Last Friday a photograph of a dress, whose exact colors were in doubt and
became the subject of much debate, dominated the Internet. Not only is this
a perfect example of the inane distractions that the public is fascinated with,
but it is also a topic that should be elevated to a higher level of discussion.
That is, how people can look at the same thing and yet interpret it in different
ways?
The current picture of economic growth in the United States is undergoing
a similar debate. During the second and third quarters of 2014, Wall Street
popped champagne corks because the average of the two periods displayed 4.8
percent economic growth. The better-than-expected GDP, coupled with a steady
decline in the unemployment rate, led many to believe that our seven years
of economic malaise were over. The economy appeared colored in growth -- happy
days were here again!
Unfortunately, the celebrations proved premature. Fourth quarter GDP has been
revised downward to an annualized rate of 2.2 percent, not the 2.6 percent
analysts had been expecting. And full-year GDP growth came in at an underwhelming
2.4 percent. Turning to data in Q1 this year, the Chicago PMI came in at 45.8,
indicating contraction in the manufacturing sector in the Midwest for the first
time since April 2013, and the number of Americans seeking first-time unemployment
benefits rose last week back above the 300,000 mark.
But the bad news doesn't end there. In January existing Home Sales fell sharply
to their lowest level in nine months, and despite bullish calls for consumer
spending to be bolstered by falling energy prices, consumer outlays fell in
both December and January, the first two-month decline since 2009.
Greenspan's Parallels Today's U.S. To Year 1937 Of The Great Depression
The former Chairman of the Federal Reserve, Alan Greenspan, doesn't think
the color of the economy is all rosy. He told CNBC's "closing Bell" that effective
demand is extraordinarily weak. Referring to the depression inside the Great
Depression that occurred in 1937, he said, "The way I measure it, it's probably
tantamount to what we saw in the later stages of the Great Depression."
Among other things, Greenspan blames entitlements for crowding out savings,
a critical aspect to investing, and crowding out capital investment. Greenspan
continued, "Capital investment is key to productivity growth. That has slowed
down quite dramatically and productivity has followed right along."
Former Treasury Secretary Larry Summers sees the economy in shades similar
to Greenspan. And he has a name for this color: "secular stagnation." Summers
contends that the inflation-adjusted Fed Funds Rate should be as low as negative
2-3 percent "forever."
More Fed Propaganda
Despite the bleak hue seen by some, many of those who work at the Fed see
the economy colored in blue skies forever and are confident we will see 3 percent
growth this year. In fact, some members of the Federal Open Market Committee
see the economic picture as so bright that they believe the Fed should dull
it with immediate rate hikes.
St. Louis Fed President James Bullard, who is generally hawkish, called for
rate hikes as part of "the normalization process," as he expects the unemployment
rate to fall below 5 percent in the second half of this year and overall economic
growth to be 3 percent for 2015.
Bullard claims, "These labor markets are improving so rapidly ... if you haven't
even come off zero and the unemployment rate has come down below 5 percent,
that seems a little bit extreme to me."
Likewise, Federal Reserve Vice Chairman Stanley Fischer said recently, "If
the labor market continues to strengthen, and if we see inflation beginning
to increase, then the natural thing is to get the interest rates up."
But perhaps Bullard and Fischer should review their color charts. The last
time we had annual GDP growth over 3 percent was in 2005. We have spent the
last nine years growing well below the 3 percent level, despite the Fed's unprecedented
accommodation. In case they forgot, we had the following growth rates for the
past five years: 2010, 2.5 percent; 2011, 1.6 percent; 2012, 2.3 percent; 2013,
2.2 percent; 2014, 2.4 percent.
Why would the economy suddenly start growing at 3 percent if "quantitative
easing" has ended and interest rates are projected to start rising? Do they
expect companies to start building factories because the cost of capital is
increasing, when they didn't build those factories when the cost of capital
was next to nothing? Or do these color-blind pundits think that collapsing
asset prices will finally spur consumer demand that has been absent for nearly
a decade?
The Harsh Reality
While those at the Fed are busy tinkering with their color wheel, they are
missing the contractionary and deflationary data points hanging all around
them. They have spent the last seven years "mixing paint," but the economy
has shown no signs of sustainable and robust growth.
The only things we have to show for years of central banks' absolute domination
of free markets are worldwide asset bubbles in real estate, equities, and sovereign
debt.
And now true to form, the Fed's reading of the economy is 180 degrees away
from the economy's actual condition. Since our central planners have managed
to artificially bring the belly of the yield curve down to around 2 percent,
it won't take many increases in the Fed funds rate before banks find it unprofitable
to make loans -- and the economy shuts down just as it did in 2000 and 2007.
So once the Fed raises interest rates just a few times and flattens the yield
curve, the real color of this economy's "dress" will become clear to everyone
-- and it is sackcloth and ashes.
