Reposted from Of Two Minds with author’s permission.

The economy will expand if you believe it is expanding–because you’ll be “animal spirited” into buying a lot of stuff on credit that you can’t afford.

It all boils down to perception–that’s the insight at the heart of the Grand Game of Perception Management. Economists speak of magical “animal spirits” that fuel economic expansion, but this is simply a colorful term for perception management: when people perceive others reaping outsized gains in profits or pleasure from taking risky bets and freely spending borrowed money, then they will feel an overpowering urge to follow the herd and leverage their capital (if any) and disposable income (if any) into risky bets and zealous over-consumption, i.e. “animal spirits.”

Conversely, when said risky bets blow up and participants have lost their ever-loving derrieres by following the herd, then “animal spirits” quickly dissipate as the herd thunders off a cliff to its financial demise.

The task of the financial/political/media Status Quo is to convince Americans to overlook the abundant evidence of economic deterioration and focus on heavily juiced “evidence” of robust “growth.”

The game plan is this: if the Status Quo can convince you that the economy has righted itself and from here on in everything will get better and better, every day and in every way, then we will abandon financial rationality and start buying homes we can’t afford on credit, cars we can’t afford on credit and boatloads of stuff from China that we don’t need on credit (of course looking cool is a “need,” i.e. having an iPad to carry around).

In other words, believing it is so will make it so. That is the essence of the campaign to stimulate “animal spirits” confidence: though the economy is actually tanking, if they can only convince us the Dow is moving to 15,000 and then on to 20,000, jobs are being created left and right and things are looking up everywhere, then the resulting piranha-like shopping-feeding-frenzy will create the expansion that is currently chimerical.

This “feel-good” promotion of “growth” is also designed to persuade the millions of holdouts earning nothing on their IRA funds to drop all that cash back into the stock market, which is “breaking out to new highs.” (Isn’t that what they said in January 2000?)

And just in case this propaganda campaign fails to do the trick, the Federal Reserve has destroyed the return on savings and cash, all in the hope that the decimated, income-starved herd will turn from rationally avoiding risk to irrationally embracing it out of sheer desperation.

“Perception management” can be usefully shortened to a one-syllable word: “con.” The confidence-man’s most basic tool is to create the surface sheen of success with minimal investment of time and capital. Thus the con-man buys a couple of designer suits, rents a cubbyhole office with a prestigious address, leases a 500-series Mercedes vehicle, counterfeits some diplomas or other signifiers of Elite status and achievement, and then goes to work conning his credulous marks.

This exactly describes the strategy being pursued by Ben Bernanke, Tim Geithner, the financial media, and America’s scabrous political class. Consider one of the Status Quo’s most valuable cons, the unemployment rate as calculated by the Bureau of Labor Statistics (BLS).

If we look at this chart from the St. Louis Federal Reserve, we see that employment–the actual number of people with jobs, as opposed to those who are without jobs–we see that the number of people with jobs has declined recently and is now at the same level of 3rd quarter 2009, a few months after it was officially declared that the recession had ended.

The official unemployment rate was 10% in October 2009, when about 140 million people were found to have some sort of job, and now that the same number of people have been found to have some sort of job (140 million), the unemployment rate is now only 8.3%, even though the nation has added roughly 6 million residents to the workforce.

Huh? How can 140 million jobs generate an unemployment rate of 10% in 2009 and 8.3% in 2012 while the workforce and population have grown by 6 million? If anything, the unemployment rate should be higher, since the number of people with jobs has held steady while the number of people without jobs has expanded.

Mish Shedlock has done many an autopsy on the unemployment rate, including this one from Feb. 3: Nonfarm Payroll +243,000; Unemployment Rate 8.3%; Those Not in Labor Force Rose an Amazing 1,177,000.

The labor force and the unemployed have magically declined by millions since the recession was declared over in mid-2009.

The Status Quo con-men are careful not to mention that $6 trillion in Federal borrowing has been squandered since 2009 just to return employment to 2004 levels. And that sum rises by $1.3-1.5 trillion every year as unprecedented quantities of money are borrowed to prop up the Status Quo.

A few years ago, deficits of $300 billion were considered unsustainable; now deficits of $1.3 trillion are accepted with little more than routine political jockeying. The con-men also never mention that this “official” deficit leaves out all supplemental appropriationswhich run into the hundreds of billions of dollars a year for expenditures such as war and bailing out Fannie Mae and Freddie Mac–and now, FHA will be added to the taxpayer bailouts: Housing Agency’s Reserves at Risk FHA losses require taxpayer bailout.

Then there’s the con-men’s masterwork of perception management, the U.S. stock market. As noted earlier this week, much of the stock rally since March 2009 has been attributed to rising corporate profits. Yet a significant share of those profits were smoke-and-mirror illusions created by the Federal Reserve actively depreciating the nation’s currency. Now that the dollar is strengthening, that charade is wearing thin.

Another chunk of those fabulous profits resulted from household incomes declining–that is, people earning less from their labor and savings as corporations kept any net increases for management and shareholders. Since 2007, the year before the most recent recession, real median household income has declined 6.4%. The median household income in 2010 was $49,445, down from $49,777 in 2009 and $52,673 in 2007. In other words, all this “growth” in GDP and profits since mid-2009 has not resulted in any visible improvement in household income, healthcare coverage, or any other metric that has a basis in real life. (Please review ths Census Bureau link above for more.)

So believe the smooth talk about Dow 15,000, strong job growth and rising GDP at your own peril. Ignore declining income, empty storefronts, lower energy consumption and all the other real-world evidence of a contracting, enfeebled, precarious economy if it boosts your all-important “consumer confidence,” but make sure you don’t confuse the con with confidence: the Mercedes is leased, the office a front, the resume a fraud, and the smooth sales pitch a clever fabrication.

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The Treasury will raise “just” $67-72 billion new cash next week. That’s some $20 billion less than the TBAC forecast. Woohoo. The recovery is here. TARP repayments, growing tax receipts, and reduced outlays are giving Treasury finances a boost. QL1.5 is working just the way it’s supposed to. The cash is filtering through the markets into the economy. Renewed economic growth results in increasing tax receipts, cutting the defecate. QE2 not needed.

Wait a minute. Here we are cheering the fact that the government will only need to borrow $70 billion next week in order to meet its expenses. Woopdedoo. And we don’t need no stinkin QE2 because QL1.5 is also lifting commodity speculation, which boosts inflation. Isn’t that what the Fed wants–another transfer of wealth to the leveraged speculating community to boost consumption and economic growth? Of course that extra cash that what’s left of the middle class will have to spend on food and fuel is just another form of tax that will only further reduce discretionary spending and send the economy spiraling into a black hole.

The Fed’s easing policy, whether QL1.5 or an enlarged QE2, is sowing the seeds of its own demise. It is robbing the middle class, or what’s left of it, to enrich commodity speculators. It is raising the cost of basic necessities for the world’s working people and those formerly surviving on fixed incomes. At the same time it eliminates the interest income that they would normally have to help them survive.

The Fed is certifiably insane, if not criminally insane.

Stay tuned for more analysis, with tables and charts worth a thousand words, in this weekend’s Fed and Treasury updates.

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