Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
The Federal Reserve And Drug Addiction – A Prediction - 27th Jun 17
Charts Show Why Emerging Markets Will Be an Essential Part of Your Portfolio Going Forward - 27th Jun 17
Former Lehman Brothers Trader: I Bet My Reputation That Stocks Bubble Will Pop In A Year - 27th Jun 17
US Bonds and Related Market Indicators - 27th Jun 17
Stocks At Record Highs: Market Sentiment Still Bullish - 27th Jun 17
Stock Market Running Out of Steam - 27th Jun 17
Gold Back With A Vengeance As Bitcoin Bubble Bursts - 26th Jun 17
Crude Oil Trade & Nasdaq QQQ Update - 26th Jun 17
Gold and Silver Ongoing Consolidation May End Soon - 25th Jun 17
Dollar May Become “Local Currency of the U.S.” Only - 25th Jun 17
Sheffield Great Flood of 2007, 10 Years On - Unique Timeline of What Happened - 24th Jun 17
US Stock Market Correction Could be Underway - 24th Jun 17
Proof That This Economic Recovery Narrative is False - 24th Jun 17
Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - 24th Jun 17
Gold Summer Doldrums - 23rd Jun 17
Hedgers Net Short the Euro, US Market Rotates; 2 Horsemen Set to Ride? - 23rd Jun 17
Nether Edge By Election Result: Labour Win Sheffield City Council Seat by 132 Votes - 23rd Jun 17
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

Is the U.S. Economy Really Recovering from Recession?

Economics / Economic Recovery Apr 12, 2010 - 02:35 AM GMT

By: Gerard_Jackson

Economics

Best Financial Markets Analysis ArticleSome Obama supporters are already bragging about how the 'recovery' will ensure him a second term and therefore save his statist counter-revolution. Not so fast. These people are making the same mistake that many conservative commentators have made in that they are assuming recessions to be indeed cyclical. This means any downturn is eventually reversed and that this is now the case. It also means that these people have learnt nothing from economic history, particularly the policy disasters that the Hoover/Roosevelt administrations inflicted on the country.


The actual and crucial role that money plays in the boom-bust cycle is rarely discussed in the media, even by monetarists who labour under the egregious error that so long as a "managed" money supply 'stabilizes' the price level there can be no boom and thus no bust. Of course, if they were right then there would have been no Great depression. During that dismal period in American history it was noted by minds far more astute than those one now finds teaching economics at Harvard and MIT that

our present difficulties are viewed largely as the inevitable aftermath of the world's greatest experiment with a "managed currency" within the gold standard, and, incidentally, should provide interesting material for consideration by those advocates of a managed currency which lacks the saving checks of a gold standard to bring to light excesses of zeal and errors of judgment. (C. A. Phillips, T. F. McManus and R. W. Nelson, Banking and the Business Cycle, Macmillan and Company 1937, p. 56)

A stable general level of prices in itself means little; it is the disequilibria among particular paces induced by bank credit expansion (or contraction) that is of chief interest and importance for business cycle theory. (Ibid. p. 191).

The one thing that Chicago monetarists and Austrians can agree on at this point is that the so-called 'recovery' is driven by Bernanke's criminally loose monetary policy. This also explains why the P/E ratio has been inflated. There are always time lags between changes in the money supply and changes in production. Because there are no one-to-one relationships in economics we can never know how long these time lags will be. All we can really do is plot them after the event. The following chart shows the change in AMS (Austrian money supply*) and industrial production from September 2008 to last March.

From September 2008 to the following June money supply zoomed by about 25 per cent, averaging an annual rate of 33 per cent. It was this monetary surge that was driving the economy, including the share market. Since last June money supply has entered a downward trend. In January industrial production flattened, seven months after the monetary decline began. (One should not of course base any predictions on a single month's figures.)

Nevertheless, it should be noted that the contraction means that the quantity of bank deposits have also been falling. The fact that commercial and industrial loans have dropped by about 17 per cent during the last three months would clearly indicate that the contraction is squeezing commercial borrowing. Or would it? If a monetary contraction was responsible for such a squeeze one should expect the demand for business loans to drive up short-term rates, which is not the case. We can infer from this that the reports from the banking sector that business demand for loans has been very weak are indeed accurate.

We have a curious situation in which there is a recovery sans an increase in the demand for commercial loans. In addition, we apparently find the same phenomenon with respect to labour. A recovery that takes place without an increase in the demand for business loans and labour is a very strange beast and -- in my opinion -- a sickly one. Critics could argue -- and probably will -- that the employment figures for last month clearly indicate a rising demand for labour. Yet these figures are somewhat dubious to say the least. The ADP reported that "nonfarm private employment decreased 23,000 from February to March on a seasonally adjusted basis".

In short, there was a net loss of jobs. So private payrolls show an increase while the ADP report shows a loss. Even if the 123,000 gain in jobs is accurate it would be a very meagre result given the rate at which the workforce is increasing. What needs to be stressed is that both measures should be rising together. Moreover, the BLS's U6 measure of unemployment (includes the underemployed and long-term unemployed) reached 16.9 per cent in March.

Right now the country has some very dodgy employment figures that even if accurate still do not paint an optimistic picture. There is also the fact that commercial and industrial loans continue to shrink, meaning that business is not borrowing. Then we have the situation of a contracting money supply which in itself strongly suggests an aborted recovery could be on the horizon.

On the other hand, the chart reveals a rapid monetary expansion started in February and continued throughout March. This expansion worked out at an annualised rate of 56 per cent. Whether this extraordinary growth is merely a spike in a downward trend or an indication of accelerating monetary growth remains to be seen. If it's the latter then America is heading into an extremely inflationary period with all that that entails.

Note: It is a serious error to confuse an increase in GDP with economic growth, which is the process of capital formation. At the moment there is no capital formation and hence no real growth is taking place.

*There are some differences among Austrians as to what ought to be included in a definition of the money supply. I try adhere to Walter Boyd's view who in his open letter to Prime Minister Pitt in 1801 defined money in the following terms:

By the words 'Means of Circulation', 'Circulating Medium', and 'Currency', which are used almost as synonymous terms in this letter, I understand always ready money, whether consisting of Bank Notes or specie, in contradistinction to Bills of Exchange, Navy Bills, Exchequer Bills, or any other negotiable paper, which form no part of the circulating medium, as I have always understood that term. The latter is the Circulator; the former are merely objects of circulation. (Walter Boyd, A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issues in Specie at the Bank of England, on the Prices of Provisions, and other Commodities, 2nd edition, T. Gillet, London, 1801, p. 2).

In simple terms, money is the medium of exchange. Nevertheless, difficulties do arise. Are savings deposits money? This presents the problem of double-counting. If I take $10,000 in cash and deposit it in my savings account it cannot be seriously I argued that I have now expanded the money supply by $10,000. It therefore follows that if the bank lends out that $10,000 the money supply still remains unchanged. We now deduce that credit transactions do not alter the money supply. Whether we include savings deposits in our definition depends on whether or not it involves double-counting.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2010 Gerard Jackson

Gerard Jackson Archive

© 2005-2017 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

Catching a Falling Financial Knife