Would the Real Economic Recovery Please Stand Up?

by mlumley

Friday, August 21, 2009 at 10:18 PM EDT

I really, really don’t understand what’s going on in the stock market right now. And by that, of course, I mean I do understand, I just don’t like it.

Today’s alleged good news is the decrease in the unemployment rate, from 9.5 percent in June to 9.4 percent in August. Predictably, the markets jumped to ‘09 highs, capping off a nearly 50 percent run from the March lows. What the markets seemed to overlook, however, is that even while the unemployment rate decreased - barely - jobless claims still rose by 247,000 last month. Yes, that’s right… the unemployment rate fell, while the number of people without jobs increased.

This can be interpreted a number of ways. The optimists among us might attribute the discrepency to measurement error on the part of two differently designed surveys. Pessimists might argue that previously “unemployed workers” (defined as those actively seeking work) may have simply become too discouraged to continue job searches, and would thus be counted among the jobless while not counted as unemployed. The Paranoids (and I might be one of them) are arguing that the data is being deliberatly manipulated to boost economic confidence.

Whether you believe that or not, one thing is certain: this labor news dos not justify a market rally, particulary not one of nearly 50 percent. In fact, no news over the past 6 months (save perhaps the imminent collapse of the centrally planned healthcare proposal) justifies such a rally. I’m forced to conclude that this rally is nothing more than a mini-bubble fed by the speculative frenzy surrounding the initial half hearted pullback from the March lows, and genourous and accomodating monetary policy from a Federal Reserve that seems content to blow yet another bubble on which to tie our hopes of recovery.

The bubble is self-reinforcing: just today analysts greeted with glee the news that AIG has returned to the black, Freddie Mac is raking in the cash and, joy of all joys, Goldman Sachs has posted a record high quarterly profit.

I have only one thought.

Well, duh.

This what happens in a bubble. Lots of people make lots of money on paper, only to lose it when reality sets in. Remember how this whole mess started? Record profits. That’s how.

But worse than this easy money bubble itself is the unfortunate economic reality that we’ve done very little to address the fundamental underlying issue in this crisis: the deleveraging of the most leveraged ecnomy in history. (From naked capitalism):

One, on debt to GDP, shows that is has risen in the last year (debt was roughly $49 trillion as of last year, it is $52 trillion this year). So we have had a lot of economic pain with NO reduction in aggregate indebtedness, This isn’t simply shifting private debt onto the public balance sheet (in effect); this is actually an increase in the underlying pathology.

So it appears then that we haven’t actually learned any lessons from this collapse and that not only are we doomed to repeat our mistakes, but we will do so in an attempt to bail ourselves out of the very crisis our failed financial system created. The Comstock Report said it the best:

We don’t believe that the U.S. massive stimulus programs and money printing can solve a problem of excess debt generation that resulted from greed and living way beyond our means. If this were the answer Argentina would be one of the most prosperous countries in the world.

The long and short of it is that any signs of ecnomic recovery are based only on the “massive stimulus programs and money printing” refrenced above. This is not a real economic recovery.

History repeats itself. If the markets behave in 2009 like they did in 2007, (and they are) they’ll fall in 2010 like they did in 2008.

This article originally appeared on Iustia Lexque Cano.