Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

US Economy: What Economic Recovery?

Economics / Recession 2008 - 2010 Jul 27, 2009 - 04:44 AM GMT

By: Gerard_Jackson

Economics

Best Financial Markets Analysis ArticleThe Dow has passed the 9000 barrier. This has gotta be a recovery, right? After all, "the share market is forward looking". I'm afraid these people have confused forward looking with foresight. Never look to share markets as harbingers of growth or recession. Market watchers would know this if they paid more attention to history and less to charts. The American economy, for example, had already shown distinct signs of contracting several months before the Great Crash of 1929.


Although the Dow (which was more representative of the economy in the 1930s than it is now) rose from its low of 42.84 in June 1932 to 150.24 in December 1939, an increase of 250.7 per cent, unemployment averaged 16.7 per cent for that year against 3.3 per cent for 1929 while the industrial production index (1923-25) had fallen to 92 in April and May before rising to 103 the following August.

Roosevelt's economic policies -- which were largely an extension of Hoover's -- were a disaster that only a political cultist could ignore. This was a period of unprecedented government interventionism that severely crippled the US economy and triggered a process of capital consumption.

Professor Higgs estimated that from 1930 to 1940 net private investment was minus $3.1 billion. (Robert Higgs, Depression, War, and Cold War, The Independent Institute, 2006, p. 7). Arthur Lewis calculated that from 1929 to 1938 net capital formation plunged by minus 15.2 per cent (W. Arthur Lewis, Economic Survey 1919-1939, Unwin University Books, 1970, p. 205). Benjamin M. Anderson estimated that in 1939 there was more than 50 per cent slack in the economy. (Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946, LibertyPress, 1979, pp. 479-48).

A period of capital consumption would be marked by a continuing rise in the average age of machinery. This is precisely what we find. The amount of metal working machinery more than 10 years old rose from 48 per cent in 1930 to 70 per cent in 1940, an increase of 45.8 per cent. The reason why so many people think Roosevelt restored growth is because GDP rose under most of his presidency. These people have made the error of confusing a reduction in idle capacity leading to increased production with an increase in the amount of capital. As we have seen, there was no such increase.

One could argue that from June 1932 the rise in the Dow Jones was sustainable. And a 251 per cent increase in 7 years would seem to confirm that view. The problem is that there was no real recovery, from which we should draw the lesson that a rising stock market in itself does not necessarily signal a genuine revival in economic activity that would include the resumption of the process of capital formation. Too few commentators seem to be aware of the vital importance that monetary policy plays in driving the stock market. Even fewer stress that the ideal stock market is one driven by economic growth and not monetary expansion. (Share markets, equities and monetary policy). The following charts track M1 and the Dow.

It can be seen that from its peak in 1929 the Dow rapidly fell. What is not generally known is that the Fed froze the money supply in December 1928. From January 1930 to June 1933 the money supply fell by about 33 per cent. It was not until the second half of 1933 that it began to expand again. The big break in the Dow in August 1937 is usually attributed to a monetary tightening by the Fed. But as the Fed only reduced excess or 'idle' reserves -- and then not all of them -- it follows that there must be some other cause. In fact, the Dow's crash corresponded with a collapse in industrial production the index for which dived from 115 in August 1937 to 76 in May 1938. This was the result of a massive wage push -- encouraged by the Roosevelt administration -- that put the US economy into reverse.

Although the second chart is not clear on this point the Dow has been closely tracking M1 since 10 March. (The use of sweeps has caused M1 to be greatly understated). No matter which monetary measure one uses it seem pretty clear that Bernanke's criminally loose monetary policy is now driving the markets. But with an official unemployment rate of 9.5 per cent that is set to rise to 10 per cent or even higher can Bernanke's monetary assault on the economy drive this figure down again? (Bernanke appears to be still wedded to the discredited Philips curve).

Don't count on it. Manufacturing is still comatosed and there are still economic imbalances that need to be liquidated but which Bernanke and Obama are working to keep afloat. Combine that with Obama's insane energy policy and the Democrats' rising tide of tax increases that will sweep across the economy and it is quite possible that the economy will suffer another severe downturn

And then there is the tidal wave of money that has been built up. Unless it is permanently sterilised the US will be confronted with surging inflation, a falling dollar and rising unemployment. It won't be a pretty picture.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2009 Gerard Jackson

Gerard Jackson Archive

© 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