Monty Pelerin's World

Economics, Finance and Politics Through The Prism of Classical Liberalism

Economic Mess is Structural Not Cyclical

[caption id="attachment_9670" align="alignleft" width="97" caption="Chris Martenson"][/caption] [caption id="attachment_16437" align="alignright" width="100" caption="John Williams"][/caption] For more than a year, I have argued that regardless of what you want to call our current economic crisis, it is not current and not cyclical. It is secular. That is, the problems that surfaced began many years ago, back in the 1970s. Chris Martenson, who interviewed John Williams of, obtained the following quote from Mr. Williams:
If you look at the government’s latest statistics - the poverty survey of 2009, which is the most recent release, with average and median household income adjusted for inflation (and they use a really gimmick low inflation rate with that one) - it shows that not only has household income been falling the last year or two, but it’s below its near-term peak before the 2001 recession. Household income has not recovered above that, and if you use the CPI-U (the usual inflation rate to deflate that by instead of the gimmick one) it shows that household income today is below where it was in 1973. Again, the average household has not been able to keep up here. If income growth is not keeping ahead of inflation, very simply you can’t have consumption growing faster than inflation on a sustainable basis.
Many will attack median household income, claiming that there are more single head of households today than in the past. That is true, if you go far enough back, and probably true for the period under discussion.  The War on Poverty started the disintegration of families in the mid 1960s. A different measure, not dependent upon families, is weekly wages. Real weekly wages today, using the government's arguably understated inflation figures, are lower than they were in 1964. This drop is not a function of the current economic problem because they dropped below in the early 1970s and never recovered. In the interview (podcast), Williams and Martenson discuss the how the following came about:
  • John came to understand how changes in the way the key economic indicators are calculated has resulted in an outcome in which they no longer reflect reality. No one believes, values or knows how to accurately apply them anymore.
  • There is rampant precedent for political manipulation of how these indicators are calculated. Past administrations forced changes in the forumlae for many reasons - a common one being optics.
  • Using erroneous indicators is dangerous - not just for the governement, but for everyone. When inflation is running higher than most expect (as it is today), investors are cheated out their returns, wage earners wonder why their paychecks buy less goods, and fixed income earners suffer greatly. Unfortunately, there are myraid incentives for politicians and corporations to embrace artificially-low calculations - as they justify reducing obligations owed.
  • The key approaches to calcualting inflation are especially convoluted, especially the practice of applying hedonics. If we instead calculate inflation according the formula used in 1980, we would see a number closer to 8%+ vs today's 1.5% rate.
  • Similarly with unemployment, John calcualtes the true rate in the country today is 22% (vs the reported 9%).
  • In sum, he sees the US suffering from structural issues that are extremely hard to address - but impossible if we continue to let fantasy data be our guide. Our circumstances are not sustainable and, in his eyes, have us on an inexorable path to higher inflation - and likely hyperinflation.
Martenson provides additional commentary on his site or you can read the linked article here.