Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
The Gold Stocks Correction and What Lays Ahead - 19th Oct 19
Gold during Global Monetary Ease - 19th Oct 19
US Treasury Bonds Pause Near Resistance Before The Next Rally - 18th Oct 19
The Biggest Housing Boom in US History Has Just Begun - 18th Oct 19
British Pound Brexit Chaos GBP Trend Forecast - 18th Oct 19
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

US Economy in Meltdown?

Economics / US Economy Oct 23, 2007 - 10:29 AM GMT

By: Gerard_Jackson

Economics On Friday the 19 October the Dow Jones industrial average plummeted by over 360 points. This immediately sent alarm bells ringing throughout the financial community ? along with nightmares of October 1929 when the Dow Jones dropped from 400 to 145 in November. This dramatic fall in share prices was not confined to America. From March 1929 to June 1931 the prices of Dutch shares dived by 60 per cent; for Germany it was 61.7 per cent from April 1927 to June 1931, and French share prices dropped by 55.7 per cent from February to June 1931. (Wilhem Röpke, Crises & Cycles , William Hodge and Company Limited, 1936, p. 57 )

Unfortunately the somewhat limited world of the share market is not noted for its historical perspective. To begin with, most observers missed the fact that America was definitely sliding into recession in July 1929, some months before the market crash. The terrible depression that followed was entirely due to political meddling combined with an atrocious degree of economic illiteracy by Hoover, which in turn was continued by the Roosevelt administration. (Naturally, our leftist media always makes sure that Hoover gets 100 per cent of the blame 1 ).

Now some financial reporters were quick to point out that the market crash of 1987 on Black Monday October 19 witnessed a fall of 508 points without being followed by a depression. The reason is simple: there is no way a stock market crash can start a recession. The recession argument goes something like this: ?irrational exuberance? starts an unsustainable market boom. When it is finally discovered that share prices are greatly inflated panic sets in, shares prices dive shrinking spending power in the process which in turn reduces consumption and hence triggers a recession. Balderdash.

Even if investors have extravagant expectations regarding future share prices their trading ? no matter how enthusiastic ? cannot bring about a boom. A stock market boom requires a continuous flow of bank credit. In other words, credit expansion. Fritz Machlup nailed this fiction with the statement that a

... continual rise of stock prices cannot be explained by improved conditions of production or by increased voluntary savings, but only by an inflationary credit supply. (Fritz Machlup The Stock Market, Credit and Capital Formation , William Hodge and Company Limited, 1940, p. 290).

For ?irrational exuberance? read reckless monetary policy. Therefore we should look to 1987 for guidance, not for economic wisdom but for an economic fallacy. Immediately after the crash I advised people not to panic. There would be no recession because the central banks will flood their economies with money. Which is exactly what they did. However, I also warned that this could only delay the impending recession. Sooner or a later it would strike. For many people it was a lot sooner than they expected. My rather laboured point is that economic events need an economic explanation, something that is becoming increasingly rare in the media. So let us see what we can do.

In 1999 I repeatedly warned that conditions in American manufacturing pointed to a recession. I repeated these warnings throughout 2000, emphasizing that the then increase in the demand for labour was hiding the effects of job-shedding in manufacturing, and that this could not continue. And of course it didn?t, resulting in a recession for which the mendacious media is still blaming President Bush. To be brief, the unfolding of the 2001 recession mirrored the nineteenth century classical description of a recession. It was always noted that the beginnings of a recession first manifested themselves in manufacturing (the higher stages of production) after which the economy contracted.

The Bush boom ? just like the Clinton boom ? has been driven by a loose monetary policy, with one significant difference and that is the Bush cuts in capital gains taxes. It should not ? though it is ? be doubted that these cuts added greatly to investment, which I think might still be playing an important role in keeping the economy afloat for the time being 2 . Therefore, using manufacturing as a leading indicator we find that from June to September capacity remained comparatively stable at around 80. For the same period total industrial production also remained stable at about 82.1, and also from primary and finished goods at approximately 82.

What is truly striking about these figures is that from January 2006 to September 2007 AMS 3 (Austrian money supply) did not change. Ordinarily we would expect manufacturing to have felt the effects of this monetary tightening some months ago. But bear in mind that the Austrian approach never loses sight of the vital importance of savings in maintaining the production structure. This is what I think may have happened here. Moreover, ?American exports are now coursing their way around the world at a record level?. (Ron Scherer The Christian Science Monitor , Biggest export last year? Nuclear reactors. Sales of boats and harvesters surge, too ,17 October 2007).

A falling dollar appears to have greatly increased the demand for US manufactures. One does not need a PhD in economics to figure out that lowering the prices of American products in terms of other currencies will help delay a recession. Lord King explained spoke of this process more than 200 years ago, saying that

? an exporting merchant ... will receive, besides the usual profit, the amount of the depreciation which will have taken place in the currency between the time of purchasing the goods and the arrival of the remittance in return. ( A Selection of Speeches and Writings of the Late Lord King , Longman, Brown, Green, and Longmans, 1844, p. 85).

These additional receipts will be used to direct more production into exports. But this is no magic pudding and a time will come when painful adjustments will have to be made on a global scale. What we have been seeing is just aspect of an unprecedented world-wide credit expansion that our economic commentariat have carelessly called a ?excess savings?.

1. Geoff Elliot from The Australian make the patently absurd statement that ?Roosevelt?s New Deal, which helped lift the US out of depression in the 1930s? ( Rising petrol prices fuel anti-Bush backlash , 11 July 2005). Elliot?s historical and economic illiteracy is on par for our corrupt media.

2. How the Laffer curve really works

3. AMS is defined as currency plus demand deposits with commercial banks and thrift institutions plus saving deposits plus government deposits with banks and the central bank. This definition reveals very clearly that monetary expansion takes place as a result of central bank injections of cash and the commercial banks? practice of fractional reserve banking.

By Gerard Jackson

Gerard Jackson is Brookes' economics editor.

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

6 Critical Money Making Rules