Commentary: Fake growth and not even an L-shaped recovery

Comment Fake growth and

Over the past few weeks, the global media have been very occupied with the anniversary of Wall Street's crash in September 2008. One year into the worst financial crisis since the 1930s, two years into a deep recession in Western economies and seven months of surprising recovery in the world's stock markets, analysts and experts have been trying to explain what has happened, why it did and, of course, providing predictions for the future. The people who didn't see the biggest crash in seven decades coming are now arguing about the shape of the expected recovery: the lucky V, the frightening W or the painful L. Almost all of these so-called experts share one basic belief: They agree that the massive government bailouts and the unprecedented money printing by the leading central banks have saved the world economy from an even worse catastrophe. US Federal Reserve Chairman Ben Bernanke, probably the most important figure in this play, spent most of his time in academia studying the Great Depression of the 1930s, its roots and the way it was handled. His conclusion, following in the footsteps of his mentor, Milton Friedman, was that the main reason the 1929 crash turned into a depression was because the Fed reduced money supply instead of flooding the streets with new dollars. So when history put him behind the wheel just when all hell broke loose, Bernanke had a rare chance of showing the world he is right. And he did so by conducting the largest and fastest money printing in modern time. The Fed's decision to inflate the markets and the huge government deficits are what facilitated the crazy rallies in the world's stock markets and the improvement in the real markets during the last couple of quarters. Now, everyone is talking about "exit strategy" from these interventions, since it is clear that money printing and a double-digit deficit rate (out of total GDP) cannot last forever. After all, the Fed's main concern should be price stability. The massive money printing is a huge risk that could hasten inflation, and Fed officials are already talking about the looming danger. The nature of this exit strategy brings us once again to the irrelevant debate about the "shape of the recovery." Why irrelevant? Because there will be no recovery - at least not the one everybody anticipates. The reason for this gloomy prediction is simple: Governments can print a zillion more dollars, but it won't change basic facts. The reality is that the growth of the last decade was faked. Private consumption in the US - the leading engine of the uptick in world trade and in American growth - was faked. All the financial statements of the world's leading financial institutions were faked. The real-estate boom in the US, the UK, Eastern Europe, the Persian Gulf and Russia was faked. The credit bubble, especially in the US and the UK, was pumped for decades by central bankers who are now trying to reinflate it after it burst. This cannot work. The way to rehabilitate a junky is not by doubling his daily dose. On the contrary, he should be deprived of any access to drugs. The true solution to the current havoc is a return to normality. It means Americans should get used to a lower standard of living, more savings, less expenditures and more taxes. It means hundred of thousands of workers in China should lose their jobs because there is no real solid demand for their products. As for the financial system, the bankers and other financial wizards whose incompetence and greed caused the collapse must pay a price for their crimes. So far, the world's financial firms have lost $1.3 trillion. But this is not even half of what they are hiding in their books. They now enjoy official protection and are actually being encouraged not to reveal the truth about their real losses. As long as governments continue to bail them out whenever their actions threaten to ruin their own establishments, we are bound to experience these traumas all over again. Politicians all over the world have demonstrated once again that they are nothing but puppets. Instead of using the situation as a reason to take full control over the system and build a better new one, they kept everything and everyone in place and only made some noise about the marginal but sexy issue of bonuses. The bottom line is that no real lesson was learned, no real remedies were given and no real criminal (forget Madoff, I am talking about official criminals) was convicted. You can't put out fire with fire, and you can't fight leveraging with more credit - it's as simple as that. This painful truth is reflected in the only economic factor that refuses to show any sign of improvement. Unfortunately, this is the most important factor of them all: the labor market. The US economy keeps shedding more than 200,000 jobs a month as consumers and businesses experience the sad reality of the world's biggest market. On Main Street, there is no escape from the notion that everything must shrink: debt levels, living standards, factory capacities and wages. So don't believe the nonsense about the recovery. There is no letter in English to describe the real shape of this depression. We are still on the way down and we haven't even hit the bottom: risks are aplenty and most of the politicians' ammunition has already been wasted. Just like the good years of 2003-2007 were proven to be a temporary break in a 10-year-long bear market, the "recovery" of April-September will probably be remembered as a false one.