I see smoke. Is there a fire?

For several reasons, which I’ll get to, I’m still not feeling like I want to sound an alarm about a possible recession.^[1] But if one goes by the old “where there’s smoke, there’s fire” metaphor, well, it seems in recent days we’ve been seeing a lot of smoke.

Folks who lived through the dot-com crash will surely find these words ominous: “[Dropbox] is a portent of wider trouble for startups that found it easy to attract money at sky’s-the-limit valuations in the continuing technology boom. The market for initial public offerings has turned chilly and inhospitable, largely because technology companies have sought valuations above what public investors are willing to pay.”^[2] There is a difference, however, as

Fast-growing revenue streams help young companies continue to attract investors and stay private longer.

That same magnetic appeal is pushing valuations higher and higher. Some of the pressure comes from mutual funds, pension funds and other money managers who are hungry for higher returns than they can earn elsewhere. Rock-bottom interest rates have increased that appetite.^[3]

My recollection of the dot-com boom is that many companies had little or no revenue and very little of anything that looked like a real business plan—and were still attracting ludicrous amounts of venture capital. But what’s common to then and now is that capital is so desperate for a return that it is once again making a mockery of the rational markets hypothesis.

Simply explained, if like any good conforming neoliberal, you believe in the market—here not in any way limited to ‘public’ stock and commodity exchanges—as the best arbiter of all value, then you have to imagine that actors in those markets act rationally, that banks will carefully scrutinize investments before plopping down billions on collateralized debt obligations (CDOs), for example, rendering any return to the Glass-Steagall Act, which imposed a sharp division between “boring banks” and risky investment practices, or anything like it, utterly superfluous.^[4] It is, of course, a ludicrous hypothesis, one of many flatly wrong neoliberal assumptions.^[5] It was wrong in the dot-com bubble. It was wrong in the financial crisis that began in 2007. And it is wrong now. But it is a necessary assumption for the belief that markets are the best means of running an economy. So therefore, being good conforming neoliberals, we believe it anyway.

Now, writes Christopher Mims for the Wall Street Journal, “If venture capitalists were as imaginative about what could go wrong in their industry as they are about what could go right, maybe we wouldn’t be in this situation.”^[6] Oh, gee. No shit, Sherlock. But Mims isn’t just worried about high tech:

Investors are herd animals, after all, and the same forces that are currently leading to what investors including Bill Gurley of Benchmark, Michael Moritz of Sequoia Capital and Fred Wilson of Union Square Ventures are calling irrational exuberance will lead to just as much flight to less risky investments when markets inevitably turn—and not just in tech.^[7]

Even without spillover, the problems aren’t just in high tech.

“The industrial environment’s in a recession. I don’t care what anybody says,” Daniel Florness, chief financial officer of Fastenal Co., told investors and analysts earlier this month. A third of the top 100 customers for Fastenal’s nuts, bolts and other factory and construction supplies have cut their spending by more than 10% and nearly a fifth by more than 25%, Mr. Florness said. . . .

Others worry that the slowdown is spreading to consumer businesses. Wal-Mart recently warned its sales this year are likely to be flat, down from projection of as much as 2% growth, and cut its earnings forecast for next year as it raises wages. The retailer blamed the strong dollar for the weakening sales growth.^[8]

Now, considering how much of its merchandise Walmart imports, blaming a “strong dollar” seems rather rich. More plausible explanations might lie in 1) whether, given Walmart’s reputation for awful labor practices,^[9] people are choosing to spend their money at Walmart; and 2) whether consumers, beset by widening inequality, have any money to spend.^[10] But moving on,

It starts with the slowdown in China, which is already straining the global recovery. The world’s second-largest economy has lost its appetite for the raw materials that fueled its industrial boom, leaving the smaller countries that supplied it with resources stumbling in its wake. Slower growth abroad translates into weaker foreign currencies and a stronger U.S. dollar, which makes American goods harder to sell in the global marketplace.

