This is why you’re stressed

A few months ago, I noticed that people seemed to be getting increasingly short-tempered and uncharacteristically nasty.  Not just here on the blog, not just in either Europe or the USA, but literally everywhere I went, virtually or in real life.  Normally patient people were snapping at others.  The habitually grumpy were either going entirely silent or biting people’s heads off at the slightest provocation. I am reliably informed that my own tendency to brood and think dark thoughts was beginning to rival Guy de Maupassant’s; I’d put it down to being on the home stretch of the novel, but now that I’m coming up for air, that doesn’t appear to have been the cause.  It has gradually become apparent that this increasingly negative social mood has come about because very nearly everyone has either been laid off, missed out on a job opportunity, knows someone who has been laid off, or has family members who are unemployed.

Those who are freelancers have been finding fewer jobs dropping in their laps, and the work that they find is less lucrative than it used to be.  I went to a good-sized tire store this week to pay for some tires that were changed after hours when I didn’t have my wallet with me – I stopped to make an appointment on the way home and the guy offered to change them then – and learned that everyone had been laid off and the operation would be shutting down at the end of the year.  And this was, to all appearances, a large and profitable operation with little competition nearby.

And yet, none of this is particularly new.  Unemployment is supposedly lower than it has been and even if we assume the usual statistical shenanigans by the BLS, job losses haven’t significantly increased since last year.  So why is the social mood so awful?  How can it be so negative when the Dow is higher than it was two years ago?  It can’t be the election; even if Republicans are deservedly in the dumps, shouldn’t the Obama-voting majority be happy with things going their way?

I suggest the reason can be seen here, in the chart to the right, which shows two lines.  The two lines match very closely from 2005 through the end of 2007; the point of maximum divergence is only 0.6 percent in Q4 2005.  They start to part company in Q1 2008, when Z1 falls $358 billion short of the expected Zn.  In the most recent quarter, Q3 2012, Z1 is $22.6 trillion lower than Zn, a 40.8 percent divergence.

Z1 represents total credit market debt outstanding, as reported by the Federal Reserve.  This, in combination with M2, is the effective money supply.  It is the “credit money spent” of which Mises and other Austrians write.  Zn, on the other hand, is what Z1 would be if it had continued growing at its historical rate of 2.36 percent per quarter from Q4 2004.  What is shows is not credit deflation; Z1 is now $2.4 trillion higher than its previous peak in Q1 2009.  It merely shows the lack of credit inflation that the U.S. economy requires to continue providing its illusion of increasing wealth and economic growth.  It is why we have seen neither the predicted inflation or deflation, this is observably what can be best described as “debt-disinflation”.

The U.S. economy’s dependence upon a rapid rate of credit growth is not a recent phenomenon.  While the 9.8 percent growth from 2005 to 2007 does exceed the 60-year average of 8.6 percent from 1948 through 2007, the 2008-2012 average of 2.0 percent is less than one quarter of the lower figure.  The current rate of credit money growth is also less than half that of the previous four-year average lows, 5.1 percent in 1948-1951 and 5.7 percent in 1991-1994.

As Karl Denninger and I have both independently demonstrated, the US economy has not actually grown in real macroeconomic terms since the early 1980s when not only M2 inflation, but Z1 inflation as well, is taken into account.  However, the illusion of growth was preserved by the quarterly credit inflation of 2.36 percent.  Once that inflation stopped, however, the illusion began to fail.  GDP growth has continued by virtue of the federal government’s massive attempt to single-handedly prop up credit growth; if Z1 had kept pace with the federal sector’s rate of growth, Zg would be $112,021 trillion and we would finally have the massive inflation that the inflationistas have been expecting.

That $22.6 trillion gap is the real demand gap that Paul Krugman and the other Neo-Keynesians have been attempting to solve for the last four years.  Since they don’t understand the significance of credit, they don’t understand the scale of the problem.  Because the Zn-Z1 credit money gap is now larger than the $16 trillion GDP, the futility of attempting to make it vanish by raising taxes or increasing spending should be readily apparent.

And the more the veil thins, the more economic stress people feel. Like those who lived through the Great Depression, they no longer believe the constant assurances that recovery is right around the corner.  Just the other day, I was surprised to hear a man in the UK who has hitherto exhibited no interest in economics refer sarcastically to “green shoots”.  When Ben Bernanke’s old catchphrase from 2009 is being openly mocked by people living on different continents who probably still don’t know who he is, it should be clear that the illusion is on the verge of complete failure.

So, if you’re feeling more stress than usual this Christmas season, understand that it isn’t all you or your lunatic relatives that are to blame and attempt to cut yourself and everyone else some slack.  It may well be the illusion of nonexistent wealth fading away that is contributing to an increasingly corrosive social mood.  I don’t have any advice or answers, (although perhaps some inexpensive escapist literature wouldn’t hurt), but sometimes it just helps to realize that you’re not imagining things and the problems you’re perceiving are material rather than figments of your imagination.