The Classic Liberal Blog

Double-Dip Recession? Depression?

Inquiring minds want to know ...

Analysis Fail

The Yield Curve Says No

The theory behind the yield curve is well-explained in William Greider's 1987 bestseller about the Federal Reserve, Secrets of The Temple. The Fed sets short-term interest rates and the market sets the longer-term ones. These differing rates over time can be depicted as a curve that either slopes up or down. If the yield curve is positive sloping -- in other words, when short-term rates are lower than long-term rates -- then the economy is likely to expand.

Today, this theory predicts an economic expansion, because, as Bloomberg reports, the gap between 2-year and 10-year Treasury notes -- the short and the longer term durations -- is 2.11 percentage points. While this spread is narrower than February 2010's record 2.91 percentage point spread, it's nearly double the average since 1990. In other words, we have a very positive yield curve now.

Bond traders note that the last seven economic contractions have been preceded by an inverted yield curve, so they're not buying the idea that a downturn is imminent ... The Cleveland Fed's projections of the three-month Treasury bill rate to 10-year note yield suggest slow, but positive economic growth -- up 1.14% over the next year.

You just read a perfect illustration of why mainstream/Keynesian analysis consistently fails. After losing trillions of dollars based on their fancy mathematical schemes - bubbles, Long Term Capital Management, bank failures, mortgage crisis, etc. - Keynesians remain as clueless as ever when it comes to the fundamentals behind behind those calculations.

Indicators like the "yield curve" are only valuable when you first understand its components in terms of real world human activity. You need to know why certain data correlates and why those correlations might fail. Economics is not physics. It is a science of deduction.

The economy is not, as Keynesians believe, a mechanistic construct that can be manipulated by adjusting their mathematical formulae. Because humans are not machines, you "cannot quantify human action." Empirical data is only good for finding deductive reasons that explain the correlations and failures in terms of real human action. So unlike physics, there are no empirical constants in economics. In fact, to provide any worthwhile meaning, your correlation has to fail at least once.

It is true that in the past a positive yield curve meant banks loaned out cheap short-term money at higher long-term rates, thus causing money to flow into the market creating a Federal Reserve manipulated boom. But this time however, banks are holding the cheap money as excess reserves, meaning the simple correlation the Cleveland Fed is relying on for an uptick in the economy isn't going to work this time because the money isn't flowing into the system.

Economic Reality

"Are we in the midst of an actual economic depression, then? Time will tell." Unfortunately my friend, we're already in a depression. A 1930s-style Depression that will end in total collapse.

What is a depression? Prior to the 1930s, any economic downturn was called a depression. Because the Great Depression was so severe, they came up with a new name for regular dips in the economic cycle - recession (Newspeak has always been the official language of government). No formal definition of a depression exists, but 2 consecutive quarters of inflation-adjusted contraction in Gross Domestic Product (GDP) is traditionally used.

GDP "is constructed in accordance with the view that what drives an economy is not the production of wealth but rather its consumption" (in other words, GDP is an illusion) though, so this definition doesn't tell us much either. And don't get me started on the deceitful Consumer Price Index (CPI)!

Therefore, "a recession is when your neighbor loses his job, and a depression is when you lose your job" makes as good a definition as any!

The End

Our economy was built on the illusions of paper money backed by nothing, the results of which are severe structural problems that can't be fixed via manipulation. President Obama may be having a great time (at taxpayer expense), while VP Biden tries to convince you "we're moving in the right direction" ... But the cold hard truth is ... there is no way out of the disaster that lays ahead.

Sidebar: If you ARE "nostalgic" for the economic policies of the Bush administration, please don't vote. Let the adults make the decisions from now on, because Republicans are Keynesian too.

"We have got to find a new batch of economists." I feel your pain friend, I really do. But an extremely reliable batch of economists does indeed exist. In fact, a lot of very smart people have been warning about this crisis for years!

But I guess the truth is powerless in the presence of the people's Ruling Class romance, because both the modern "left" and "right" not only refused to listen, but chose to ridicule and denounce those who were right instead (which is why partisan politics fails). Making matters worse, the pattern hasn't changed.

This didn't happen overnight. The crisis was years in the making. Government piled debt upon debt and discouraged savings, while the Federal Reserve ruthlessly devalued the dollar in spite of repeated warnings from sound economists. Now, the economy built on paper has begun to collapse ... As it fights for its very existence, our insolvent federal government will attempt to force you to buy their debt, confiscate your assets, and most certainly print money like mad. Bread and circus will be provided via war with Iran.

Yes America, "We the People" are staring a genuine nightmare scenario in the face. A nightmare that will last for years, have consequences that stretch far beyond the financial, and dramatically alter not only your future, but that of your children and grandchildren as well.

It is going to end in tears.

More Economic News

• DO NOT BUY TREASURIES!
• The trillion dollar bailout you didn’t hear about
• Prepare for More Bank Bailouts
• U.S. Dollar Threatened by Fannie & Freddie
• If California's unemployed came together to form a state, it would be the 36th largest in America
• Upper-Income Workers Living Paycheck to Paycheck
• 40.8 million Americans receiving food stamps
• Food Shortage Coming?
• Why almost everyone is wrong about how to survive any food shortage or crisis!
• Surviving the Economic Crisis

Your Ruling Class Betters