A growing chorus of prominent economists and analysts are arguing those dynamics could tip the world — and the United States along with it — into recession within the next two years. The fear is showing up in the recent wild swings in financial markets, rare outside of broader economic downturns. The pace of U.S. job growth has slowed substantially compared to last year. And though the economic expansion has never quite reached many workers, it has actually lasted longer than the post-war average.

“The global economy is uncomfortably close to the edge,” said David Stockton, senior fellow at the Peterson Institute for International Economics.^[11]

As I said, I’m reluctant to forecast a recession. First, I’m not an economist. Second, “[m]ost analysts still believe the most likely scenario is that the country continues to chug along.”^[12] Third, I have an admittedly cynical—and entirely unsubstantiated—suspicion that some of this rhetoric might be intended to at least introduce fear about the economy if not to produce a fear-driven recession so as to affect the 2016 elections.

Still, with employment to population (figure 1) and labor market participation (figure 2) ratios stuck at 1970s and 1980s levels, this so-called ‘recovery’ is not one I’d want to hang my hat on. Economically speaking, the only thing the elites deserve credit for is making the rich richer and the poor poorer. To the extent the economy relies on consumers consuming, and to the extent that banks have tightened up credit since the financial crisis, I just don’t see where the money for a strong and resilient economy comes from.

Update, October 30, 2015: In writing this post, I neglected to mention the oil industry: “‘The bubble is bursting,’ [Spencer Cutter, a credit analyst with Bloomberg Intelligence] said. ‘And if oil stays where it is, the worst is yet to come.'” It seems that oil producers expecting higher prices borrowed to finance methods of extraction that could only be financially viable at those higher prices.^[13]

Wildcatters attracted billions of dollars during the boom after years of near-zero interest rates sent investors hunting for returns in riskier corners of the market. U.S. high-yield debt has more than doubled since 2004 to $1.3 trillion while the amount issued to junk-rated energy companies has grown four-fold to $208 billion, according to Barclays Plc. Most of the companies spent money faster than they made it even when oil was $100 a barrel and are struggling to stay afloat with prices at $45.^[14]

Now, even as U.S. production declines, prices remain low^[15] and these prices may well remain low for another year, partly because Iran is expected to resume oil exports after a long embargo and partly because China’s economy has weakened, reducing demand.^[16]

