Posted on 07/26/2009 7:16:10 PM PDT by sickoflibs
Most experts and commentators are of the view that the worst of the US recession may be over by year's end. My own prediction is for an illusory recovery of government-constructed economic indicators, but nothing more than that.
It is held by most experts that a recession is typically set in motion by various unpredictable shocks. For instance, it is argued that the present recession was triggered by the crisis in the real estate market. Since, as a rule, various shocks tend to weaken consumer demand, it is the role of the central bank and the government to replace this shortfall in demand by boosting monetary pumping and government outlays. Thus, the central bank and the government counter the effects of various negative shocks by means of monetary and fiscal stimulus policies.
The monetary and fiscal stimulus is aimed at boosting overall expenditure in the economy, which (it is believed) is the key for economic growth. On this logic, spending by one individual becomes the income for another.
Following this way of thinking, since September 2007 the US central bank has aggressively lowered its interest rates. The federal funds rate target was lowered from 5.25% in August 2007 to almost zero at present. The yearly rate of growth of the Fed's balance sheet (that is, the pace of monetary pumping) jumped from 4% in September 2007 to 152% by December 2008.
With respect to the fiscal stimulus, aggressive government spending has resulted in a massive deficit. For the first nine months of fiscal year 2009, the budget deficit stood at $1.086 trillion. That compares with a shortfall of $285.85 billion in the comparable year-ago period. The twelve-month moving average of the budget had a deficit of $105 billion in June — the largest deficit since 1960.
It would appear that recent strengthening in some key economic data raises the likelihood that various stimulus measures have succeeded in reviving the economy. Seasonally adjusted retail sales increased by 0.6% in June after rising by 0.5% in the month before — this was the second consecutive monthly increase. The pace of deterioration in industrial production appears to be softening as well. Seasonally adjusted production fell by 0.4% in June after a fall of 1.2% in May. (Note that in January production fell by 2.2%.)
If recessions are caused by a fall in consumer demand as a result of various unforeseen shocks, then it makes a lot of sense for the government and the central bank to beef up the overall demand in the economy.
Why Popular Statistics Provide Misleading Signals Observe that various economic data, which serve as a guide to establishing the state of the economy, are derived from monetary expenditure data. This means that the more money that is created, the larger the expenditure (in terms of money) is going to be. Hence, various derived statistics are going to mirror this strengthening. For instance, the so-called gross domestic product (GDP), which is pivotal in the analysis of various experts, reflects the rate of growth in money supply.
Once the state of an economy is assessed in terms of GDP, it is not surprising that the central bank appears to be able to counter any recessionary effects that emerge. By pushing more money into the economy, the central bank's actions will appear to be effective, since GDP will show a positive response to this pumping, following a time lag.
Even if one were to accept that GDP depicts a well-defined "economy," there is still a problem as to why recessions are of a recurring nature. Does it make sense that unconnected, various shocks cause this repetitive occurrence of recessions? Surely there must be a mechanism here that gives rise to this repetitive occurrence?
Also, how can an increase in demand boost economic growth? After all, in order to be able to generate an increase in the output of goods and services, there must be an increase in various means to support the increase in the production of goods.
If the key to economic growth is an increase in demand, then poverty world-wide would have been eradicated a long time ago. Every central bank in the world could have generated massive demand by means of monetary pumping, which according to popular thinking would have generated massive economic growth. That this is not the case — have a look at Zimbabwe — should raise questions regarding the soundness of this popular way of thinking.
Loose Monetary Policies Cause Boom-and-Bust Cycles Careful examination actually shows that, rather than protecting the economy, loose monetary policies are the key source of boom-bust economic cycles.
The source of recessions turns out to be the alleged "protector" of the economy — the central bank itself. Further investigation demonstrates that the phenomenon of recession is not an indicator of the weakness of the economy as such, but rather an indication of the liquidation of various activities that sprang up on the back of the loose monetary policies of the central bank.
