Jesse's Café Américain: Have Fed Policy Errors Pushed Us Into a Stagflationary Depression?

As we noted at the end of 2007, there is little doubt we entered a recession in 2007. The only question was how long and how well the Fed might conceal it, and mask its effects on the financial markets and banking system which is their first priority no matter what else they might say, for a variety of reasons.

Depending on how one wishes to define it, and how one wishes to measure our monetary inflation, we have probably been in a technical recession starting early in 2007 and perhaps late 2006.

The recession is growing stronger and deeper because of the Fed and Treasury policy errors, squandering valuable national capital on a financial sector that requires reform, not welfare support.

Their errors are so large and so misguided that they may have condemned the US to a stagflationary depression. The equally misguided efforts of several national central banks may drag a good part of the developed world down with us for several years.

This study is a significant focus of our inquiries at this time, our intellectual raison d'être now that the question of recession is settled. Its no longer a question of 'how long and how deep' but the evlving nature of this downturn, the actions of the Fed and Treasury in reaction and the manner in which they prolong and mutate it. We may be watching something truly exceptional, and are seeking to understand it.

It will probably be the employment numbers that eventually make the difference in definition, although as we have previously shown that the government is actively revising those numbers many years back on a regular basis.

The major stock markets deflated by an appropriate contra-dollar measure also are consistent with the view that we are entering the recessionary aftermath of a market crash that occurred in 2000-3. We have never legitimately recovered. The Fed has been engaged in a protracted monetary experiment. We await the outcome of their gamble with keen interest, as the stakes of the wage are severe.

A significant challenge is the lack of transparency and reliable government and private statistics, and the willing complacency of most economists.

This may be an historic event. It is entirely consistent with what occurred in 1929-31 that it is happening largely unnoticed by a complacent public until they are swept away by it, with revelation after revelation that they have been deceived and misled.

What about the theory that if we pretend there is no recession or inflation then we won't have one? If we pretend that reality doesn't matter we will simply and slowly go collectively insane. There is some precedent for countries that do this.

So what ought one to do? Get in there and short the financial markets? That is like running down on the beach to sell flotation devices for an incoming tsunami.

When the tsunami is coming, get off the beach. The 'beaches' in this case are dollar denominated financial assets and financial assets dependent on the US economy.

We hope that the vectors of our data analysis are not correct. May God have mercy if they are.

U.S. Recession May Have Begun in Last Quarter of 2007
By Timothy R. Homan

July 31 (Bloomberg) -- The U.S. economy may have slipped into a recession in the last three months of 2007 as consumer spending slowed more than previously estimated and the housing slump worsened, revised government figures indicated.

The world's largest economy contracted at a 0.2 percent annual pace in the fourth quarter of last year compared with a previously reported 0.6 percent gain, the Commerce Department said today in Washington. Growth for the period from 2005 through 2007 was also trimmed.

The revisions now reinforce measures such as employment and production that already signaled the economy was shrinking. The National Bureau of Economic Research, the Cambridge, Massachusetts-based arbiter of economic cycles, defines a recession as a ``significant'' decrease in activity over a sustained period of time. The declines would be visible in GDP, payrolls, production, sales and incomes.

``We're in a recession,'' Allen Sinai, chief economist at Decision Economics Inc. in New York, said in a Bloomberg Television interview. ``It's going to widen, it's going to deepen.''

The government also said incomes grew less than previously thought, raising the risk that consumer spending will again stumble after getting a temporary boost from the tax rebates last quarter....

Today's GDP Number Will Be Revised Lower - April 28