The term “false dawn” refers to the zodiacal light that is a result of the sun reflecting (much as it does in respect of the moon) its light toward Earth, via the trillions of tiny particles of interplanetary dust: This dust acts like miniature moonlets, they being scattered throughout the space of the solar system.
The light appears along the curve of the zodiac, which is the track apparently followed by sun, planets and moon as that track is seen from Earth. The Z light at midnight can be bright enough on a really dark night to be mistaken for an eerily early dawn light. But midnight remains, in fact, quite a long way away from true sunrise.
Such a false dawn is a metaphor for current economic conditions.
US President Joe Biden likes to say that the recent reduction of the price of gasoline from its high point is a signal that the rate of inflation is diminishing. He is wrong.
His most recent policy innovation consisting of an infusion of three-quarters of a trillion dollars in new spending, some of it devoted to forgiveness of certain student loans, will, among other factors, assure me that inflation will remain high, as long as such spending, most to it financed by new debt, continues.
The price of gasoline in the US has fallen from its topmost level because that price in itself, along with price increases in an entire range of householder products, combined with diminished asset values in property (here is one of many depressing factors shared with China), has reduced consumers’ wealth and so reduced their demand for dispensable, discretionary goods like recreational travel.
Travel-related goods like gasoline fall off, and so does their price.
Inventory cycle
Just as the zodiacal light is caused by many moonlets, there are a number of economic processes that give off economic signals that are often confused with “dawn,” with imminent recovery from today’s combination of recession/inflation. One of them is the inventory cycle.
The inventory cycle sometimes looks like a reversal of inflation, and it sometimes looks like businesses are suddenly becoming the friend of the consumer.
The inventory cycle has to do with the dynamic motivation given to producers when they observe the inventory-to-sales ratio of their unsold but produced goods “on the shelf” to goods “going out the door” in the form of actual sales. Consumers also modify their normal behavior during an inventory cycle.
It works like this: During good times, just prior to recession, firms are producing goods at top speed, and they can barely keep sales shelves full. Product is sold as fast as or even faster than inventories (in the hands of the “in-between” selling agents) need to keep inventories adequate, given sales volume.
But as things slow down from the overheated vigor of an economic boom, the engines of production do not slow down fast enough to prevent, in the shops of the “in-between” selling agents, a buildup of unsold goods. The ratio of inventory to sales rises.
Selling agents cannot afford at such times to keep unsold goods on shelves, especially since inventories are financed with borrowed money, and interest rates are rising. According to data source Seeking Alpha, inventory-to-sales ratios have been rising for the past three quarters at Walmart, Home Depot, Target, Costco and TJX. As I write these words, a major retailer is advertising a special end-of-summer sale, with price reductions of 50%.
Such sales cause a false signal to be sent. It may look like inflation is ending, since bargain sales are going on all over the place.
But clearance sales depress profit margins. They mean the retailers in question will renew their sales-depleted shelves only with smaller orders, putting pressure on “upstream” profits earned by suppliers. If the general air of recession continues, suppliers and retailers may be forced to keep prices at sales levels, squeezing profits, perhaps so “tight” they become losses.
This is not to be welcomed as a sign of moderating inflation; rather, it is a sign of worsening recession.
Declining real income
In export-oriented countries like China, something similar is going on. Sales to importers like the US and Europe, which in good times had been strong and rising, are cut back because the final foreign buyers are suffering from recession and inflation, as well from wealth losses due to popped bubbles in property markets and pandemic-related losses.
Political increases in tariff barriers add to the sales problem, and unsold goods build up in pipelines, or else production lines run at a slower pace than in good times.
In particular these days, “zero tolerance” Covid shutdowns reduce productivity. Policies to reduce the external value of the yuan, in order to keep up sales, have the effect of reducing the real earnings of Chinese economic entities, including workers and investors in export industries, who experience declines in their real income.
According to the investment firm Trading Economics, “The offshore yuan [is] hovering near its lowest levels in two years, as weak Chinese data and renewed Covid lockdowns in major cities weighed on sentiment and heightened the risk of further capital outflows.…
“China’s manufacturing activity contracted for the second straight month in August, keeping the pressure on authorities to maintain accommodative policies and deliver more pro-growth measures.”
The Chinese government’s “accommodative” policies that attempt to replace these real losses in international buying power with various forms of direct or indirect payments of domestic paper money send more false signals that everything is under control – when it is not.
Life and death
On Friday, September 2, Gustavo Arnal, the chief financial officer of the firm Bed Bath & Beyond, plunged to his death from his 18th-floor balcony, located in a luxury Manhattan apartment house. His death could be an especially troubling signal, this one not a false one of the kind of economic problems among retailers.
Arnal is suspected of issuing false-dawn signals himself. He is the subject of a complex lawsuit, complaining that he along with some Bed Bath & Beyond colleagues engaged in a “pump and dump” scheme involving the firm’s stock.
The scheme is an example of false-dawn signaling. It is one where false “super happy” news is promulgated into markets about the economic situation of, in this case, stock of their firm and one of its spin-offs.
Once the stock is pumped up, the guilty parties dump their own holdings, taking a big profit. But in fact, the firm is in trouble. It is closing stores, laying off employees and seeking a “white knight” who will supply the US$500 million it needs to solve its financial troubles.
The Bed Bath & Beyond story is faintly reminiscent of the possibly exaggerated tales of the economic situation at the time of the Great Depression of the 1930s. Let us hope the similarity is a completely false analogy, and that today’s economic troubles, like the zodiacal light, will, in fairly short order, be replaced by a real dawn of recovery.
Tom Velk is a libertarian-leaning American economist who writes and lives in Montreal, Canada. He has served as visiting professor at the Board of Governors of the US Federal Reserve system, at the US Congress and as the chairman of the North American Studies program at McGill University and a professor in that university’s Economics Department.