The "New Normal"

Treasury secretary, Geithner describes the "new normal" of the business environment after last year's liquidity crisis to indicate where we go from here. The implication is that the well-trodden path is to somehow be different.

With unemployment continuing to rise, more foreclosures in the offing, and continued consolidation of net worth, the "new normal" is the old Keynesian reinvention of the old classical model and dynamics of capitalism. Nor is the global economy anything all that new.

The type of modeling predicts future trends.

Capital, industries and markets will continue to consolidate into the business model of "too big to fail" which bodes well for earnings and explains the steep rise in equities despite the prospect for economic recovery being very bleak by the same measure.

It used to be, classically, that earnings will not improve unless there is a distribution on the accumulation, causing employment. The gamma risk was virtually non-existent. Now, however, neo-classically, the money supply is maintained to allow for profits to lead employment (refered to as "capital formation") in a stagflationary trend. It is largely the result of managing a burgeoning gamma risk that is the "demand" for government action, substituting for the lack of demand (a deflationary accumulation) in the marketplace.

Geithner is indicating that, despite the rhetoric for a high gamma risk, the classic macro model will be the predictor for micro trends.

Since the classic model calls for continued accumulation, a double dip is highly probable. The gain in equities will retrace by at least half.

A macro distribution will not occur and pull the economy out of recession until commodities reflect the fundamentals with another sharp dip that will sustain a disinflationary trend and bring the consumer's dollar back in to support a secular, macro recovery instead of supporting the accumulation phase of a classic cycle.

What is new, or neo-classical, is the size of the money supply. It is so large that its consolidation allows just a few large entities (too big to fail) to manipulate, if not command, critical global markets, like energy, and cause the length and breadth of trends (and if you can cause it, you can certainly predict it).

M&A activity will increase in the second dip, indicating the end of the accumulation phase of the business cycle and a secular bull market to give the mergers and acquisitions value.

When the retributive value on so much value accumulated gets so high that the gamma risk becomes critical to profitability, commodities will lose support and a macro distribution will occur. Maintenance of the organizational model, and the big earnings, of being too big to fail gets support. The support will be the "ethic" of the marketplace despite Geithner's call for a "new business ethic" to guide us forward.

Ethics is mere rhetorical legitimacy if the economy is organized for command manipulation. The ethical reality, the legitimacy, is just whatever the outcome is (a false ontological legitimacy of the ends justifies the means as opposed to a true free-market ontology in which the means justifies the ends). The outcome is mitigated by rhetorical artifice and lengthy political processes resulting in apathy and anomie, reducing the gamma risk without reducing the retributive, economic value, which would defeat the value--the purpose--of the practical (predictive) dynamic model.

A distribution phase that reduces the gamma without retributing the value puts tension in the system to be managed. The result will be stagflation into the next crisis as the Fed and Treasury manipulate the neo-classical, Keynesian money supply to accommodate (resolve) low inflation and high employment within a deflationary (accumulative) organizational model of too big to fail.

What ultimately fails, and is resolved, is employment, accumulating the retributive value, strengthening support for the gamma risk, bringing the preferred organizational model into question. The risk is not likely for at least the next four years, and the market trends will be very similar to the last four. Hardly a "new" normal, just new gamma-risk rhetoric to support the norm.