Loose monetary policy sets in motion an exchange of nothing for something, which amounts to a diversion of real wealth from wealth-generating activities to non-wealth-generating activities. In the process, this diversion weakens wealth generators, which in turn weakens their ability to grow the overall pool of real wealth.
The expansion in activity that sprang up on the back of loose monetary policy is what constitutes an economic boom — in reality, false economic prosperity. Note that once the central bank's pace of monetary expansion has strengthened, irrespective of how strong and big a particular economy is, the pace of the diversion of real wealth will also strengthen.
However, once the central bank tightens its monetary stance, it slows down the diversion of real wealth from wealth producers to non-wealth producers. And as activities that sprang up on the back of the previous loose monetary policy receive less support from the money supply, they fall into trouble — an economic bust, or recession, emerges.
From what we have shown, we can conclude that recessions are essentially the liquidation of economic activities that were created and sustained by the loose monetary policy of the central bank. The process of a bust is set in motion when the central bank reverses its earlier loose stance.
Having established this, we must investigate why recessions are recurrent. The reason for this is that the central bank's ongoing policies are aimed at fixing the unintended consequences arising from its earlier attempts to stabilize the economy — or rather, what it believes to be the measure of the economy: the GDP. On account of the time lag between changes in money supply to changes in GDP, the central bank is forced to respond to the effects of its own previous monetary policies. These responses to the effects of past policies give rise to fluctuations in the rate of growth of the money supply and, in turn, lead to recurrent boom-bust cycles.
Wealth Generators Key for Economic Growth The key drivers of the economy are wealth generators. Hence, the fact that various non-wealth generators come under pressure as a result of the central bank's tighter stance is indeed good news for wealth generators and real economic growth. A tighter stance means that less real wealth, which is required to support economic growth, is taken from wealth generators.
From this we can infer that the government's and Fed's loose monetary policies have only weakened the wealth generators' ability to grow the economy by diverting real wealth to nonproductive activities.
Can the economy recover despite aggressive policies of the Fed and the government? We suggest that this depends on whether wealth generators have managed to retain their ability to generate wealth despite destructive central bank and government policies. The ability to support economic growth hinges on the pool of real savings. Once this pool is starting to move ahead, the economic growth follows suit. This in turn means that economic growth is emerging, despite government and central bank aggressive policies.
We suggest that the aggressive policies of the Fed from 2001 to June 2004 — during which time the fed funds rate was lowered from 5.5% to 1% — have significantly damaged wealth generators' abilities to keep the flow of real savings going. While the Fed's tight interest rate stance from June 2004 to September 2007 provided good support for wealth generators, the loose stance since September 2007 has most likely undone anything positive from that time. Hence, we doubt that the US economy is on the verge of solid economic recovery, if at all.
Some commentators hold the view that the present economic crisis is the result of the Greenspan-chaired Fed's extremely loose monetary policy between 2001 to June 2004. Yet for some strange reason the same commentators hold the view that Fed's loose monetary policy since September 2007 has saved the economy from massive disaster. According to this way of thinking, at certain times pumping money is bad for the economy, while at other times it can be of great benefit. We find this logic extraordinary. Something that is bad cannot also be good. Printing money always undermines the bottom line of the economy. This is why it is always bad news.
We also find it extraordinary that many experts are urging the US government to increase its fiscal stimulus in order to strengthen the expected economic recovery. Again, as with loose monetary policy, loose fiscal policies can only redistribute the existing pool of real savings. The greater the fiscal stimulus, the less that is left for wealth generators to promote real economic growth.
Fed May Consider a Tighter Stance On account of massive monetary pumping, the growth in momentum of various key economic data is likely to strengthen in the months ahead. This, we maintain, may prompt Fed policy makers to consider curtailing the pace of monetary pumping. In an interview with Reuters, the Kansas City Federal Reserve Bank president Thomas Hoenig said that the Fed's massive monetary stimulus must be gently withdrawn as the economy improves. "There are ways to pull it out when you see the economy showing signs of stability, pulling out the liquidity slowly, carefully," he said.