1. ^[1]See David Benfell, “The biggest bubble of all,” Not Housebroken, April 23, 2015, https://disunitedstates.org/?p=7436↩
2. ^[2]Rolfe Winkler et al., “Tech Startups Feel an IPO Chill,” Wall Street Journal, October 19, 2015, http://www.wsj.com/articles/tech-startups-feel-an-ipo-chill-1445309822↩
3. ^[3]Rolfe Winkler et al., “Tech Startups Feel an IPO Chill,” Wall Street Journal, October 19, 2015, http://www.wsj.com/articles/tech-startups-feel-an-ipo-chill-1445309822↩
4. ^[4]William Black, interviewed on Democracy Now!, “Crony Capitalism: After Lobbying Against New Financial Regulations, JPMorgan Loses $2B in Risky Bet,” May 15, 2012, http://www.democracynow.org/2012/5/15/crony_capitalism_after_lobbying_against_new; Jason M. Breslow, “Were Bankers Jailed In Past Financial Crises?” Public Broadcasting System, January 22, 2013, http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/untouchables/were-bankers-jailed-in-past-financial-crises/; Steven Jonas, “Reconsidering the Legacy of Bill Clinton: When the Democrats Turned Neoliberal,” Truthout, August 6, 2014, http://truth-out.org/buzzflash/commentary/reconsidering-the-legacy-of-bill-clinton-when-the-democrats-turned-neoliberal; Krugman, P. & Wells, R. (2012, July 12). Getting away with it [Review of the books The escape artists: How Obama’s team fumbled the recovery, by N. Scheiber, Pity the billionaire: The hard-times swindle and the unlikely comeback of the right, by T. Frank, & The age of austerity: How scarcity will remake American politics, by T. B. Edsall]. New York Review of Books. Retrieved from http://www.nybooks.com/articles/archives/2012/jul/12/getting-away-it/; Robert Kuttner, “Austerity never works: Deficit hawks are amoral — and wrong,” Salon, May 5, 2013, http://www.salon.com/2013/05/05/austerity_never_works_deficit_hawks_are_amoral_and_wrong/; Robert Kuttner , “The Debt We Shouldn’t Pay,” review of Debt: The First 5,000 Years, by David Graeber, New York Review of Books, May 9, 2013, http://www.nybooks.com/articles/archives/2013/may/09/debt-we-shouldnt-pay/; James Kwak, “5 Years Later, We’ve Learned Nothing From the Financial Crisis,” Atlantic, September 10, 2013, http://www.theatlantic.com/business/archive/2013/09/5-years-later-weve-learned-nothing-from-the-financial-crisis/279506/; Gretchen Morgenson, “How to Cut Megabanks Down to Size,” New York Times, January 19, 2013, http://www.nytimes.com/2013/01/20/business/a-fed-voice-asking-to-cut-megabanks-down-to-size.html; Gretchen Morgenson, “Wake Up the Banking Police,” New York Times, December 14, 2013, http://www.nytimes.com/2013/12/15/business/wake-up-the-banking-police.html; John Nichols, “The Populist Rebellion That Tripped Up Larry Summers,” Nation, September 15, 2013, http://www.thenation.com/blog/176175/populist-rebellion-tripped-larry-summers; Jed S. Rakoff, “The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?” New York Review of Books, January 9, 2014, http://www.nybooks.com/articles/archives/2014/jan/09/financial-crisis-why-no-executive-prosecutions/; Robert B. Reich, “Economics Is Too Important to Be Left to Economists,” Chronicle of Higher Education, September 23, 2015, http://chronicle.com/article/Economics-Is-Too-Important-to/233335/; Robert Scheer, “Go Ahead, Back Hillary Clinton and Forget All About Her Record,” Truthdig, October 9, 2015, http://www.truthdig.com/report/item/go_ahead_back_hillary_clinton_and_forget_all_about_her_record_20151009; Joseph E. Stiglitz, “Why Janet Yellen, Not Larry Summers, Should Lead the Fed,” New York Times, September 6, 2013, http://opinionator.blogs.nytimes.com/2013/09/06/why-janet-yellen-not-larry-summers-should-lead-the-fed/; Washington’s Blog, “Failing to Break Up the Big Banks is Destroying America,” July 21, 2012, http://www.washingtonsblog.com/2012/07/11869.html; Washington’s Blog, “The Banker Most Responsible for Allowing the Too Big to Fail Banks Says We Must Break Them Up,” July 25, 2012, http://www.washingtonsblog.com/2012/07/the-banker-most-responsible-for-allowing-the-too-big-to-fail-banks-break-them-up.html↩
