and shoulder patterns — the final “shoulder” tends to be followed by a crash. Now, I recognise we are not dealing with an equity, so the crash may not be in terms of price level. It may be geopolitical, or inflationary, or ecological, or some black swan. It may be this year (moderately unlikely, but plausible) or sometime down the line. Who knows?

Hold onto your seats.

26 thoughts on “Bubbling Up

  1. “the aftermath of a bubble (so long as it is not accompanied by war, and riots, and famine — in other words, the explicit destruction of capital stock) does not necessarily damage anything other than lending and confidence.”

    What if country X receives huge amounts of useful goods from outside (food, iPads etc. that are keeping people happy) in exchange for building huge, useless stone pyramids in their own country (let’s assume this is possible due to the follies and excesses in the financial system). In this country X, a whole array of other industries will develop to cater to the needs of those working in the pyramid building industry (restaurants, bars, companies producing huge useless blocks of stone etc.). So yes, the economy was not damaged by the aftermath of the credit bubble, it was damaged during the course of the bubble. (We may replace pyramids with housing for example to get to an approximate situation).

    • PS: I’ve just read Krugman’s piece and think his example with the farmland price bubble is risible. I’m trying to remain humble (and for a good reason, because I know I do not know a lot) but I cannot not say what I think: Krugman seems to have the logic of a drunken sailor and in the world of abstractions he lives in, I think he can draw almost any conclusion imaginable while still keeping a straight face.

      • So long as the capital stock, population and infrastructure (etc) have not been damaged by a bursting bubble, capacity is not lowered.

        Rejecting this is a cop out, and Krugman seems to think that by getting his opponents to agree with this simple principle that somehow this is a backdoor to condoning reflation.

        However, this is not a justification for arbitrary and forced reflation. Again, who needs 5 TVs? (The intellectually dishonest Krugmanite answer is to say “everyone needs those who can afford higher consumption to go out and spend so we can have jobs”). But ultimately the needs and wants of the nation, as expressed through the market place should be the heuristic that determines what capacity the economy should be operating at. People need food, people need jobs, and people need energy — that is not a burden or a problem, that is a huge business opportunity, and can create a lot of jobs and prosperity and wealth in the private sector. Right now there are so many barriers to entry, so much legal tape (and loopholes for the big players, e.g. on healthcare mandates), so many government-enforced monopolies and oligopolies, and so much in the way of subsidies that the market is totally crooked and dysfunctional. That’s why social mobility is so low, and getting lower, and why income inequality is growing. We need to get the largesse out of the way and restrict the government to the role of referee to prevent exploitation, prevent violence, adjudicate, enforce contracts, create infrastructure and administer a small safety net for people (never corporations, and preferably on the local level).

        America needs cheap, clean energy, for example. The government would do well to quit throwing around subsidies to cronies and political insiders, and quit regulating new startups (competitors to their donors) out of business with barriers to entry and red tape. That alone would create a lot of demand, and domestic jobs. My hunch is that solar would win, but that government is holding back solar development with loan guarantees to crony capitalists like Solyndra who could never survive in a free market, and whose prominence sucks resources and capital away from smaller and better companies.

        Krugman picks those he engages with carefully. He would never engage someone like me, although he should, because it is getting boring watching him bash irrelevant old monetarists.

        • My fear is that he has no ulterior motives and that he truly believes in those theories. And indeed, papering over the debris of a bubble through printing might have worked in the past due to a confluence of factors like: cheap & abundant oil & resources, demographics, the status of USD as the reserve currency (I’m amazed how few people bother to ask whether some theory would work for any country that is not US), low debt levels (we were only at the beginning of the great Keynesian experiment), etc.

          Now understanding this, we realize that Lagarde was sincere when she said something like “we’re entering a new dangerous phase for the world economy”. And indeed, the world economy and its underlying structure is in such a mess that she was probably amazed that it didn’t blow up already. The “mad Hayekians” at the ECB (as AEP would call them) understand that Krugman’s road will lead somewhere only under very fortunate circumstances (even though they do not have any solutions themselves).