Furthermore, Hoenig argues that it is important to raise interest rates from current levels to a range around their "neutral" setting — the level where they neither stimulate nor restrict economic activity in order to prevent future inflation. According to Hoenig, "[O]nce we get the policy rate in a range — around neutral — you stay within that range. What we need to do is get to some level of policy that is more constrained, around a neutral level, and then let the economy work its way through."
We, however, suggest that once the Fed tightens its stance — regardless of the neutral interest rate fiction — this will set an economic bust in motion; that is, it is going to hurt the various activities that emerged on the back of the Fed's previous loose monetary stance.
Conclusion Most experts are of the view that the worst of the US recession may be over by year's end. Common opinion holds that the key reason for the expected turnaround is the positive effect that the policies of the government and Fed have on various economic indicators. The pace of monetary pumping by the US central bank jumped from 4% in September 2007 to 152% by December 2008. With respect to fiscal stimulus, aggressive government spending has resulted in a record deficit of over one trillion dollars in the first nine months of fiscal year 2009. Careful examination shows that, rather than protecting the economy, it is loose monetary policies that are the key source of boom-bust economic cycles. Loose Fed and government fiscal policies have only weakened the wealth generators' ability to grow the economy. Aggressive policies have inflicted severe damage to the sources of funding that support real economic growth. Hence, we are doubtful that the US economy is on the verge of a solid economic recovery. On account of massive monetary pumping, the growth in momentum of various key economic data is likely to strengthen in the months ahead. We maintain this may prompt Fed policy makers to consider curtailing the pace of monetary pumping, and we suggest that this will set in motion a new economic bust
Interesting chart, but 1933 was the bottom of the depression, however, the deleveraging process took 10 years.
If we repeat the chart, we have hit bottom but the recovery will be long, slow and barely noticeable.
The Austrians are right.
We can get out of this
1) drill the damn oil
2) dump the greenies
3) lower taxes
4) deregulate everything at every level (that means drying clothes on a line in your neighborhood)
5)close the borders.
6) no more foreign aid
7) get out of the UN
8) cut all federal programs (arts, education, etc)
You are falsely assuming that we boast a free market capitalist country. America, in the past, use to rely on free market economics for growth, but this time it's different. It's also important to note that monetary policy is not necessarily the same thing as economic policy, and thus its better used as an indicator of how intrusive a government is over how healthy the economy is. The current Fed policy is a mess with debt monetization, dependent banks, and a reliance on artificially low interest rates. So, in other words, the government is currently quite intrusive. Poor monetary policy by itself hinders an economy and reflects an out of control government, but not surprisingly it's only one of many bearish factor contributing to our unsustainable path.
On top of an inflationary Fed policy, the US has a an unchecked anti-growth and anti-wealth government. The government is declaring war on the investors and job creators of the economy. To mask the high levels of unemployment, the local, state, and federal governments are hiring more public workers now than in anytime in recent memory. The only opportunities for new jobs is through the government or through its subsidized businesses. Unfortunately or fortunately, depending on how you look at it, all governments are running out or have run out of money and cannot bank roll an increasing number of unproductive labor indefinitely.
Restraints on this current government are nonexistent and its prevailing opinion continues to hold the misguided belief that central planning can improve the economy and even more bureaucratic regulations are needed to protect the common people. This misguided belief and economic ignorance is expensive and continues to drain America's wealth and productive capacity. With every country around the world,including America, continuing the reckless practice of excessive government spending, borrowing, and currency devaluation, harsh consequences will follow. Economic realities will rear its ugly head and scream the fact that these socialist policies and behaviors are leading us down an unsustainable path.
I hate describing this as economics because it's really governmental intrusion, waste, and corruption. The American economy has grown in the past despite these horrible economic inputs forced upon entrepreneurs and small businesses by these tyrannical bureaucrats. Too many people, including you, put faith in the government to fix the economy. All the problems facing America could have been avoided with a true free market. However, man is an arrogant creature that thinks he can make his own truth and avoid the consequences to his poor choices. I will personally add you to the list of the delusional.
