“The Great Depression 2.0 is what is presently developing, although due to a reactive wave of positive social mood, statistical obfuscation, and understandable denial, it will take about a year for the consensus opinion to cycle through the various scenarios in descending order of optimism before the grim reality finally becomes apparent to even the casual observer.”
– “The Return of the Great Depression,” Oct. 29, 2009
One reason I prefer economics to finance is that timing has never been my strongpoint. I thought the tech bubble was going to pop in 1998. I wrote a column in 2002 that commented on the expansion of the housing bubble and noted that this was likely to have a negative effect on the global financial system, but never imagined that the bubble could go on as long as it did or that real-estate prices would rise to such elevated levels. So, given this track record of prematurity, it should be no surprise that it has taken longer for the economic consensus to recognize that the global economy is caught up in a very large economic contraction than I anticipated.
But it is coming, nevertheless. Consider the following two headlines from last week:
“‘WE ARE ON THE VERGE OF A GREAT, GREAT DEPRESSION’”
– Drudge Report, June 1, 2011
“U.S. house price fall ‘beats Great Depression slide’”
– The Independent, June 1, 2011
Slowly, but surely, the appropriate terminology is creeping into a credulous media that previously bought into the economic recovery story that the Federal Reserve, the Bureau of Economic Analysis and Wall Street have been tirelessly attempting to sell the American public since the spring of 2009. The problem is that the map is not the territory, and the morass of economic statistics is designed to provide a mathematical abstraction of an economic reality that is readily observable by those who are daily participants in the American economy.
While it is possible to make use of statistical shenanigans and keep the U3 unemployment rate below 10 percent by redefining and artificially constricting the size of the “labor force,” such actions are not going to fool anyone who isn’t working and can’t find a job. Nor are they going to fool his family and friends who don’t care if he is formally classified as being in or out of the labor force by the statisticians at the Bureau of Labor Statistics. All they know is that he is out of work. While “unemployment” is presently reported at a high, but not disastrous, level of 9.1 percent, the observant economist will note that the employment-population ratio has declined to 58.4 percent, significantly down from its historical peak of 64.4 percent in 2000.
This six percent decline may not look particularly dramatic, but to put things in perspective, it is rapidly approaching the equivalent of women collectively leaving the workforce, as the Employment-population ratio was 56.6 percent in 1948. (Of course, the idea that women first “entered” the workforce after World War II is a feminist myth. Working-class women were always a part of the labor force as the women who entered the post-World War II workforce en masse were from the middle classes.)
What has disguised the ongoing depression that has engulfed the United States, Europe and Asia is the enormous amount of government borrowing and spending that has been substituted for economic activity in the private sector. The true extent of this is not revealed in the most-reported macroeconomic figures. According to the BEA, state, local and federal spending still only accounts for 18.9 percent of the economy, compared to 18.8 percent in 2000. The component of GDP known as “G” may have increased by $500 billion, but has only done so in line with the overall growth of the economy over the last 10 years. But the false nature of these figures is easily seen when one compares the change in the amount of government debt to private debt. In 2000, the federal government accounted for 12.5 percent of all outstanding U.S. debt. It now accounts for 17.8 percent of it, half of which was borrowed after 2005. Yet somehow, all that additional money being borrowed and spent by the federal government isn’t showing up in the GDP figures.
The inherent unreliability of GDP shows that it is foolish to attempt to attempt to ascertain the state of the economy by looking at the official figures. It doesn’t matter that the BEA reported 1.8 percent growth in the first quarter last week, just as it wouldn’t have mattered if the BEA had reported 18 percent growth. The former figure is as incredible as the latter. The economy is not growing. It is contracting, and the governments of the world are losing their ability to conceal that fact from their citizens.
The truth is that the economic recovery is not faltering. The truth is that the economic recovery never existed in the first place. There is no double-dip recession, only a single large-scale economic contraction that is already, by some measures, bigger than the Great Depression of the 1930s.