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The Recession is Semi-officially here
The retail same store numbers for last month that just came out can be described in one word. Carnage. But then that's what Captain Carnage and his crew of nit wit wonders specialize in. There's no reason to be nice here, this much delayed recession sets the stage for another recession. Where's the slowing of inflation? Where is the bone crunching, back breaking correction of prices? Where is the liquidation, not just of some speculative instruments at faked prices, but of real re-allocation of effort? In short, there's no creativity, and little destruction. Except for people who work, they are seeing wages drop and layoff notices.
Nancy Pelosi is going to regret the day that she signed on board to a 600 dollar stimulus check solution to this recession. It does the worst thing, it gives money to a few people to pay higher prices. Basic liberal economic theory is to spread demand, force merchants to lower prices by giving some money to more people. But in conservative framed economics, giving money to people who have "earned" it is meritorious, even if that means it is inflationary. WIC? Running out of money. Food stamps? Woefully behind the food inflation that is already out there. Mortgage bailout? Late and wrong.
Doesn't anybody here know how to play this game?
Let's go over what carnage in the retail sector looks like:
Among department stores, J.C. Penney posted a larger-than-expected 12.3 percent sales decline. The department store retailer had warned late last month that same-store sales would be down at least 10 percent amid a souring economy.
Even high-end department stores like Saks Inc. which operates Saks Fifth Avenue, and Nordstrom Inc. languished. Saks reported a 2.9 percent decline in same-store sales, worse than the 3.5 percent gain that Wall Street anticipated. Among the weakest areas at Saks were women's designer apparel and fine jewelry. Nordstrom had a 9.1 percent decline in same-store sales; analysts had expected an 8.0 percent drop.
Now, with the evidence for downturn in December, an honest arbiter of recessions would have to admit that a down turn lasting December through at least April is already "in recession".
The government stimulus bills, plural because all emergency Iraq/Afgahnistan bills are stimulus bills, and we have been passing them like clockwork, are not going to reach the economy until summer. But all that means is that gas prices will get to stay higher for longer.
What the check is, is a partial rebate on the inflation tax which is being levied to bail out the financial system. As long ago as the 1750's Benjamin Franklin noted that a diminution in money's buying power represented an invisible tax. This is done by interest rates that are too low, and skewed towards consumption over investment. Excessive consumption creates inflation. This is the basic lesson: excessive consumption over supply is what creates inflation. There are many ways to bring consumption back in line with supply, the easiest being to pay people less money so they can consume less, but no matter what mechanism excessive consumption over supply is allowed, the root cause is the same.
Iraq is not a supply venture, but a consumption venture. Not one barrel of oil that would not have come out of the ground without the invasion will come out of the ground because of it. The housing boom was consumption oriented. So too is the security boom. The cost of health care has not increased health care supply, except for rather particular specialties, many of which, like cosmetic surgery, are largely consumption. The three H's: housing, health care, and homeland security, mean that this decade has largely burned through the cushion that the 1990's built up. Whatever good came of the neo-classical era of policy, it is gone now.
The stimulus bills are also consumption oriented, which is to some extent expected from stimulus bills. But if they were really creating consumer confidence then people would be borrowing money now in the expectation of its arrival. That the checks have been spent already, is seen in these retail numbers.
Over the last month we have gradually gotten the admission from various administration sources that a recession is expected. First from an obscure report on energy use, and now finally from the President and his economic team.
What is unpleasant however is that commodity prices, the driver of inflation over the last expansion, have not been significantly altered in their upward dynamic. The problem is structural. When a consumer spends on a retailer, then much of the money stays inside the economy, and generates a multiplier, which corresponds to the multiplier of fractional reserve accounting money generation. When a consumer buys energy, most of that money leaves the economy, and is recycled as outside investment. These outside investors do not have the same view of what is good for the future that Americans do.
What these numbers mean, in the business cycle view of things, is simple: contractions have an anatomy. First the speculative parts of the economy contract. This happens before the down turn, and in our case started in earnest in August.
This does not look like much, but it is the speculators who are in a hurry. They pay retail price for things. They may be small fraction of the economy, but they are a large fraction of the immediate demand on the far end of the demand curve. Things like FedEx and UPS having problems indicates that the speculative collapse has long since hit the profitability. This began in October and November.
The next thing that happens is that business stop hiring and start laying off. This too has started. Consumers, pressed by inflation and credit squeeze, restrain spending. This was December through March.
What is next is the rippling through the rest of the economy, much of which is not very profitable. Thin profit margin businesses start reconfiguring. First they try and hold the line on prices, and accept lower volumes. One reason for demand spreading is to create more people with just enough to spend, rather than fewer people with more to spend, it blunts this business tendency not to pay menu costs or write down inventory.
This cycle can continue for several iterations as the recession continues. Finally there is a bottoming, where the activity reaches a new equilibrium. However, looking back over two centuries of hydrocarbon business cycles, it is clear that wages only return when there is an injection of real stimulus. The present stimulus is nowhere near enough, and that isn't necessarily a bad thing, because the nature of the stimulus also determines the shape of the expansion.
And that is better left to people who are capable of doing more than staying in office despite sub-30% approval ratings.