5. ^[5]Mark Blyth, Austerity: The History of a Dangerous Idea (Oxford, UK: Oxford University, 2013).↩
6. ^[6]Christopher Mims, “The Dangers Ahead if Tech Unicorns Get Gored,” Wall Street Journal, October 26, 2015, http://www.wsj.com/articles/the-dangers-ahead-if-tech-unicorns-get-gored-1445832492↩
7. ^[7]Christopher Mims, “The Dangers Ahead if Tech Unicorns Get Gored,” Wall Street Journal, October 26, 2015, http://www.wsj.com/articles/the-dangers-ahead-if-tech-unicorns-get-gored-1445832492↩
8. ^[8]Theo Francis and Kate Linebaugh, “U.S. Companies Warn of Slowing Economy,” Wall Street Journal, October 25, 2015, http://www.wsj.com/articles/u-s-companies-warn-of-slowing-economy-1445818298↩
9. ^[9]Democracy Now! “Over 110 Arrested as Record Black Friday Protests Challenge Wal-Mart, Major Retailers on Low Wages,” December 2, 2013, http://www.democracynow.org/2013/12/2/over_110_arrested_as_record_black; Josh Eidelson, “Senators blast Wal-Mart “trampling” workers’ rights as dozens of activists are arrested on Black Friday,” Salon, November 29, 2013, http://www.salon.com/2013/11/29/senators_blast_wal_mart_trampling_workers_rights_as_dozens_of_activists_are_arrested_on_black_friday/; Josh Eidelson, “Tens of thousands protest, over 100 arrested in Black Friday challenge to Wal-Mart,” Salon, November 29, 2013, http://www.salon.com/2013/11/30/tens_of_thousands_protest_over_100_arrested_in_black_friday_challenge_to_wal_mart/; Josh Eidelson, “Wal-Mart arrests could fuel ‘a new political movement of the disenfranchised,’ Grayson tells Salon,” Salon, November 29, 2013, http://www.salon.com/2013/11/29/wal_mart_arrests_could_fuel_a_new_political_movement_of_the_disenfranchised_grayson_tells_salon/; ↩
10. ^[10]Associated Press, “Census data: Half of U.S. poor or low income,” CBS News, December 15, 2011, http://www.cbsnews.com/news/census-data-half-of-us-poor-or-low-income/; Associated Press, “80 percent of U.S. adults face near-poverty, unemployment, survey finds,” CBS News, July 28, 2013, http://www.cbsnews.com/8301-201_162-57595861/80-percent-of-u.s-adults-face-near-poverty-unemployment-survey-finds/; Megha Bahree, “Who’s To Blame For The Increasing Gap Between The Rich And The Poor? Market Policies, Says New Report,” Forbes, November 5, 2014, http://www.forbes.com/sites/meghabahree/2014/11/05/whos-to-blame-for-the-increasing-gap-between-the-rich-and-the-poor-market-economy-says-new-report/; Jared Bernstein, “The Economics of a Higher Wage Floor,” New York Times, August 9, 2013, http://economix.blogs.nytimes.com/2013/08/09/the-economics-of-a-higher-wage-floor/; Josh Boak and Christopher S. Rugaber, “Do more jobs mean more economic security? Not for some in U.S.,” Peoria Journal Star, June 8, 2015, http://www.pjstar.com/article/20150608/NEWS/150609272/1994/NEWS; Alexander Eichler, “Working Poor: Almost Half Of U.S. Households Live One Crisis From The Bread Line,” Huffington Post, January 31, 2012, http://www.huffingtonpost.com/2012/01/31/working-poor-liquid-asset-poverty_n_1243152.html; Alexander Eichler, “America’s Poorest People Running Out Of Places To Live: Study,” Huffington Post, February 17, 2012, http://www.huffingtonpost.com/2012/02/16/affordable-rentals_n_1282519.html; Justin Elliott, “Are those startling poverty numbers accurate?” Salon, December 16, 2015, http://www.salon.com/2011/12/16/are_those_startling_poverty_numbers_accurate/; Larry Elliott, “Revealed: how the wealth gap holds back economic growth,” Guardian, December 8, 2014, http://www.theguardian.com/business/2014/dec/09/revealed-wealth-gap-oecd-report; Larry Elliott, “Pay low-income families more to boost economic growth, says IMF,” Guardian, June 15, 2015, http://www.theguardian.com/business/2015/jun/15/focus-on-low-income-families-to-boost-economic-growth-says-imf-study; Johan Galtung, “To Save the U.S. Economy, Lift the Bottom,” InterPress