Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The US Economy: Recession, Depression and Monetary Mismanagement

Economics / US Economy Jun 22, 2009 - 04:49 AM GMT

By: Gerard_Jackson


Best Financial Markets Analysis ArticleThe Institute for Supply Management reports that May was the "16th consecutive month of contraction in the manufacturing sector". Even though the contraction appears to be slowing the demand for capital goods continues to drop with no sign of a reversal in sight as of yet. Of course, this fall in demand has hit the producers of capital goods. In the meantime unemployment continues to rise with some commentators expecting it to reach 11 per cent before the year is out and maybe even climb to 12 per cent next year. Therefore the current signs suggest the US could be sliding into an actual depression, if it isn't there already.

It seems that Obama's borrow, spend and inflate policy is proving to be a complete failure. The idea that government borrowing is counter to recession was always a myth. The notion that transferring purchasing power from individuals to bureaucrats and politicians would expand aggregate demand is so stupid that -- as George Orwell said with respect to another matter -- only the intelligentsia could "believe a thing like that: no ordinary man could be such a fool". And Keynes was no fool. When he spoke of deficits and borrowing it was always with reference to monetary expansion. It's his disciples who keep getting it wrong.

Part of the current problem is that the US economy has accumulated masses of malinvestments that need to liquidated. Pumping money into these failures will sabotage economic recovery, a lesson that Obama and his economic advisors seem incapable of grasping. Of course they could argue -- as some are now doing -- that the fall in consumer spending combined with the rise in the personal savings rate is holding back recovery. On the contrary, more real savings is just what the economy needs, not less.

A reduction in the demand for consumer goods makes more resources readily available for production and makes it easier to get rid of malinvestments. However, what is being called savings is -- in my opinion -- largely an increase in the demand to hold cash balances. Given the uncertain state of the economy and the level of personal debt this is a perfectly rational thing to do. Anyone who argues that this process damages recovery is revealing an ignorance of how recessionary forces work themselves out if not hindered or even checked by political decision-makers as happened during the 1930s.

Nevertheless, the myth that the consumer is the economy's saviour lives on. As I tirelessly point out, consumer spending is only about one-third of total spending. It is the fallacious rule that intermediate spending should be excluded from the national accounts that conceals this fact. This has led to the grave error that consumer spending is the driving force behind the economy instead of business spending.

Now if intermediate spending was included we would immediately see that not only is the drop in consumer spending very small in relation to the drop in aggregate business spending but that it followed the latter. Yet the same people who ignore this fact nevertheless call attention to the fall in demand for inputs, which are really intermediate goods. Evidently the contradiction completely eludes them. Therefore "the need for households to return to a normal tendency to consume in order to ensure recovery" is an erroneous prescription.

Unfortunately America is being governed by the most anti-business administration since F. D. Roosevelt. Obama inherited a $4.5 billion deficit and then immediately transformed it into a $1.8 trillion deficit which is about 12 per cent of GDP. Not satisfied with that he set about implementing a borrowing and spending regime that was not only unprecedented and unnecessary but also reckless to the point of smacking of criminal negligence. He then did the manly thing and blamed his predecessor for the mischief. (Obama cultists still mindlessly send me emails asserting that Bush did it. I will get round to Obama's outrageous lying on this matter in a later article).

As I have said before, watch out for monetary policy. Virtually overnight the very accommodating Bernanke doubled the country's monetary base and in doing so planted an inflationary time bomb. No wonder Chinese students laughed when Geithner told them that China's dollar assets were safe. A monetary expansion of this magnitude would undermine any currency and those students know that. Moreover, so does Geithner.

The Fed's criminally loose monetary policy is closely tied to Obama's unsustainable fiscal policy. John Taylor, a professor of economics at Stanford University, estimated that because of Obama's spending plans the government would to impose a 60 per cent across-the-board tax increase to balance the budget by 2019. Read that again: 60 per cent. There is no way to support this colossal spending binge without resorting to the printing press, which is exactly what the Fed is doing.

The weakening dollar and bond prices are clear evidence that the markets are taking Bernanke's monetary shenanigans into account. (Nor should we ignore the fact that China is Surreptitiously accumulating gold and commodities as well as trying to buy into other real assets. It seems that Russia might be doing likewise). True as it is that the growth in the monetary base has yet to make itself fully felt it has nevertheless contributed to a weakening in the demand for US Treasuries.

When the expanded monetary base turns from a trickle into a river there will be no checking the inflationary pressure. This will lead to an irresistible rise in interest rates which in turn will force down bond prices. What is a central banker to do in the face of accelerating Inflationary and the government's insatiable demand for credit? The only way to force rates down would be to buy bonds. But the only way the Fed can do this is by printing more money, which will see investors dropping more bonds. This is not really a dilemma. It is not a choice between equally undesirable alternatives but between sound monetary management and the Fed's grotesque monetary mismanagement.

However, sound monetary management is not sufficient. What is also needed is a return to free market solutions. (It wasn't free markets that created the present crisis but the lousy economics that central banks practise and what politicians mindlessly parrot). Instead the brilliant Obama and his merry band of clever dicks have chosen the path of the statist thug. Free markets are to be severely curbed, regulated and bled by taxation. And why? Because in the fevered imagination of Obama's leftists mind only the state can deliver economic growth.

By Gerard Jackson

Gerard Jackson is Brookes' economics editor.

Copyright © 2009 Gerard Jackson

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