What Economy?

The irony would be delicious if the implications were not so disturbing.

Capital markets are in full flower, testing new highs and replenishing depleted coffers. But the basis for that financial optimism has almost nothing to do with actual economic performance. In fact, companies are laying people off, job growth remains moribund and household incomes are stagnant.

The impetus for this movement in stock price is almost completely divorced from the actual economy: the one where stuff gets made, services get delivered and people pay for whatever it is they buy. Merchants are downcast about the prospects for the holiday shopping season; governments continue to tout austerity as the only way to address the gap between output and outcomes; the citizens of Europe and America glumly accept a world of diminished expectations for themselves and their children; and even in China, the ruling elite institutes policies reflective of the realization that growth is neither inevitable nor necessarily sustainable.

Despite chest-thumping paeons to the wonders of ostensibly 'free-market' capitalism by corporate avatars, it is relentless infusions of - dare we say it? - stimulus from the US Federal Reserve and its global compatriots that preventing the economic situation from being even worse than it is. Political conservatives continue to rail against taxes and regulation, but it is government money that enables them to keep their enterprises and careers afloat.

The obvious problem is that this situation is not sustainable. The question is at what point the private sector will have to wean itself off this financial life support and start contributing to that actual economy for which it used to be the driving force. JL

Ian Welsh comments in his blog:

Ok, enough, the Dow just skirted 16K and I’m here to tell you that virtually the entire run-up of the stock market is based on one thing, and one thing only, the Fed pumping money into the markets.  That is it, that is all.

Since the market bottom the market has more than doubled, but jobs aren’t even close to recovering as a percentage of the population, Europe is still in crisis, and oil prices are still ludicrously high.
There has been a recovery in a technical sense, in a business cycle sense, and that is very very bad, because this has been the recovery?
I said that we wouldn’t see jobs recover as a percentage of the population in a generation the day I saw Obama’s stimulus plan (after seeing that he was going to bail out banks and not put people in jail) and I was right.  I will continue to be right.  The problems the economy has cannot be fixed by giving more money to banks and rich people and attempting to turn the housing market into a cash cow again.
The economy requires targeted spending, to get off oil, to break up the big banks and other oligopolies, to open up the economy to actual competition, and to increase the pricing power of labor and reduce the pricing power of employers while making sure there we do not run up against supply bottlenecks.  It does not require giving money to people who will simply use that money for more leveraged financial plays or to bury bad assets on balance sheets at mark to model (aka. mark to fantasy.)
To the extent a market works it must be regulated to be competitive, and assets must not be allowed to pile up in a few hands.  Financial profits cannot be allowed to be higher than non-financial profits, and the labor market must be tight, so that people are free to move away from jobs they hate (if your employees hate their jobs they should either be very well paid because the job is absolutely necessary, or it shouldn’t exist at all.)
The US, and indeed, the West, no longer has an economy. It has a bunch of crony capitalists sucking from the state teat or engaging in oligopolistic practices, sucking the population dry in a fashion that is going to leave us in a depression for the forseeable future, and lead to a very nasty economic collapse when real world factors (like climate change or any unforseen shock) intervene.
As for the stock market, it is in fantasy land, entirely a creature of the Federal Reserve, almost completely divorced from the actual economy.
Repeat after me, you cannot have profits higher than actual productivity increases plus inflation plus population increase.  Anything more than that is not profit, it is fraud, underinvestment in real capital or it is diverting future profits to the present.
None of those things are economic growth, and all of them will be paid for, with interest, in suffering.