Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is the US Economy Facing a Credit Crunch?

Economics / US Economy Nov 20, 2007 - 02:26 AM GMT

By: Gerard_Jackson

Economics Every time an economic crisis seems to be on the horizon you can bet your last dollar that scores of advisers will be warning that a drop in consumer confidence will cause a fall in consumer demand which will drive the economy into recession. For the umpteenth time, business spending drive the economy and not consumption. The Bureau of Economic Analysis now includes intermediate goods in its calculations, producing what it calls “gross output”. This figure shows business spending at about 50 per cent of aggregate spending. My own calculations put total spending at about $30 trillion


If we take a look at the BEA’s Survey of Current Business for 2003 we find that GDP is $10,083 trillion and consumption spending is $7,385, which is 73 per cent of GDP. But spending on intermediate inputs was $8,297. Therefore aggregate spending equalled $18,380 trillion, putting consumption at about 39 per cent of “gross output”.

Let us now take 2001 and see if we can deduce a rough rule of thumb for calculating consumption as a per centage of total spending. GDP is $10,082 trillion, other costs minus depreciation equal $15,098 trillion giving us a total expenditure of $25,180 trillion. (This is not the BEA’s concept of “gross output”). Private consumption is $6,987 which is approximately 28 per cent of total spending. Therefore our rule-of -thumb tells us to multiply GDP by 2.5 to get a rough estimate of aggregate spending.

Because GDP has severely skewed the consumption data economic commentators and advisers are apt to state that recessions are always caused by a fall in consumer spending. A Brief look at the Great Depression proves otherwise. Taking July 1929 as an index of 100 we find that by September 1934 the production of capital goods had plummeted to 43. A calamitous decline of 57 per cent. However, for the same period the output of consumer goods fell 16 per cent. ( Prices in Recession and Recovery , National Bureau of Economic Research , Inc., Publication No 31, 1936, p. 419). This is what classical economists called “disproportionality”, a concept that has been largely lost to the economics profession.

The Austrian theory predicts that not only are the producer goods industries hit the hardest, they are also the first ones to go into recession. For example, by July 1929 US manufacturing was already going into recession and shedding labour, even though the stock market and consumption still boomed. We had exactly the same thing for the 1990 recession and Clinton’s recession — for which the Dems and their media allies blamed President Bush. What is particularly interesting about the last recession is that consumer spending continued to rise. How can this be? Well, we have the answer to that. If I had followed the advice of these commentators I would have had to say that there was no recession because consumer spending was still increasing. Now wouldn’t that have been a daft thing to do?

It has been reported that Jan Hatzius, Goldman Sachs chief US economist, estimated that credit losses on outstanding mortgages could come out at around $400 billion or, according to our estimates, about 1.4 per cent of gross spending. From this back-of-the-envelope calculation Hatzius goes into full panic mode by warning that this loss could see a monetary contraction of some $2 trillion. The first thing to note is that though this would be about 15.5 per cent of GDP it would be probably be in the region of 5 per cent of total spending.

What is being argued is that the banks will strive to build up their reserve ratio. If , for example, the reserve ratio is 10 per cent, this means that every dollar added to the reserve causes spending to drop by $10. The problem with this line of thought is that it ignores the role of the Fed. I do not doubt for a moment that if an attempt by the banks to rebuild their reserve ratio looked as if it would trigger a deflation the Fed would immediately step in with freshly printed greens, regardless of the impact on the CPI.

Prices are clearly on the rise. As usual, the real culprit — the Fed — gets off scot free. It was loose money that eventually drove down the dollar and raised import prices while giving US manufacturing exports a good shot of whiskey. But for sometime now money supply has been comparatively flat.

Instead of looking at consumer spending as bringing about a turndown, commentators would do themselves a favour by paying a little more attention to monetary policy. As for debt problem, let us not forget who it was that created the credit that made enormous debts possible.

*Note: The Austrian definition of the US money supply is currency outside Treasury, Federal Reserve Banks and the vaults of depository institutions.

Demand deposits at commercial banks and foreign-related institutions other than those due to depository institutions, the U.S. government and foreign banks and official institutions, less cash items in the process of collection and Federal Reserve float.

NOW (negotiable order of withdrawal) and ATS (automatic transfer service) balances at commercial banks, U.S. branches and agencies of foreign banks, and Edge Act corporations. NOW balances at thrifts, credit union share draft balances, and demand deposits at thrifts.

AMS definition therefore equals cash plus demand deposits with commercial banks and thrift institutions plus saving deposits plus government deposits with banks and the central bank.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Gerard Jackson Archive

© 2005-2022 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