If recognizing the failures of anti-market policies grant people the label as doom spreaders and idiots then it's clear there is not much one can do to change your lack of understanding of basic economics. However, your failure to recognize simple economic realities is contributing to the pool of economic ignorance which lowers the quality of life, destroys opportunities, and crushes personal liberty to billions around the world. Aggregate wealth can only increase by advancing technology, expanding freedom, or by improving incentives. Any other belief is wrong.
I do find it funny the timing you chose to attack Austrian economists. There are currently six job seekers to every one job opening. Most of the job openings are government related. The liberals are putting all of their political capital in taking over at least fifteen percent of the economy with nationalized health care. Around 70% of the US economy is based on consumer spending which relies on low interest rates. The only growth earnings have proved so far is overseas. The Treasury is auctioning more debt to a tune of $235,000,000,000 this week. The Bush tax cuts will expire and more tax rate increases on the "rich" will be implemented. Fannie and Freddie are masking the bearish state of the housing market by making artificial demand. Government waste will only get bigger and the effects of the recent splurge of inflation will begin to show. You are right to see these green shoots JasonC! How could I could have missed all of this bullish news?!!
Double down on socialism... I dare you!
Not to worry. Palin will fix it.
We are not on the gold standard anymore and haven’t been for many decades. They can print all the money they want...our money is based on the good faith and credit of the United States, which is a debt system.
So as long as Americans work...our money will be worth the debt we generate.
The question becomes at what point does America lose the “good faith and credit?”
What is the magic debt to income ratio for a country to go bankrupt? We’re already bankrupt, we’ve been that way for several years now. America is just like those people who over bought into homes they couldn’t afford, ran up their debts...and then lost their jobs...
America has been bleeding jobs overseas for decades. All our policies and regulations has left us with only one hope...federal job creation...jobs support and back our money, not gold.
From you neighbor next door who lost their job to the car company moving overseas to build cars in China...it is about jobs.
Welcome to the serfdom.
I too, no longer see any way out but down now as the goobermint is racing madly to suck more wealth from the economy and piling on enormous unheard of massive amounts of debt to the US taxpayer.....I'm predicting the dead cat bounce in the markets early this fall, but, there are no more solid fundementals left for the economy here to grow.
Too many Porkulus, Ponzi Scheme, items now being dumped into legisalation the Congress critters never read.
We've not even seen the effects yet of Shamnesty (once it passes) and universal (rationed care - let the old die) socialist healthcare.
The Fed, Congress, Administration, Big Banks and the sheeple will make sure a Depression like never seen before will come very soon.
BTW, this is not a recession, it's a depression.
The LSM isn't covering the real stories at all....they cherry pick warm fuzzy reports for a positive economic outlook and the truth is 180º out for our long term financial security as a nation.
They are intentionally bankruting the baby boomers as hyperinflation is well on its way in food, energy, medical and taxes.
U6 numbers as of July 2, 2009 have gone from 10.3% to 16.5% in one short year!
U6 accounts for the folks below, as well as the newly unemployed. Basically it lumps together EVERYONE that’s without a job, or those WITH part-time jobs who are ready, willing and able to work full time:
“Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.
Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.”
http://www.bls.gov/news.release/empsit.t12.htm
No jobs, no prospect of jobs, no recovery. The Porkulus Bill didn’t create a SINGLE job that can be seen. Porkulus II won’t do a d@mn thing but completely seal the fate of our kids and grandkids as endentured slaves to Government.
It’s really pretty simple.
***The Porkulus Bill didn’t create a SINGLE job that can be seen.***
Any jobs “created” from the “stimulus” bill are jobs not created by the market and thus a drain on our scarce resources. It’s too bad the government only looks at GDP and unemployment because these measures mean very little without qualification. We could have minimal unemployment and soaring GDP if the government hired a bunch of people to dig holes and fill them again.
Yes, I'll take the same claim 2-3 years out. Will you admit it when you are wrong? That is the only question here. I'm not holding my breath. Doom mongers never do admit it when the sun comes up in the morning. They always screech louder and say doom is just around the next corner. Always. And they are always wrong. Always.