Service, January 14, 2013, http://www.ipsnews.net/2013/01/to-save-the-u-s-economy-lift-the-bottom/; Henry A. Giroux, “Neoliberalism and the Machinery of Disposability,” Truthout, April 8, 2014, http://truth-out.org/opinion/item/22958-neoliberalism-and-the-machinery-of-disposability; Stewart Lansley, “The Hourglass Society,” Los Angeles Review of Books, May 28, 2013, http://lareviewofbooks.org/article.php?id=1708; Jeff Madrick, “Our Crisis of Bad Jobs,” New York Review of Books, October 2, 2012, http://www.nybooks.com/blogs/nyrblog/2012/oct/02/our-crisis-bad-jobs/; Annie Lowrey, “Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones,” New York Times, April 27, 2014, http://www.nytimes.com/2014/04/28/business/economy/recovery-has-created-far-more-low-wage-jobs-than-better-paid-ones.html; Lucy Mangan, “If you don’t understand how people fall into poverty, you’re probably a sociopath,” Guardian, January 24, 2015, http://www.theguardian.com/commentisfree/2015/jan/24/if-you-dont-understand-poverty-youre-a-sociopath; Mark R. Rank, “Poverty in America Is Mainstream,” New York Times, November 2, 2013, http://opinionator.blogs.nytimes.com/2013/11/02/poverty-in-america-is-mainstream/; Theresa Riley, “Making the Rent on Minimum Wage,” Bill Moyers, April 2, 2012, http://billmoyers.com/2012/04/02/making-the-rent-on-minimum-wage/; Sam Roberts, “New Census Numbers Show Recession’s Effect on Families,” New York Times, August 27, 2013, http://www.nytimes.com/2013/08/28/us/new-census-numbers-show-recessions-effect-on-families.html; Joseph E. Stiglitz, “The Price of Inequality,” Project Syndicate, June 5, 2012, http://www.project-syndicate.org/commentary/the-price-of-inequality; Ana Swanson, “What you’d need to earn in every state to rent a decent apartment,” Washington Post, June 9, 2015, http://www.washingtonpost.com/blogs/wonkblog/wp/2015/06/09/what-youd-need-to-earn-in-every-state-to-afford-a-decent-apartment/; Joan Walsh, “Poverty nation: How America created a low-wage work swamp,” Salon, December 15, 2013, http://www.salon.com/2013/12/15/poverty_nation_how_america_created_a_low_wage_work_swamp/; Kai Wright, “Our Economy Has Failed — Until We Admit That, We’re Screwed,” Alternet, December 30, 2011, http://www.alternet.org/economy/153614/our_economy_has_failed_–_until_we_admit_that%2C_we%27re_screwed/; Matthew Yglesias, “America’s biggest economic dilemma: private affluence amid public squalor,” Vox, June 8, 2015, http://www.vox.com/2015/6/8/8742803/private-affluence-public-squalor↩
11. ^[11]Ylan Q. Mui, “Economists are starting to warn about the risk of a new U.S. recession,” Washington Post, October 23, 2015, http://www.washingtonpost.com/news/wonkblog/wp/2015/10/23/economists-are-starting-to-sound-alarm-about-the-risk-of-a-new-u-s-recession/↩
12. ^[12]Ylan Q. Mui, “Economists are starting to warn about the risk of a new U.S. recession,” Washington Post, October 23, 2015, http://www.washingtonpost.com/news/wonkblog/wp/2015/10/23/economists-are-starting-to-sound-alarm-about-the-risk-of-a-new-u-s-recession/↩
13. ^[13]Asjylyn Loder, “Junk-Debt Investors Fight for Scraps as U.S. Shale Rout Deepens,” Bloomberg, September 25, 2015, http://www.bloomberg.com/news/articles/2015-09-25/junk-debt-investors-fight-for-scraps-as-u-s-shale-rout-deepens↩
14. ^[14]Asjylyn Loder, “Junk-Debt Investors Fight for Scraps as U.S. Shale Rout Deepens,” Bloomberg, September 25, 2015, http://www.bloomberg.com/news/articles/2015-09-25/junk-debt-investors-fight-for-scraps-as-u-s-shale-rout-deepens↩
15. ^[15]Nicole Friedman, “U.S. Oil Output Finally Falls, But It Isn’t Helping Prices,” Wall Street Journal, September 28, 2015, http://www.wsj.com/articles/lid-on-oil-prices-refuses-to-budge-1443478581↩
16. ^[16]Georgi Kantchev and Sarah Kent, “Oil Will Struggle to Break Past $60 a Barrel in 2016,” Wall Street Journal, October 29, 2015, http://www.wsj.com/articles/oil-will-struggle-to-break-past-60-a-barrel-in-2016-1446116882↩