Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
BREWING FINANCIAL CRISIS 2.0 Suggests RECESSION 2022 - 28th Jan 22
Financial Stocks Sector ETF XLF $37.50 Continues To Present Opportunities - 28th Jan 22
Stock Market Rushing Headlong - 28th Jan 22
The right way to play Climate Change Investing (not green energy stocks) - 28th Jan 22
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The US Economy: Recession, Depression and Monetary Mismanagement

Economics / US Economy Jun 22, 2009 - 04:49 AM GMT

By: Gerard_Jackson


Best Financial Markets Analysis ArticleThe Institute for Supply Management reports that May was the "16th consecutive month of contraction in the manufacturing sector". Even though the contraction appears to be slowing the demand for capital goods continues to drop with no sign of a reversal in sight as of yet. Of course, this fall in demand has hit the producers of capital goods. In the meantime unemployment continues to rise with some commentators expecting it to reach 11 per cent before the year is out and maybe even climb to 12 per cent next year. Therefore the current signs suggest the US could be sliding into an actual depression, if it isn't there already.

It seems that Obama's borrow, spend and inflate policy is proving to be a complete failure. The idea that government borrowing is counter to recession was always a myth. The notion that transferring purchasing power from individuals to bureaucrats and politicians would expand aggregate demand is so stupid that -- as George Orwell said with respect to another matter -- only the intelligentsia could "believe a thing like that: no ordinary man could be such a fool". And Keynes was no fool. When he spoke of deficits and borrowing it was always with reference to monetary expansion. It's his disciples who keep getting it wrong.

Part of the current problem is that the US economy has accumulated masses of malinvestments that need to liquidated. Pumping money into these failures will sabotage economic recovery, a lesson that Obama and his economic advisors seem incapable of grasping. Of course they could argue -- as some are now doing -- that the fall in consumer spending combined with the rise in the personal savings rate is holding back recovery. On the contrary, more real savings is just what the economy needs, not less.

A reduction in the demand for consumer goods makes more resources readily available for production and makes it easier to get rid of malinvestments. However, what is being called savings is -- in my opinion -- largely an increase in the demand to hold cash balances. Given the uncertain state of the economy and the level of personal debt this is a perfectly rational thing to do. Anyone who argues that this process damages recovery is revealing an ignorance of how recessionary forces work themselves out if not hindered or even checked by political decision-makers as happened during the 1930s.

Nevertheless, the myth that the consumer is the economy's saviour lives on. As I tirelessly point out, consumer spending is only about one-third of total spending. It is the fallacious rule that intermediate spending should be excluded from the national accounts that conceals this fact. This has led to the grave error that consumer spending is the driving force behind the economy instead of business spending.

Now if intermediate spending was included we would immediately see that not only is the drop in consumer spending very small in relation to the drop in aggregate business spending but that it followed the latter. Yet the same people who ignore this fact nevertheless call attention to the fall in demand for inputs, which are really intermediate goods. Evidently the contradiction completely eludes them. Therefore "the need for households to return to a normal tendency to consume in order to ensure recovery" is an erroneous prescription.

Unfortunately America is being governed by the most anti-business administration since F. D. Roosevelt. Obama inherited a $4.5 billion deficit and then immediately transformed it into a $1.8 trillion deficit which is about 12 per cent of GDP. Not satisfied with that he set about implementing a borrowing and spending regime that was not only unprecedented and unnecessary but also reckless to the point of smacking of criminal negligence. He then did the manly thing and blamed his predecessor for the mischief. (Obama cultists still mindlessly send me emails asserting that Bush did it. I will get round to Obama's outrageous lying on this matter in a later article).

As I have said before, watch out for monetary policy. Virtually overnight the very accommodating Bernanke doubled the country's monetary base and in doing so planted an inflationary time bomb. No wonder Chinese students laughed when Geithner told them that China's dollar assets were safe. A monetary expansion of this magnitude would undermine any currency and those students know that. Moreover, so does Geithner.

The Fed's criminally loose monetary policy is closely tied to Obama's unsustainable fiscal policy. John Taylor, a professor of economics at Stanford University, estimated that because of Obama's spending plans the government would to impose a 60 per cent across-the-board tax increase to balance the budget by 2019. Read that again: 60 per cent. There is no way to support this colossal spending binge without resorting to the printing press, which is exactly what the Fed is doing.

The weakening dollar and bond prices are clear evidence that the markets are taking Bernanke's monetary shenanigans into account. (Nor should we ignore the fact that China is Surreptitiously accumulating gold and commodities as well as trying to buy into other real assets. It seems that Russia might be doing likewise). True as it is that the growth in the monetary base has yet to make itself fully felt it has nevertheless contributed to a weakening in the demand for US Treasuries.

When the expanded monetary base turns from a trickle into a river there will be no checking the inflationary pressure. This will lead to an irresistible rise in interest rates which in turn will force down bond prices. What is a central banker to do in the face of accelerating Inflationary and the government's insatiable demand for credit? The only way to force rates down would be to buy bonds. But the only way the Fed can do this is by printing more money, which will see investors dropping more bonds. This is not really a dilemma. It is not a choice between equally undesirable alternatives but between sound monetary management and the Fed's grotesque monetary mismanagement.

However, sound monetary management is not sufficient. What is also needed is a return to free market solutions. (It wasn't free markets that created the present crisis but the lousy economics that central banks practise and what politicians mindlessly parrot). Instead the brilliant Obama and his merry band of clever dicks have chosen the path of the statist thug. Free markets are to be severely curbed, regulated and bled by taxation. And why? Because in the fevered imagination of Obama's leftists mind only the state can deliver economic growth.

By Gerard Jackson

Gerard Jackson is Brookes' economics editor.

Copyright © 2009 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 - 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