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 Heading for a Recession?

Economics / US Economy Sep 11, 2007 - 09:38 AM GMT

By: Gerard_Jackson

Economics Best Financial Markets Analysis ArticleThere have been oodles of commentary about the effects of the subprime real estate fiasco and how this will impact on the US economy. The first thing to bear in mind is that this financial disaster should be laid at the feet of the Fed. Without its loose monetary policies the credit to fund subprime mortgages on a massive scale would not have been available. Pumping masses of credit into the banking system is like pouring water into a bucket that is full. It's gotta overflow. And this is precisely what America got: an overflow of credit that went into funding a lot of dodgy loans — and not all of them are mortgages.


Dr. Robert Shiller of Yale University and the author of Irrational Exuberance has asserted that in the next few years real estate prices across the US could plummet by 40 per cent in real dollars. I find this prediction very dubious. It is true that land and houses can suffer severe and prolonged drops in their prices. For example, good British farming land that sold for $100 an acre in 1860 was selling for $10 in 1940. This was not due to any land boom going bust but to the successful opening up of the prairies by the railways. The flow of grain and meat from this agricultural cornucopia dealt a severe blow to many European farmers. My point is that one should be very careful when dealing with real estate trends. That the market is overvalued is indisputable: that a correction could slash real estate prices across the board is something that would, in my opinion, require a significant deflation.

Readers will recall that I frequently refer to findings by the ISM (Institute of Supply Management) that keeps a very accurate check on the performance of the manufacturing sector. It is true, as several readers pointed out to me, that the index is falling though it still remains positive. The interesting thing here is that a decline in the index is usually followed by a recession. But it is at this point where we must exercise caution. In 1999 I made similar observations. However, I did not ‘predict' recession, as I recall, until the manufacturing indicators were negative, leading some economic commentators to make the silly statement that the US economy was half in recession while the other half was booming, as was employment.

A similar thing happened in the in 1924, 1927 and Australia in 2001. It was clear in 1924 that the US economy was sliding into recession. The Fed saved the day by quickly expanding the money supply. Economic activity slowed again in 1926 and in the following year the Fed opened the monetary tap. In 1999 it was obvious to me that Australian manufacturing was slowing and in 2000 the slowdown became more pronounced so that by the end of the year it was generally agreed that the country was going into recession. The Reserve Bank of Australia reacted to the threat by letting the money supply rip. From January 2001 to February 2002 bank deposits rocketed by 25 per cent and M1 grew by 38 per cent.

So it is not just a case of a declining ISM index but also the response of the Fed that needs to be considered. Should the Fed decide on a significant cut to the funds rate then it is possible that manufacturing and even the residential real estate market could rebound, as happened in Australia. But this would be a case of putting of a day of economic reckoning for a more pain one down the track. The real danger to the economy would be control of both Houses and the White House by the Democrats. If they are true to their word about taxation and spending then they would sink the US economy. After all, every economy can only take so much punishment. And let us also bear in mind just how ignorant of economics and economic history Democrats — not that they really care.

People ask me whether real estate is a good economic indicator. Not exactly, the real indicator here is new residential building. The reason for this is durability and price. These two factors make housing very sensitive to interest rates charges in the same way that durable capital goods are responsive. Houses are built on the expectation of being sold at a price that covers the cost of production. A self-evident fact. What is not self-evident is that the price of the house is the sum of the value of its discounted services. It therefore takes little to understand how interest rates would influence the building industry 1 . The demand for big ticket consumerables is also declining, particularly for cars. One reason would be that many of these articles are bought with borrowed money. This too could indicate recession.

I know that a number of economists are predicting an imminent recession. But I have also shown why one must be cautious about such predictions. But do not forget that it is manufacturing that first feels the cold wind of recession 2 — even when monetary policy is not particularly tight. Never underestimate the power of money!

Banks are being urged to come clean with investors. Laudable as this sentiment is it overlooks the fact that the problem is not one of devious bankers holding out on investors and ordinary depositors but of bankers — along with the Fed, most of the economic commentariat and academia — being completely ignorant of the nature of money, capital and interest rates. The economic commentary I've read from banks, including central banks, does not fill me with confidence.

1. Hayek considers houses to be capital goods “so far as they are non-permanent”. Additionally, “we have to replace them by something if we want to keep our income stream at a given level…” ( The Pure Theory of Capital , The University of Chicago Press, 1975, pp. 77-78). But the same thing can be said of cars, televisions, books, furniture. In fact, just about any household appliance. Or even works of art. Although the Mona Lisa is 500 years old and will probably survive another 500 years no one calls it — at least as far as I know — a capital good.

2. The exception would be a consumer-led boom. The effect on the capital structure by this type of boom would be very different from credit boom that directly fuelled industrial expansion. I should also add that it is a myth that Austrians do not — and never have — considered consumer booms.

Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

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