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
our money is based on imagination
our money is based on imagination
It used to be considered essential to conservatism that one had one's feet on the ground and a sense of proportion, and new that politics is not the sum or substance of human life. Ideologues who want to imitate instead the total ideologies of the left that make everything about politics and everything about hyperbole and doom and terror, are not conservatives, and I want them to learn better or get out of my movement.
The "new" American economy won't be worth sneaking over the border for...
The 1920s were a binge time. It took until the late 1980s for the USA to reach that level of conspicuous consumption that is the hallmark of a spending boom. I think the party is over and people are going to be living very frugal lives for decades. So... if we see growth, it might likely be lackluster. This will dampen our lifestyles as people forgo the expensive luxuries and head for McDonalds!
I've never stocked up on anything.........until now.
"Consumer debt levels are increasing slightly"
The savings rate just went from 0% to 7%; Americans are saving ~$1 trillion a year they weren't this time last year. That covers a lot of debt service. While the savings rate soars, demand is lower of course, but it won't go on soaring at 8% of income per year rates indefinitely. In fact, it has probably already adjusted as much as it needs to (maybe a quarter more). As soon as the savings rate stops soaring, consumer demand is back.
"Business debt is scarce and banks are demanding tough new conditions"
But they do not require banks. Last fall in the panic the bond market closed, but it has reopened this year as the money market recovered (under Fed therapy). The corporate bond market has been in a full blown bull market since March, and $2 trillion in new issued have been floated.
"Government spending is, as usual, beneficial only to those who get the juicy, politically friendly contracts"
False, whoever gets the first receipt they have their own demands. The net new debt of the treasury must appear as net new assets to the corporate and household sectors, accounting identity. And they all spend it on whatever they normally consume. Sure, in the long run taxpayers pay what those gained, but it is short run stimulative whoever gets it.
"aging and downsizing so they aren't buying much"
Healthcare is booming of course. As a long demographic trend, the move south and west that got ahead of itself in the housing bubble is still in place, and lower rates and time will rationalize much of that capital allocation, that was mistimed and mispaced more than completely misdirected.
"The current generation is debt strapped into oblivion"
Nonsense, US household net worth is $50 trillion. All debts are owned and net foreign assets remain trivial, so they are pretty much all owned here. The asset line dropped $7 trillion with stocks and real estate, but that just puts it at mid "oughts" levels, and it is being added to at a $1 trillion a year clip now that the savings rate has recovered. The whole line that Americans weren't saving has been obliterated by the crisis. Those who were dissaving recklessly were cut off; the populace as a whole now saves again.
"new graduates are, frankly, unemployable"
Hardly, with productivity at record levels. The job market is a lagging indicator and will take a year to recover, but incomes have held up anyway. Net job growth will continue to come from the small business sector and from services, same as always.
"revenues will be cut to the bone to fund Obama"
Contradiction in terms. The government is in fact going to mandate $1 trillion more in spending in the health care industry, all of which will be earned by health care providers. This may not be the most efficient allocation of resources, but it is certainly a net new inflow to that industry and a huge one.
"Everyone is tapped."
There is a wealth effect that has reduced spending and increased the need for savings, that is certainly true. But net worth is over $50 trillion, savings are 7% of income, companies are profitable despite the epic dislocation in demand last year, financing is possible again. Everything the free economy actually needs in order to grow is present. Dumb tax increases from the government are an impediment, but the Fed is extremely accomodative.
"very flat GDP over the next 10 or so years."
I'll bet you a beer the average rate of real GDP growth over that long a period beats 2%, same as it always does.
"Jobs of any quality scarce (except for those on Wall Street who do foreign business)"
There are 2 million unfilled want ads as of this moment. Business week did a story about it. No, Wall Street is not the place people are hiring, that is a smear and beneath the rest of your discussion. It has in fact lost several hundred thousand people and the finance industry has lost several times that again. But health care is hiring, and tech is hiring, and services as always.
"its the 1970s all over again"
We are in a deflation not an inflation. It is not remotely the 70s all over again.
But that story, beloved of moralizing financial pundits everywhere for the last decade, *ended* comprehensively with a bang last fall. Savings are normal again, and all of the moralizing talk about how we couldn't afford to borrow any more is over and done with. We simply aren't doing it anymore, the banks cut off those who had been doing so.
And just as the economy grew decade after decade with a normal savings rate, it will again with a normal savings rate. As soon as it stops rising, consumer spending resumes, without any debt anything being required. We actually earn all of it, you know.
Men with $14 trillion in annual income are not going to be living "very frugal lives". Saving 1/14th of one's income is not great frugality nor any hardship. It is mere normality - and sounder prosperity.
Everyone pretending that Americans are poor as dirt is simply pretending and not living in the real world. A wrenching adjustment was needed away from an unsustainable course, and it has been made. Our prosperity, which didn't start in 2001, was not and is not predicated on that unsustainable course, and will go quietly on without it.
I hope I'm completely wrong on this one. I'm not looking forward to a decline in living standard...
You assume those men are not married to wives with credit cards! There! I run circles around you logically!
You are welcome! You make excellent points. Truly, Economics IS, in fact, the dismal science. A daily game of fortune telling where the best one can ever get is “close.” I prefer your outlook to my own because you share rays of hope...
US personal savings rate since 1959
The US savings rate was above this level from 1959 to 1992 with few temporary expections, and the economy grew fine. There is nothing about economic growth that requires spending more than one earns. The whole idea that our prosperity is built on things we can't afford or didn't pay for is a moralistic self-loathing error, all the way down.
We are rich because we are productive, and we are productive because we go through the difficult discipline of actually adjusting our behavior to the new state of the world, all of the time. People who want economic growth without wrenching adjustment do not know where it comes from in the first place. Economy consists in moving everything to where it does the most good. Moving stuff from what it was doing before isn't fun, it is painful, the stuff being moved includes millions of men's lives and efforts and dreams. But it is the willingness to take the pain and make the jumps reality demands, that makes us rich in the first place, keeps us so, and will make our kids better off than we are.
It is frankly a bit crazy the level of ingraditude and self doubt abroad in America today. Conservatives used to known better, we had the market cornered on optimism and confidence and faith in the power of human freedom. I for one still do, and I wish the rest of my fellow conservatives would get it back.
You will never out-doom the left and we are fools to try. It is half of why they are useless. Their belief that politics is the sum total of human life and of all that matters is most of the other half of why they are useless. I see that infecting conservatives too. You all need to snap out of it. Losing one election does not mean America is doomed, nor does one measly recession mean America is poor.
I completely agree... but... communism or whatever we are calling the New Left today is a dangerous force. Capital is scared to death right now. In Obama's world, the state makes decisions and those who are part of the Machine get franchises while private capital gets taxes into oblivion. In every country where the Left has taken control private capital is destroyed or severely regulated. The United States has NEVER been so close to socialist disaster as right now. I'm a conservative and a capitalist and I'm sitting tight until I see how this plays out. I am not optimistic at the moment because I've lived long enough to know that Disneyland is fake!
EXACTLY! But capital is global and I'm growing more convinced by the day that opportunities for capital exist in other jurisdictions that respect capital. Here, capital seems to have picked up the burden of feeding the huddled masses.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.