Of Two Minds
MAY 4, 2018
The underpinnings of the past ten years’ non-recovery recovery are being taken away. Fed unwind has begun.
In 2016, US productivity growth actually fell for the first time since 1982, after several years of eking out less-than-1% gains. This has not been a recovery born of ingenuity, innovation, or even hard work; it has been gasoline sprayed on embers, and will be revealed as such now that the pyrotechnics are over.
Central banks have been running a grand experiment for 9 years, and now we're about to find out if it succeeds or fails. For 9 unprecedented years, central banks have pushed the pedal of monetary stimulus to the metal.
The two goals of this unprecedented stimulus were 1) bringing consumption forward and 2) generating a "wealth effect" as the owners of assets rising in value would translate their perception of feeling wealthier into more borrowing and consumption that would then feed a self-sustaining virtuous cycle of expansion.
The Federal Reserve has finally begun reducing its stimulus programs of near-zero interest rates and bond purchases, the idea being that the "recovery" is now robust enough to continue without the extraordinary monetary stimulus of the past 9 years since the Global Financial Meltdown of 2008-09.
Will the "synchronized global recovery" continue as interest rates rise and central bank assets purchases decline? Policy makers and economists evince confidence as they collectively hold their breath--is the recovery now self-sustaining?
Meanwhile, bringing consumption forward has drained the pool of future consumption and creditworthy borrowers. Future consumption now rests on the shaky foundation of marginally qualified buyers and the relatively few young people forming new households who also have high incomes and good credit.
The reality nobody dares acknowledge is that a "recovery" based not on improving productivity and innovation but on cheap credit and an artificially stimulated "wealth effect" was inherently weak, for the stimulus effectively hollowed out the productive economy in favor of the financialized, speculative economy and created perverse incentives to over-borrow and over-spend, stripping future demand to create the illusion of growth in a stagnating economy of rising wealth and power inequality.
A funny thing happens when you borrow from the future to spend more today--the future arrives, and we find the pool has been drained to serve the absurd policy goal of "no recession now, or ever again."