Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why the United States Will Go Into Recession

Economics / Recession Mar 04, 2008 - 01:37 AM GMT

By: Gerard_Jackson

Economics If my email is anything to go by, there are a lot of worried and confused people out there. Basically most want to know why if the US economy is going to slide into recession. Of course it will. The question is when. I have to exercise caution here because I haven't had the time during the last couple of weeks to take a much closer look at the economic trends. Since Bush won the 2000 election the media has done nothing but report economic doom. For them, predicting a recession is bit like predicting rain a few weeks hence. They one will eventually develop, they just hope Bush is still president when this happens.


Let's start with a few current figures. The Institute for Supply Management Index for January stood at 50.7, up 2.3 from December, and was still expanding. For the same period production had increase from 48.6 to 55.2, a 6.6 per cent jump. The jump in the prices of inputs was particularly revealing having leapt by 8 per cent, up from 68 to 76. This rise is a clear warning sign of inflationary pressure. As we all know, the economic commentariat always focus consumption. Retail sales for strongly suggest that consumer spending is being maintained. Naturally, our commentators believe this will lessen the chances of a recession

If only that were so. It isn't consumer spending that we should be looking at but business spending . We have seen that manufacturing appears to be expanding. But this expansion is being accompanied by inflation. I believe the expansion the rise in prices are the result of Bernanke's loose monetary policy. At the moment the situation has the characteristics of the classic boom-bust cycle , meaning that indicators of recession will first appear in the higher stages of production rather than at the level of consumption.

What needs to be understood is that economics is a qualitative and not a quantitive discipline, meaning that mathematics cannot help to predict the timing of a recession. An Austrian economist can tell us that central bank policies have made recessions inevitable. He can do this because his analytical tools have shown him that money is not neutral and that forcing interest rates below their market level — which is what Bernanke is now doing — and expanding credit creates an unsustainable economic boom while creating malinvestments, investments that are not justified by genuine market conditions.

Anyone aware of these facts can only declare the inevitability of a bust but not the timing. However, once certain symptoms emerge, then we know that the bust is appearing on the horizon. One of those symptoms is not a stratospheric stock market — that is a boom symptom — but other symptoms that tend to be neglected because orthodox economics cannot account for them.

Now the real cause of confusion over the present economic situation has been caused by Keynesian economics and a lack of understanding of economic history which has misled two generations of economists into believing that tight labour markets cause inflation and a falling stock market triggers recession. The same people also argue that a reduction in consumer confidence and spending could also bring about a recession.

Unfortunately economic misconceptions have a tendency take on an independent existence. This is largely why Greenspan was credited by most economic pundits with cleverly using monetary levers to steer the US economy to prosperity while keeping a world-wide recession at bay. But is this so? These people point to the 1987 stock market crash and claim that Greenspan's 75 base point cut in rates in response to the crisis averted a recession. I don't think so.

Movements in share prices, no matter how sudden or severe, cannot in themselves cause recessions. The 1987 crash was a necessary correction, though overdone, in response to the previous slack monetary policies. The reaction of central banks in pumping up the money supply to ward off another "Great Depression" set the stage for another monetary tightening which in turn led to another recession that cost Bush 41 to lose the presidency.

The Fed then held down rates a gain to escape the US banking crisis of the early 1990s, which it helped create in the first place. It then, according to the economic folklore of some, tightened monetary policy through 1996 to 1998. This is not so and confuses any rise in rates with monetary tightening. What matters is whether those rates were below market rates. I would argue that given the size of monetary growth they definitely were. Moreover, the Fed then followed with three rate cuts in 1998. This policy has generated a monetary growth that caused the Fed to flag rate rises. This led to the emergence of the 75-base-points myth, which, according to past evidence, is what was needed to take the heat out of the economy. The plain fact is that no one could possibly know by how much rates should have risen.

But these monetary shenanigans would never have taken place if the major players were genuinely acquainted with the economic history of America between the wars and understood the monetary and real forces that were unleashed by the Fed. The 1920s experienced very tight labour markets, comparatively stable consumer prices and high productivity — though most of the productivity gains occurred in the first part of the decade — yet the country still collapsed into a severe depression. What is not generally recognised is that the period was one in which the Fed's monetary policy was one of credit expansion that artificially lowered interest rates.

The effect of 'cheap money' policies is to cause a stock market boom. When the boom goes off the boil then that's the time to worry. However, many argue that a rise in stock prices is only reflecting realistic profit expectations. As an example, in his book Against the Gods Peter Bernstein reminds us that when the Dow Jones Industrials returned to their 1929 level in 1955 many sold, believing that a crash was imminent. They erred. This is called drawing the wrong lesson from history.

Historical facts have to be interpreted, not parroted or treated as a crystal ball. What these investors overlooked is that the American economy of 1955 was much more capital intensive and productive than in 1929 and that is why the share prices were justified. In other words, income streams justified the share valuations.

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.


Post Comment

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