I think it's finally time...

...to call this dead cat bounce.

For a long time I've been claiming that the next significant economic event will be a dead cat bounce.  On the 11th of January this year, I wrote: "the deflationary forces in the economy will temporarially mask the inflationry effects of the scheme, and if enough money is printed then there will be a dead-cat bounce".  I continued to refine and develop this theory in late January, April, and a myriad of occations before and since.

I know I get accused of being a doom-and-gloom merchant, but on that score my prediction was a hell of a lot more upbeat than the cheerleaders, and also a hell of a lot more accurate.  But again, I am always right.  (It is this arbitary categorisation of bulls and bears that also stop debate, it's physically impossible for any genuine independent balanced analysis to make any kind of widespread impact.  This is doubly true in the mainstream media.)

There's now enough evidence that various economic indicators are actually moving, before hand people were just reading non-existant patterns from sampling errors.

So why do I think this is a dead cat bounce, rather than a recovery?  For many reasons, most of which I have explained in previous posts - any recovery that happens at the same time as unlimited government guarentees and money printing isn't a recovery, it's a subsidy - that sort of thing.  So for this post I want to concentrate on one particular theme:

The reason why I believe this to be a dead cat bounce is precisely because people think it isn't a dead cat bounce.  I'm talking about good old-fashioned delusion.  What does delusion have to do with it?  Quite a lot, unfortunately; people's perceptions of the causes and effects of the great 2007-2009 financial crisis will control what happens next.  Decision makers, whether: government, Bank of England, academia, individual businesses, etc., will all make huge judgments based on this delusion.

For example, today David Blanchflower was given a CBE.  Apparently, he's a visionary because he was calling for rate cuts several years before they were needed.  How is that visionary?  Surely that's a textbook example of a stopped watch being correct twice a day?  Low interest rates for too long were one of the major errors during this decade, that's what allowed the whole unsustainable debt bubble to get so ridiculously big.  And even if it wasn't, the jury is still out on whether low rates is helping with a recovery or not; the problem was always one of liquidity, which could have been tackled equally well with higher rates.

You see, people are already being congratulated on their "vision" even before the consequences of their actions are known.  This is what we have to deal with.  The establishment has already decided that permanently low rates and inflation can suit itself is the one true way.

This is just lunacy.

Your average newspaper columnist is no better.  I'm not going to mention names, but they know who they are.  At the beginning of the year: "a tentative recovery will begin, fueled by quantative easing, but a sustained recovery may be a long time in coming."  Now: "service sector output rose in May, that means we've fixed all the problems and everything is super!"

Essentially what's happening is fully consistent with the "tentative" hypothesis, but that's been dropped in favour of "good times are back again!" - a view which is unsupported by any real evidence.

It has to be some form of bad news fatigue, or something.  People are leaping on any positive indicator, then spontaneously forgetting about any other issues and declaring everything as done, finished, sorted.

Why?  All of the reasons for believing a recovery will be slow are still in place - government debt is high, requiring future spending cuts or higher taxes; oil prices are rising, which will add to inflation; etc.  (The "elephant in the room" - god I hate that phrase, but it seems apt - is that the "boom years" were based on a lie, it was that dawning realisation that caused the credit crunch in the first place.  That makes the "boom times are back" a physical impossibility, they never existed in the first place.  There will only be "good times" when we have a functioning non-subsidised economy that's driven by something other than financial voodoo.)

It's something to do with the perception that the good news has come along all of a sudden, that has shocked people, they weren't ready.  Well I was ready.  It's inevitable.  If you guarentee all banks so they can't lose money, then print an extra few hundred billion on top, well fuck me, some of it gets spent.  That's why things are moving upwards people, it doesn't take a rocket scientist to work that one out.

This spending was the entire point of making those policies, of course.  But yet all the descriptions of activity fail to mention this.  If this were a spontaneous recovery then the 0.5% interest rates are dangerously low, we'll have 15% GDP growth by the end of the year and a huge economic burn-out.

And of course, it's this key small matter that's the real issue.  The beatificaton of Blanchflower, are conspiring to keep rates low; and they will remain low for too long.  The next crisis, a crisis that is going to dwarf what has happened so far, is a crisis of inflation.  It's been a long time coming, and it won't start for a while yet, but it's coming.

Despite rates being low, real financial products have already started moving up - like mortgages.

Even if GDP growth is now positive, which was claimed by one group this week, that's not the end of the matter.  Not by a long way.

The final example of delusion:  Double-dip recessions are not uncommon.  Given the evidence before us now: seemingly positive indicators, plus high probability of a future inflation spike; then a double-dip recession is certainly a distinct possibility for the current problem.  The "recovery" may last for six months, it may last for a year, but the chance of it all slipping back is certainly in the realms of probability.

How many mainstream media citations of the possibility of a double-dip have you seen?  That's right: none.  None whatsoever.