07 March 2008

The Potemkin Economy Just Fell Over

Let there be no mistake, no further debate. With two months of back to back Jobs Report declines the discussion on the US economy must shift from "full recession or mild slowdown" to "how long a recession and how bad."

The internals of the numbers were actually worse than we expected, and worse than the headline number.

We often thought that this would be an interesting economic experiment, with the Fed chairmen, first Greenspan and then Bernanke, getting the chance to replay the onset of the Kondratieff Winter and an economic depression. This time they were allowed to pour the money on in significant amounts, in the absence of that barbaric Gold Standard and honest mainstream economic scrutiny, to try and turn the winter into spring.

Well now we know. It's not working. It raised up a Potemkin economy that looked pretty on the surface from 2003 to 2006, but in reality was as thin as ..... paper.

We're chuckling to ourselves this morning as stocks rally from their lows, ignoring the economic news presumably, perhaps using the increased largesse of the Fed and their Treasury Auction Facility (aka Selective Helicopter Money). But we like to think of it as a fresh coat of paint on the Potemkin facade, to make people doubt their own eyes, and ears, and reason. The first principle of the Big Lie is to never tell the truth, never admit a mistake, while you can shield the people from the consequences of your deceptions.

But the charade can only continue for so long. As von Mises observed:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved... The boom squanders through malinvestment scarce factors of production and reduces the stock available through overconsumption; its alleged blessings are paid for by impoverishment."