The Mirage of the Recovery

The last few months have been quite taxing on any rational person, a fact that has been aggravated by naive (or maybe intentional hype) about the so-called recovery in the economy. Any sane person searching for signs of recovery would have very clearly come to the conclusion that the recovery (if at all it existed) was due to the government support and the near disappearance of the capitalist order that was propounded as the panacea just three years ago. 

It is perplexing that all those who at one point of time were strongly against subsidies are now demanding not just subsidies but doles that are many times more than what the government would spend on public health and education. I remember the years immediately after the process of liberalisation started we had industry bodies demanding that subsides to people (poor as well as middle classes) only made them more lazy and that these should be dismantled because free markets are the best way to reduce poverty and create a work ethic that supposedly doesnot exist in India. Two full years into a crisis, nobody talks about dismantling subsidies, instead these bodies are now clamouring more subsidies, albeit to their own members. 

As a student of Social Sciences, I find it absolutely interesting to watch how fickle the markets are. Till about January this year we had everybody (including the 20 something reporters in the press, who would be hard pressed to explain the difference between macro and micro economics to the policy makers who are willfully lying about the state of the economy) claimed that the world has recovered. Even important members of the bond houses were warning about the era of hyper-inflation that was about to be unleashed - I guess their assistants forget to give the charts of M3 and M2. In reality, the recovery turned out to be the case of 'so near yet so far' - as it has happened so often in the past three years. 

 Two charts given below would probably reinforce the need as to why people should be more circumspect about the supposed recovery.

The Chart above shows the Personal incomes in the USA including the government transfers, often used till now to indicate the 'recovery'. Seems good! Good as long as we dont see the chart along with the rise of government debt. 

The chart below shows the state of Personal Incomes in the USA excluding government transfers. 

The chart is one that I guess our learned friends in the media and among the policy makers would like to think that did not exist. Unfortunately, our elected politicians donot have that luxury as they will learn in the next few months and years - if you dont believe me, ask Germany's Chancellor Merkel. She has stopped making public statements after the provincial elections wiped out their alliance due to a 10% vote swing. Rest assured her political career is likely to come to a spectacular end in the probably the next three years.

For long I have been in the deflation camp. I continue to believe, as I did for the past two years, that we are heading into a deflationary (at least over the next two years, if not more). Nor do I believe the hype about China, India and the emerging markets replacing the west as the major consumers in the present context. It will happen, but the argument is probably a few decades early. By the middle of this century, it is likely to happen but we are likely to be too old (and I am sure i will be quite senile to even think about the issue). 

Interestingly, if my argument is about a likely deflationary environment wrong, then I think it will be unique because the very fundamental nature of capitalism as we have known since the end of the Second World War will have changed - forever