Pretending to be oppressed by finance in a free capitalist society is a lie. If you think rates are wrong take the other side; if you think this or that outfit are making out like bandits, join them. But slandering them instead is just the same old tired dodge of the Marxists - demand profits for capitalists be zero without volunteering any of their own capital.
That's right I just called you are Marxist. The ideology is exactly the same and so is the way it works, even its villains are the same. The spin has been updated to catch a modestly different demographic, that is quite completely all.
True current policies from DC - though not from the Fed which has been fine throughout - are dumb, raising taxes and huge new middle class entitlements should not be enacted (period), and especially not at the bottom of a deep recession. But politics isn't in charge of the economy, and economics is an objective discipline that looks at the real world, and not a plaything of ideologies and spin machines. And the economy will recover, we already know it will because we know how it actually operates, and it doesn't operate according to your doom mongers ideological prescriptions.
And yes I will admit that I was wrong about this next year if the economy is not growing then. But I won't be wrong, it will be growing. I know it not because of political anything or spin anything, but because I am objective and I see the facts, and admit them. You do not see them because you see only what your ideology authorizes you to see.
When next year you notice and remember that I was right and your ideology mislead you, drop the scales from your eyes. Objective truth is not in an ideological box. You can't determine economic fact ready 80 year old books, you have to look at the real world today.
I took all my money out of the markets 5 years ago, and in doing so I avoided some sharp losses that you probably incurred. I recently put some money into the markets, in the hope I can get out again in time.
But slandering them instead is just the same old tired dodge of the Marxists - demand profits for capitalists be zero without volunteering any of their own capital.
So you must think Obama and Waxman are free market capitalists, since they are pushing crap and trade, which would allow Goldman and others to make money in a superficially "capitalist" role.
Ignore the damage this scam would do to the nation.
demand profits for capitalists be zero without volunteering any of their own capital.
You are delusional. I never advocated zero profits, unless you call government bailouts of banks "profits."
"I see not much of an increase in GDP for the foreseeable future. Consumer debt levels are increasing slightly so we see spending with debt burden. Business debt is scarce and banks are demanding tough new conditions for new business debt. Government spending is, as usual, beneficial only to those who get the juicy, politically friendly contracts... and not much benefit to the economy as a whole. The Baby Boom is aging and downsizing so they aren't buying much except travel and that really doesn't help our domestic economy. The current generation is debt strapped into oblivion and their retirement plans are in tatters. The new graduates are, frankly, unemployable in this flat economy. The elderly will be killed off by Obamedics and medical services and revenues will be cut to the bone to fund Obama (non)Care. So... there ain't no spending capacity left. Everyone is tapped. I, in my Oracular capacity, see a very flat GDP over the next 10 or so years. Housing prices flattening at this funky low level. Jobs of any quality scarce (except for those on Wall Street who do foreign business), crappy Chinese made products falling apart and lowering the standard of living for all of us as our infrastructure deteriorates and intense social upheaval as the poor get violent and the middle class comes to realize that a decent quality of life is slipping from their grasp. In short, its the 1970s all over again..."
So sayeth the Oracle of Lexington.
Friendly fire, here. What do you see driving GDP? Exports? Consumers? Business spending? (Please don't say green jobs or you will have instantly destroyed your excellent reputation as a guy who actually knows something about economics). I'm struggling to see a growth engine. And, this recent increase in minimum wage law is going to exacerbate the unemployment problem as more small businesses give up or lay off. Thanks!
The savings rate was zero last summer just before the biggest wave of the financial crisis hit. The savings rate is 7% of income today. A trillion dollars a year in net new savings have been created out of income, in less than a year's time. Despite short rates at zero.
It was sufficient to cut off the deadbeats borrowing what they could never pay back. They were dis-saving and consuming the savings of the rest of us. Now they are not.
