Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

When will the Bush Credit Driven Boom Crack?

Economics / Money Supply May 22, 2007 - 12:49 AM GMT

By: Gerard_Jackson

Economics

Unfortunately every credit fuelled boom ends in recession. Although no one can really predict the actual timing of a recession one can look out for certain danger signals, the major one being manufacturing. Once manufacturing finds itself in a profits squeeze rising costs start to bite into profit margins it will have no choice but to discharge labour, cut back on investment and reduce output.

After a while the manufacturing contraction will reach down into the consumption stages of production, at which point it will be officially declared that the economy has tanked.


(I am assuming, of course, that the Fed does not let loose with the money supply in an effort to bolster manufacturing output and investment. This is precisely what the Reserve Bank of Australia did in 2000).

Readers should not be tempted into thinking that because manufacturing is shedding jobs that this will immediately raise unemployment level. Throughout 2000 aggregate unemployment even though manufacturing had shed a considerable number of jobs. This situation confused the economic commentariat who came to believe that a condition of being half-pregnant was indeed possible. This caused Steve Slifer, chief economist at Lehman Brothers, to say of the US economy in January 2001:

It's really an odd-looking slowdown. The manufacturing sector is, in fact, in a recession but not the overall economy. At least not yet.

But in fact there was nothing odd about it all. If Slifer had applied the production structure approach to the his dilemma would have disappeared very quickly. What really happened is that consumer spending continued to expand and in doing so it generated more jobs. This is why the unemployment rate continued to fall in the face of a decline in demand for labour from manufacturing. The economic commentariat naturally interpreted the situation as vindicating the vital role that consumer spending is alleged to have played in bringing about a "soft landing". In fact, consumer spending continued to grow throughout the recession, raising an interesting question: If consumer spending is as important as the vast majority of economists claim, why did the US economy sink into recession?

The answer is simple: consumer spending is not and never has been an engine of economic growth. This is one of the great economic fallacies of the age. GDP is a value-added approach that by definition omits from its accounts spending on intermediate goods. (How highly intelligent economists insist that value-added accounting gives a gross figure has always been something of a mystery to me). Fortunately the US Bureau of Economic Analysis have arrived at a similar conclusion. It now produces a national income statistic it calls gross output which is supposed to include spending on all intermediate goods.

The results has been very instructive: the Bureau's December 2006 release for gross output revealed that spending for all industries was $22.857 trillion against a GDP of about $13 trillion. Considering that consumer spending is something like 66 per cent to 70 per cent of GDP, this must mean that business spending was in the region of $13-$14 trillion as against about $9 trillion for consumption.

We can deduce from this that the GDP method of accounting conceals enormous fluctuations in business spending. Once we take this into account we find that the drop in economic activity was greatly understated by the GDP figures. It now follows that manufacturing is not only a key indicator in trying to plot the course of boom it is also a good measure of just how deep a recession is. Unfortunately the great number of economists are not likely to abandon their GDP, even in the face of the figures produced by the US Bureau of Economic Analysis.

We must never lose sight of a fundamental fact: booms are always triggered by 'cheap money' policies. By forcing down the market rate of interest the Fed creates a flood of credit that creates malinvestments, causes so-called balance-of-payments problems, housing booms and share market booms. Needless to say, the debt burden begins to grow. As Richard von Strigl put it:

The more credit expansion progresses, the greater will become the share of additional credits in the overall volume of credits within the economy, while savings capital gradually loses its relative importance. ( Capital and Production , Mises Institute, 2000, first published 1934, p. 126).

In other words, the huge debt has been produced by the Fed's monetary policies. And as for predicting actually timing of the recession, we just need to look out for those tell-tale signs, while exercising due caution.

Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes economics editor.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules