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
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

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

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