        • Obviously, he was not talking about everyone at the ECB, but about the Germans who oppose outright QE, a somewhat veiled QE through strong SMP purchases and who oppose even the LTRO.

        • Hear hear!

          When are we going to meet up in Davos, hopefully get some funding from an Oligarch for a new grass roots political movement. You cover UK, I will cover Australia.

          BTW I am still waiting on Zerohedge membership where I can use my name and connect with a bigger Australian Audience. I only need 500 registered voter Australian members to register a new political party.

  2. Standard operating procedure for central banks to pump up the cash before a election trying to get capital users to over invest in a sick economy. Bull Shit Keynesian/monetarist economics 101.

    Austrians know this crap inside and out, which is why we are never fooled by fake profits and real growth.

    • The Austrian School has done some admirable work, however it worries me that occasionally Austrians like Peter Schiff are too hasty to predict imminent hyperinflation and currency crises. Economists should be more measured and less sensationalistic, in my view.

      • Hyperinflation won’t happen. Read Mein Kampf the un edited version. Hitler has nearly a whole chapter on the causes of hyperinflation. Basically the politician of the time thought it would be prudent to strike rather than battle the French in the Ruhr valley industrial area. The money was borrowed from OS to pay workers to strike. The loss of production, and excess money chasing too few goods caused hyperinflation.

        Of course Hitler preferred battle, and dedicated a chapter to berating this economic policy.

        Because the world has excess capacity, deflation is the outcome in goods, and inflation in commodities (ZIRP handed out to market buddies front running). Biflation as you suggest in earlier posts.

        • The loss of production, and excess money chasing too few goods.

          This can happen anywhere, particularly in a nation like America that is dependent on foreign oil and foreign goods and components. A big geopolitical shock could cause hyperinflation in America. The people who are wrong are those like Peter Schiff who believed it could happen based solely on monetary factors.

        • Agreed. If you have trade sanctions imposed on the USA (Hostile ASEAN bloc with China pulling the strings) the USA would internally collapse.

  3. Quote:
    “Right now there are so many barriers to entry, so much legal tape (and loopholes for the big players, e.g. on healthcare mandates), so many government-enforced monopolies and oligopolies, and so much in the way of subsidies that the market is totally crooked and dysfunctional. That’s why social mobility is so low, and getting lower, and why income inequality is growing. We need to get the largesse out of the way and restrict the government to the role of referee to prevent exploitation, prevent violence, adjudicate, enforce contracts, create infrastructure and administer a small safety net for people (never corporations, and preferably on the local level).” End Quote

    Yep this in a nutshell is the problem…and those who benefit from this situation currently lack the vision and the will to allow any changes…their path is towards destruction. The only real possibility of a change is if a alternative leadership emerges somewhere which has the vision and will to bring about change…a black swan.

    • Secession of a few states (Confederate alliance?) where there is internal dislocation of the population to move to the states. Ron Paul is a Texan. What if Texas secedes, and other states follow?

      I don’t see anything improving for the Libertarian movement unless there is a new country created. Polarisation of the nation is getting critical.

      I heard a poster on Zero Hedge compare food stamp handouts to feeding animals. They get fat lazy and unhealthy. They become dependant and can become violent. “Don’t feed the bears”. They would vote Democrat. Then you have others who would vote for Ron Paul. Types who have a strong work ethics, self reliance. Save for a rainy day. Take out insurance if sick or injured.

      How long will it take before a “Messiah” comes along and says enough is enough. Join me on a journey to a better land.

  4. Wow this is a scary chart. But I’ve done some digging, and it is by no means unique:

    The difference I suppose is that it was that the head and shoulders top (67-77) was broken out of via a surge in industrial production, and not the current slump we find ourselves in.

    • That seems like precisely the difference. People see the 70s as an unproductive decade, but really there was a surge in production during the Carter administration, setting the stage for the growth we saw from the 80s all the way up to 2001. This time, there hasn’t been such a surge, which is why this is a hollow reflation.

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