'Emphatically, recessions are primarily points where the mix of goods and services demanded by the economy becomes misaligned with the mix of goods and services being produced .. Fed policymakers then respond to economic weakness with actions that amplify the misallocation of capital..'<blockquote>'We continue to observe deterioration in what I call the “order surplus” (new orders + order backlogs - inventories) that typically leads economic activity. Indeed, across a variety of national and regional economic surveys, as well as international data, order backlogs have dried up while inventories have expanded. Understand that recessions are
not primarily driven by weakness in consumer spending. Year-over-year real personal consumption has only declined in the worst recessions, and year-over-year
nominal consumption only declined in 2009, 1938 and 1932. Rather, what collapses in a recession is the
inventory component of gross private investment, and as a result of scale-backs in production, real GDP falls relative to real final sales.
Emphatically, recessions are primarily points where the
mix of goods and services demanded by the economy becomes misaligned with the mix of goods and services being produced. As consumer preferences shift, technology introduces new products that dominate old ones, or market signals are distorted by policy, the effects always take time to be observed and fully appreciated by all economic participants. Mismatches between demand and production build in the interim, and at the extreme, new industries can entirely replace the need for old ones. Recessions represent the adjustment to those mismatches. Push reasonable adjustments off with policy distortions (like easy credit) for too long, and the underlying mismatches become larger and ultimately more damaging.
..
Any system that rewards the winner of one competition with the means to win the next competition also contains a self-reinforcing feedback loop. Many internet and social media companies benefit from this dynamic, because new users tend to gravitate toward the platforms chosen by existing users. Even if these companies operate with little profit, speculative financial markets may provide them with a war chest of cash through overvalued public offerings, which can then be used to acquire other businesses. The U.S. income distribution has featured a similar feedback loop in recent decades because repeated cycles of capital misallocation have resulted in a scarcity of productive investment. The irony is that as productive capital becomes scarce, the pie becomes smaller, but a
larger share goes to the owners of existing capital. Fed policymakers then respond to economic weakness with actions that amplify the misallocation of capital. Instead of continuing these monetary distortions, the best way to improve the distribution of income in the U.S. would be to encourage productive investment at every level - government (productive infrastructure, clean energy), industry (investment and R&D incentives), and individuals (education, job training). This would contribute both to a larger pie and a more equitable income distribution.'
- John P. Hussman, Ph.D.,
Complex Systems, Feedback Loops, and the Bubble-Crash Cycle, January 11, 2016</blockquote>
Context<blockquote>
'..credit booms tend to undermine productivity growth..''China now is a lot like Japan was in the 1980s, says Shilling..'</blockquote>