The savings rates might still need to go a few percent higher, to 10% or so. Or it might drop back to 5% on recovery. But it is a self adjusting system and it is emphatically not going downward.
The Fed is setting rates correctly to maintain the exchange value of money broadly stable. If they had left short rates at 5%, the price level would have fallen 20-40%, just as house and commodity prices have. That would have doubled the weight of all existing debts - without benefiting creditors incidentally, because those debts would simply have defaulted as a result.
The stock market is going up because the corporate bond market has been healed from the panic of last fall. As a result, companies can borrow again. Companies have also cut their costs enough to break even at much lower levels of sales than a year ago, and that necessary adjustment is now basically complete. This is exactly what free economies do in response to new sets of prices; they adapt.
Oil prices are half what they were a year ago.
The government is shoveling a trillion dollars in deficit spending at the corporate and household sectors, all of it must show up as someone's receipt. In the short run those lending to the government will not treat their bond holdings as lost to themselves, and future taxpayers have not repaid those debts yet.
The Fed has forced a huge lump of new money into the banking system, enough that their liquidity problems has eased. First money market rate spreads dropped as a result (3 month Libor is at 0.5%, not 5%), and following those, corporate bond rates have fallen from their double digit peaks of last fall. Simultaneously the bond market has reopened for corporate issuance, which has run nearly $2 trillion so far this year, from practically shut down in October and November of last year.
Inventory ran off in the smash as unfinancable at nosebleed interest rates in the panic, even faster than sales fell. Inventory levels are now as lean as they've ever been. Job reductions exceeded the pace of spending declines, and measured productivity increased as a result in the 1st and 2nd quarters. Not all of that is real long term gain, of course. But it does mean corporate America will stay in the black, lower earnings but not outright losses. And both adjustments have stored up future demand.
Housing starts collapsed to less than half a million units annual rate, low enough that (1) they have stopped falling (2) wouldn't have much impact anymore even if they didn't (3) that the supply overhead, still large to be sure, is now being eaten through at a million to a million and a half units per year annual rate.
Auto sales fell by half, as the single most deferrable large ticket consumer item. That helped the adjustment but is not sustainable and ordinary rates of sales will resume.
Tax collections fell and transfer payments increased automatically due to the income hit and the asset price hit from unemployment and the financial crisis. Along with the deficit spending, this has kept overall personal income after taxes *flat* since last year, despite the huge rise in unemployment. The fall in consumer spending has all gone straight to higher savings rate as a result, repairing consumer balance sheets. It suffices for consumer spending to rise again, merely that the savings rate stop increasing. That will happen this quarter or next at the outside, as it has already made an epic (entirely necessary) move to 7% of income. It won't go above 10 and stay there. As soon as it stops rising, the income stabilizers that already kept after tax incomes from falling, will restore consumer demand.
Huge debt write offs by banks are not absolute losses to the economy as a whole, they are transfers. The deadbeats who didn't repay them earned equal and opposite unjustified windfalls for every dollar some bank or saver lost. Huge debt defaults are assymmetrical in their timing and the firm-destruction and business-model falsification they involve are clear net drags, certainly. But the windfall side of that for the consumers who do not repay also operates to repair household balance sheets and maintain eventual consumer demand.
If you add all of it up, we have one quarter more of slower contraction, tops, and we may begin outright GDP growth as soon as the 3rd quarter of 2009. We will certainly be growing within 6 months. Growth in GDP sets multiple virtuous circles in motion that have been operating in reverse for the last 9 months. Notably, very low rates combined simply with asset prices that are no longer falling, will restimulate investment.
The economy is a self adjusting system, especially with macro-fiscal stabilizers (government counter-cyclical collections and entitlements, on autopilot, entirely independent of anything Congress does or doesn't do) and with countercyclical action by the Fed. All operate slower than mortal man desires but all do operate. The economy will grow because that is what free economies do as men shift resources from less urgent uses to more urgent ones, in the new configuration of prices.
In other breaking news, the sun will come up and water remains wet. Predicting that the US economy will grow in real terms is as safe a bet.
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