Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelertoing Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

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

U.S. Sleep Walking Into Another Recession

Economics / Double Dip Recession Aug 18, 2011 - 12:32 PM GMT

By: Terry_Coxon

Economics

Best Financial Markets Analysis ArticleThe rebound from the recent recession is the slowest economic comeback in living memory – so slow that some doubt whether it is happening at all. The recession bottomed (the economy stopped shrinking) in June 2009, so the recovery is now two years old. Here’s how things looked 24 months into recovery from the last four recessions.


Recession Begins Recession Bottoms Unemployment Rate
24 Months After Bottom
July 1981
November 1982
7.2%
July 1990
March 1991
7.0%
March 2001
November 2001
5.8%
December 2007
June 2009
9.1% as of May 2011

The sleepwalking during the last 24 months is all the more remarkable, given that the economy has been treated with the biggest dose of monetary and fiscal stimulants ever administered in U.S. history. Why the continued weak pulse?

Each recession has its own story – how long it lasts, how deep it gets, industries worst hit, particular bubbles burst. But in every recession, the heart of the problem is the same, namely, an imbalance in the market for cash. Every recession begins when the aggregate amount of cash that people want to hold (given their wealth and the other things they want to own) is more than the amount of cash actually in existence. That imbalance – the demand for cash exceeding the supply – depresses the entire economy because the flip side of the market for cash is the market for everything else. All markets and all industries are hit, and most of them contract because most people are trying to sell more than they buy... which is the only way for anyone to increase his cash holdings and which is impossible for everyone to do at the same time.

In the period from the end of the Civil War to the end of World War II, most recessions began when the government, by plan or by blunder, contracted the supply of cash, so that it fell below the public’s demand for cash. Since World War II, every recession has begun when the government, again by plan or by blunder, allowed the growth in the supply of cash to lag behind the growth in the demand.

The early stages of a typical pre-WWII recession would push some commercial banks into insolvency, which would shrink the supply of cash even further, since insolvency meant that some part of the deposits held by bank customers were lost. As the recession proceeded, an increase in the demand for cash by worried investors, worried business people and worried workers would make the cash shortage even more severe.

Every recession between the Civil War and World War II ended on its own. In no case was a recession brought to an end by the actions of an alert government agency or with the advice of learned economists. Recessions were cured, automatically, by falling prices. Falling prices were the cure because they increased the real value (purchasing power) of whatever amount of cash the public was holding. Prices kept falling until the real value of the existing supply of cash grew to a level that exceeded what the public wanted to hold. Then, as individuals and businesses began to spend the excess, the economy would begin to recover.

Until the Great Depression of the 1930s, the average length of a recession was 21 months. The misery that began in October 1929 lasted five times that long – 105 months. It was the severest recession ever, with unemployment reaching one-third of the workforce, because the shortage of cash that brought it on was the severest ever: the M1 money supply (hand-to-hand currency plus checking deposits) shrank by one-third. But a different factor made it the most prolonged of recessions. Aiming at a symptom of recession rather than at the cause, the government pursued an array of policies to prevent prices from falling, which had the perverse effect of preventing the economy from recovering. The government’s would-be medicine was, in fact, poison.

Even though the government’s first active attempt to end a recession produced a disaster, it did establish a presumption that the government shouldn’t just stand by when the economy turns down. It should do something, and the duty to do something has been assigned to the Federal Reserve.

Since the end of World War II, the Federal Reserve has acted in fire department fashion to cure each recession as soon as it was identified. Relying on a fall in prices to restore prosperity wasn’t an option the Fed wanted to consider. The Fed has attached a variety of labels to its recession-fighting steps, such as “lowering interests,” “easing credit conditions” or, more recently, “quantitative easing.” But they’ve all amounted to the same thing – increasing the public’s supply of cash to a point where it exceeds the public’s demand for cash.

As of the end of June, we are 42 months from the December 2007 start of the last recession. The table below shows the total growth in the M1 money supply during that period and also during the 42 months following each of the preceding three recessions. The most recent downturn has clearly been met with the most aggressive additions to the supply of cash. The July 1990 recession comes close in that regard, but in that case the new cash produced the intended effect; the economy revived. Why is it that, this time around, the new money seems to be accomplishing so little?

Recession Begins Unemployment Rate with
24 Months of Recovery
M1 Growth 42 Months
After Recession Begins
July 1981
7.2%
21%
July 1990
7.0%
39%
March 2001
5.8%
22%
December 2007
9.1% ( May 2011)
40%

The answer has at least four parts.

1. Nearly all recessions are exacerbated to some degree by an increase in the public’s demand to hold cash. Recessions produce worry and uncertainty, and cash is the most versatile provision for the unknown and hence is the best anti-anxiety drug. The collapse, in 2008 and 2009, of financial institutions that the public had taken for granted as part of an unshakeable firmament is still a fresh memory. The public wants to hold more cash now than it did going into the last recession because it is still worried. So some part of the 40% increase in M1 has been absorbed by that increase in the demand to hold money.

2. Expected real estate deflation. In the housing market, the U.S. government has repeated the 180-degree wrong-way error of the Great Depression – trying to keep prices from falling. Tax credits for first-time homebuyers, payments to lenders in exchange for rewriting existing mortgages and the inventorying of foreclosed houses by government-dependent banks have prevented house prices from reaching a market-clearing level. The expectation that prices have further to fall is a reason to hold off on buying, and the flip side of delaying a purchase is holding more cash.

3. Unsettled loan portfolios. The echo of vulnerable real estate prices is doubt about bank loan portfolios. As real estate prices decline, losses on mortgages can only increase. Will the banks need to be rescued again? If so, will a deficit-ridden government show up in time? More uncertainty means more demand to hold cash.

4. Uncertainty about tax rates and rules. Much of today’s tax rules will expire at the end of 2012. No one knows what the rules will be after that. Uncertainty about tax rules is a reason for businesses to postpone investing, and a reason to put off investing is a reason to hold cash.

We don’t know how much each of those four factors has added to the demand for money, and, as investors, we don’t need to know. The critical point is that each of the factors adds a quantity to the demand for cash, something finite. So it is a certainty that their total effect can be overcome by yet more increases in the supply of money.

And more increases in the supply of money are what we are going to get until unemployment rates come down. Don’t be distracted by speculation over whether there will be a QE3. QE is just a slogan. It’s the numbers that matter, and the numbers on the money supply will keep growing. The Federal Reserve’s fear that the economy might slip back into recession will keep the numbers growing. The Fed’s need to protect the capital markets from the effect of the Treasury’s trillion-dollar deficits will keep the numbers growing.

[The public’s demand for cash is one element of a burgeoning debt crisis in the U.S. You can learn how to protect your investments: Register for the free online event, The American Debt Crisis, that will take place September 14 at 2 p.m. EDT.]

© 2011 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

sideeffectsmorphine@yahoo.com
28 Aug 11, 14:49
Ambien side effects

All markets and all industries are hit, and most of them contract because most people are trying to sell more than they buy... which is the only way for anyone to increase his cash holdings and which is impossible for everyone to do at the same time.


sideeffectsmorphine@yahoo.com
30 Aug 11, 03:38
Ambien side effects

The expectation that prices have further to fall is a reason to hold off on buying, and the flip side of delaying a purchase is holding more cash.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules