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
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th 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

Bush Economic and Housing Boom was Fueled by Credit Expansion

Economics / US Economy May 26, 2008 - 10:51 AM GMT

By: Gerard_Jackson

Economics Best Financial Markets Analysis ArticleAmerica's sluggish economy has the ever-so patriotic Democrats and their media playmates drooling over the prospect of a recession and rising unemployment. Those political activists who have the brazen effrontery to call themselves journalists have been gleefully drawing unfavourable comparisons between the economy under Bush and the Clinton boom, painting the former as a dreadful record of lousy growth, stagnant wages and tax cuts for the rich.


Honest journalists — of which there are very few — recognise that the economy has gone through a boom under the current administration. Nevertheless, some of them feel that things are not quite right. What they fail to note is that things are never quite right in a boom. It's the nature of the beast and something that they fail dismally to understand.

Robert Shiller has been making noises about the housing market and sub-prime lending, which has turned some minds to Shiller's book Irrational Exuberance . This work caused something of a controversy in popular economic circles, particularly in the financial press. Shiller correctly points out that the Dow Jones Index more than tripled in five years, leaping from 3,600 in 1994 to over 11,000 by 1999. Unprecedented and, in his opinion, unsustainable.

Examining the sustainability side he noted that during this great leap in the Dow the nation's GDP rose by less than 30 per cent, of which about 50 per cent is accounted for by inflation. Therefore the real increase in GDP was only about 15 per cent. Although corporate profits rose by nearly 60 per cent, this picture was not particularly bright when we consider that profits came from a recessed base. Looked at historically, profits were not high. Moreover, from an economic perspective were very few real profits anyway. This view is supported by Shiller's observation that the rise in the Dow "is not matched by real earnings growth".

He drew attention to the 1920s bull market which came to an end with the 1929 crash. (In fact, it was terminated in December 1928 when the Fed froze the money supply). Coming to price earnings ratios we find that for 2000 they averaged 45 times earning while they were 35 times earnings for 1929. That earnings ratios are completely out of kilter are not only obvious but a clear danger signal. But this always happens in these circumstances. He also refers to 1901 and 1966 as other major peaks in the market.

But pointing to major peaks in market activity tells us nothing about causes. Let us begin with the 1901 peak, which had its origins in the 1890s. Great amounts of gold began to flow into America in 1896 leading to a considerable expansion of bank credit and this fuelled a boom and triggered a stock market take-off. Now the increase in massive amounts of credit also sparked a merger mania, just as it did from 1924-1929, that largely occurred in the years 1899-1902. This is also the period that saw the market peak in 1901. In 1903 the economy had gone into a depression. It was no coincidence.

The end of the First World War witnessed a contraction in the American economy which was quickly reversed by rapid monetary growth that brought about the 1919-20 boom. The Fed applied the monetary breaks causing the 1920-21 financial crisis which became the sharpest contraction in American history. The recovery gave America the 1920s boom and the infamous 1929 crash. The 1966 market peak followed the same pattern. Rapid credit expansion fuelled the boom in stocks while a monetary tightening caused them to drop.

It is no great insight to point out that earnings ratios plummeted once these markets crashed, even dropping to zero during the great depression. This is what happens during depressions. The trick is explaining the forces at work and not to confuse symptoms with causes.

Each of these boom periods was preceded by rapid credit expansion. Each crash was preceded by monetary tightening. Looked at in this light the so-called business cycle becomes a monetary roller-coaster. That Greenspan raised interest rates by nearly two per centage points between June 1999 and May 2000 should have been seen as a red alert, as it was clearly an attempt to rein in credit.

Unfortunately Shiller is wedded to the fallacy that consumption drives the economy because it is about 66 per cent of GDP. The trouble here is that GDP ignores spending between stages of production. Once this spending is taken into the situation is reversed. Focussing on consumption led him into the error of thinking that the sub-prime debacle will slash house values and thus reduce consumer spending and hasten a recession.

But values — including those in real estate — are not purchasing power. It is production and production alone that creates purchasing power. Therefore, if real estate values did dive this in itself would cause "aggregate demand" to contract. Ironically, the following chart, which comes from the second edition of Irrational Exuberance , makes my point.

In his book Shiller rightly points out that the decline in house price up to 1920 was the result of increased productivity in the building trade. Yet, since WWII house prices have continually trended upward despite increasing productivity. So why did prices more than counter the downward pressure on prices that rising productivity generated? The answer is Keynesianism. Booms are fuelled by credit expansion, otherwise known as "easy money" policies. By continually expanding credit the Fed has inexorably driven up house prices. And this is exactly what Shiller's chart shows.

As a postscript I should point out that the preceding view is largely in keeping with the monetarists' explanation of booms and busts. And yet there are fundamental and irreconcilable differences between the monetarists and the Austrians. The latter examines and stresses the microeconomic consequences of credit expansion, explaining why so-called price levels are not measures of inflation and how, even where the price level is 'stable', a depression can still come about.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

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


Comments


28 Feb 09, 17:53
Economic Collapse

Excellent piece. Less than 4 months after it was written the Bush Economic Collapse occurred.

Note that he points out that, after inflation, the economy only grew 15% while corporate profits rose 60%. Also salaries and bonuses for corporate execs increased 200%. In other words, corporations cut costs, partially by manfacturing in Asia, and then, instead of putting the profits into future products, as they would have 30 years ago, they put most of it into their own pockets and into dividends for the shareholders, to maintain the upward propulsion of their stock prices. This was a recipe for future disaster.


Post Comment

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