You have to love Krugman being credited with the late-day rally:
“I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer,” he said in a lecture today at the London School of Economics. “Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing.”
U.S. stocks erased an earlier decline after Krugman made his comments. The Standard & Poor’s 500 Stock Index was little changed at 939.14 at 4:07 p.m. in New York after slumping as much as 1.5 percent earlier, and the Dow Jones Industrial Average gained 1.36 points to 8,764.49.
Now that sounds good, right?
Ehhhhh.... watch how these buttclowns cover either possibility:
Krugman, a Princeton University economist, has warned recently that the U.S. government hasn’t done enough to help the country’s economy recover. Last month, at a conference in Abu Dhabi, he said the fiscal stimulus is “only enough to mitigate the slump, not induce recovery.”
....
Even with a recovery, “almost surely unemployment will keep rising for a long time and there’s a lot of reason to think that the world economy is going to stay depressed for an extended period,” Krugman said.
This is how you manage to claim you are never wrong. You simply say both things, and that way, no matter what happens you're covered.
Let's go back and review for a minute or two.
Last week I cited this "victim" of the credit crisis:
Far from being one of those who used easy-money loans to speculate on homes proliferating across the desert soil of greater Phoenix, she has lived in the same modest, stucco-sided condo in suburban Mesa for a dozen years. She bought the two-bedroom home in 1997 for $77,500.
....
Like tens of millions of other American homeowners, she added to her mortgage balance as the value of her condo swelled, at one point exceeding $200,000. She refinanced to pay off some credit cards and settle into a 30-year, fixed-rate loan. Later, she took out a home equity line of credit to buy a new Hyundai. She refinanced again in 2007, borrowing $20,000, mostly for a new roof.
Now let's dissect this.
This woman's pay is listed as "more than $1,000 every other week" in take-home pay.
From that we can work backward; there are 26 pay periods, so that's more than $26,000 in "take home" pay. If we back out FICA and other tax withholdings, we likely wind up somewhere around $40,000 gross.
This income buying a $77,500 condo is quite conservative.
But note what happened: Over the space of 10 years, that $77,500 mortgage turned into $144,000, or about 70,000 in extra debt. Over ten years, that's $7,000 of additional spending beyond income per year.
Note that she was taking home $26,000 after taxes, but spending almost one third again as much through taking on more and more debt.
This, ladies and gentlemen, is why we are in this damn mess!
Now you say "well, so what?"
I'll tell you what: There are millions of Americans just like her. And that's a problem - not because people like her might go broke (they will) but because that excess, pulled-forward demand in the economy cannot be re-created.
IT IS NOT POSSIBLE.
Now spending 30% more than you make is an extreme case. Or is it?
Its not as extreme as you'd think. Some people lived within their means, certainly. Quite a few people did.
But let's assume that one in ten households lived at an excess spending level somewhere around hers.
That means that about 4-5% of aggregate demand has simply disappeared and cannot return - all other things being equal.
But of course all other things are not equal. When this woman no longer can buy a new car, the people who build the car have no work - and they get laid off. This further contracts the economy.
In reality, each dollar of excess spending that doesn't happen is, economists tell us, backed by $2-4 worth of economic activity.
This means that somewhere between 10-20% of consumer demand is simply gone and cannot return. Since the consumer is 70% of GDP, this in turn translates into a contraction in GDP of somewhere from 7-14%.
And that's just people who spent beyond their incomes. Millions more spent at their income, but did so using debt. That's a further contraction in GDP of some unknown amount.
The fact is this:
Essentially the entire "recovery" from 2003 to 2007 was nothing more than pulled-forward demand via "fog-a-mirror" credit that is now exploding and will continue to explode. That demand is permanently gone but less than 1/3rd of the balance sheet damage that has to be taken before the economy and market can clear has been recognized and absorbed.
THE OTHER 2/3RDS IS YET TO COME, AND COME IT WILL WHETHER WE LIKE IT OR NOT!
I have argued that we are facing at least a 20% contraction in GDP before we reach equilibrium. This, of course, horrifies economists and politicians, as they ramped up government spending at the same time, and firing government workers or not paying millionaire-size pensions to firefighters is politically difficult - at best.
Yet just as outsize spending creates more GDP increase than you'd think, so debt overhang creates more drain than you'd think.
The math works both ways.
Krugman has no chance of being correct. We haven't come anywhere near clearing the bad debt out of the economy, but we have to and further, we must reset downward economic output to match actual consumer demand.
Until we do any attempt to "deal with the recession" is an exercise in can-kicking, and the bond market is getting tired of the idea that government will spend double what it takes in via taxes - fast.
Obama might be able to fool you just as did George Bush, but neither can or will fool the bond market.
The Chinese, Saudis and others with actual money that we are attempting to borrow to kick that can once again have figured out our scam and they are headed for the exits.
Bernanke's "Quantitative Easing" is almost identical in intended effect to a program The Fed ran during and after WWII to try to keep people's war bonds from depreciating (due to increases in interest rates.)
It didn't work and The Fed abandoned the program in 1951.
The bottom line is that until austerity comes to the fore, bad debt is flushed and the economy is ratcheted down to a sustainable level of output there can be no durable recovery.
Housing MUST CONTRACT IN PRICE to a sustainable, affordable level. It has not finished doing so and until it does reach that equilibrium with interest rates in the 7-8% range we are not at the bottom.
As a direct consequence of the math, which is never wrong, I sent the following to Krugman by email this afternoon:
You were quoted on Bloomie this afternoon claiming it (the recession) would be over by September.
I'm the guy who writes http://market-ticker.org.
I'll bet you're wrong - not a snowball's chance in hell The Recession is over on or before September. We'll go with the NBER's official claim (even though I'd argue its flawed.)
The loser puts on a clown suit and either shows up at CNBC to wear it and admit they're wrong, or, if CNBC won't have the loser, does it on Youtube.
Game?
--
Karl Denninger
I'm willing to bet that I will get no reply to that challenge, because, of course, Krugman will claim he didn't actually make that prediction. He hedged his bet so that when (not if) what's left of the housing market implodes under higher interest rates he can claim that he "never said it would be over."
Yeah, right Paul.
And by the way - if you bought the market this afternoon into that ramp job?
Good luck.
You're going to need it.
Disclosure: Lightly short the broad market and will be shorter than a field mouse soon.
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