A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Tuesday, December 25, 2012

Transcript: Recession Call, Idiots of the Week

Today on the podcast, the recession call, idiot of the week forecast edition with John Silvia and Mickey Levy, that's chief economists at Wells Fargo Securities and Bank of America, and the problems with establishing our new forecasting blog: apples to oranges, apples to metronomes, and apples to sheep. Also known as how to make a model fly in the real world.

First the recession call

Yes. I know we are recovery deniers here at Demand Side, so how do we get to call the onset of another recession without having closed the last one? Well, we DID predcict a slump aftger the election, following the political business cycle. We DID follow the federal spending, particularly defense spending, as it ran up prior to the election. And we HAVE called downside risks in all of our commentary.
Listen to this episode
So for that, and for reasons of comparison with the supply siders, we decided to rejoin the fray.

The U.S. economy slipped back into recession (in the conventional frame) in December 2012.

Of course, in the Demand Side frame we are still bouncing along the bottom, stagnating, the real economy's physical and human capital deteriorating, its resources and natural systems depleting at dangerous rates, and its control systems seriously corrupted by entrenched corporate power.

We'll get more of the conventional view in a moment with John Silvia, but as we get ready to launch the Forecast blog again, now under the URL remacro.com – look for that January 1—we've had to level some critical thinking at some basics. that exercise, somewhat to our surprise and certainly to our disgust – allowed us to see through the facile garments worn by many modern forecasters. We'll get to that after Silvia.

First. The recession call.

As long-time listeners to the podcast will know, Demand Side does not see the recovery purported to have begun in July 2009. We see an economy bouncing along the bottom, a depression ameliorated by the New Deal institutions of social security and unemployment insurance, a continuing employment and income crisis. We see financial markets, including commodities now, where higher prices are founded on cheap chips from the Fed. We see an investment phase of the business cycle by its absence. The business cycle is broken. High profits, cheap financing, large cash balances on corporate balance sheets have failed to connect with the business cycle because the economy is driven from the demand side and the demand side is staggering under high unemployment, huge debt burdens and stagnating incomes.

The uncertainty excuse purveyed by the supply siders is very lame, when it is followed by "government policy" or "government regulation." The real uncertainty is about demand. Corporations which did well individually by increasing margins through downsizing and cost cutting are in the aggregate responsible for cutting the legs out from under any sort of real recovery. Demand is stagnant and risks another fall.

We get some concurrence from ECRI, the Economic Cycle Research Institute, although that shop headed by Laksman Achuthan is relying on the basic leading indicators and did not see the political business cycle. Gary Shilling, as you've heard here, is also on board. Most importantly, small business in the NFIB – National Federation of Independent Businesses – survey has been in step not only on this call, but on the whole non-recovery call. And this week, the Michigan Consumer Sentiment Index came in low, getting a vote for recession from the average citizen. Charts online at demandsideeconomics.net

The University of Michigan Consumer Sentiment final number for December came in at 72.9, a decline from the December preliminary of 74.5 and a dramatic decline from the November final of 82.7.

To put today’s report into the larger historical context since its beginning in 1978, consumer sentiment is 15% below the average reading (arithmetic mean) and 13% below the geometric mean. The current index level is at the 21st percentile of the 420 monthly data points in this series.
The Michigan average since its inception in 1975 during the five recessions is 69.3.

Now to

Idiot of the Week


Quickly turning from stimulus – which DID work in the ARRA back in 2009 – and Levy can see it in his own growth charts, he takes some shots at Ben Bernanke. We like that sport, and we've been doing it a lot longer than he has. You heard us say in 2008 that monetary policy won't work, can't work. Now it's mainstream.

But government stimulus, which is code for spending on real stuff, hiring real people, has worked, can work, will work. In terms Levy might understand, it is putting money into the economy, directly into the economy, not into the casino on the hill in hopes the rich will feel richer and let some slip out.

And housing as a non-monetary factor. The Fed is obsessed with housing. It is the bulls eye in their easy money obsession.

The non-monetary factor is the spending factor, THAT is common sense.


Didn't learn very much. As if Social Security had something to do with the downturn or low growth or the debt and deficit. Social security is supporting growth and not one nickel of the deficit or debt comes from social security. Tens of billions come from defense spending. Let's call war a corporate entitlement, maybe that will loosen some minds.

So co-idiots of the week, John Silvia and Mickey Levy. Notice we didn't pick easy targets, we didn't lampoon the weak-minded. Let's be clear, these are accomplished economists, but they have a difficult path to walk. Locked up in Neoclassical jail, and employed by the banks. They cannot talk about writing down the tremendous private debt, the first step in recovery, because their employers are marki ng that debt to make-believe in order to remain solvent. Not dissimilar to the Eurozone, where bank economists must insist on austerity, because if sovereign debt were restructured, at least if it is done before it is transferred to the ECB or individual nations' central banks, that takes down the economists' paycheck.

Now to the forecast.

January 1, we are rolling out the new Forecast Blog. remacro.com. Don't go there now. It is not ready. We have issues.

First, we want to continue to be better as in more accurate than the other forecasters. In one of the first posts on that site, we'll show you the chart of how many forecasters got the scale and timing of the Great Financial Crisis right. Then we'll trot out the Federal Reserve Governors' forecasts and show that skill in prognostication is apparently not attracted to money.

There are some issues.

First is the fact that the mathematical models used by many forecasters are DSGE, Dynamic Stochastic General Equilibrium models, that ignore money and banking, treat time as if it had no historical dynamic, and of course, constrain the outcomes into an equilibrium that plainly does not exist in the real world. That is one problem.

The second is that even those models that escape from the absurd assumptions of the Neoclassicals are still mathematical models that cannot see climate change, corporate dominance of decision-making, or other institutional structures that really form an economy.

The third is that the economy that is measured is not the real economy, but one of aggregated metrics. Growth can boom in prosperity or war. Inflation can be high in recovery or stagnation. Employment can be in healthy, high-paying or sick dead-end jobs. Depletion of resources and natural systems, goods versus bads, and public goods are all either ignored or wildly inaccurate in the GDP Growth economy of economists. That GDP Growth fetish is going to kill us all. Particularly when it favors policy which kills the economy. It is not so far from the short-term fixation of corporate executives which corrupts the long-term health of their corporation.

So, we have set for ourselves an improbable task: One, Describe an economy in real terms, actual terms, so that people can relate, and so it has relevance to the real ... actual ... world. Two, recalibrate so we can compare to other forecasters and see who comes out as most accurate. This means translating demand-side and medium term into supply-side short-term numbers, as well as stripping away much of the real ... actual ... economy to find the comparable numbers. All this without overwhelming you with data and verbiage.

Should be fun. We will hope to get your help on that, via feedback.

So, today's podcast, as always, brought to you by Demand Side the book. DemandSideBooks.com, AND by remacro.com, because as Karl Popper said, "Predictions and explanations are symmetrical and reversible." That is, as we say, if your predictions are no good, then your explanations are no good, your models are no good.

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