Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Economists are Still Getting it Wrong on the Recession

Economics / Recession 2008 - 2010 Oct 27, 2008 - 02:03 PM GMT

By: Gerard_Jackson

Economics Best Financial Markets Analysis ArticleThe recession is deepening and our economic commentariat still cannot get it right. Access Economics economist Chris Richardson is a classic. He figures governments and central banks "just don't have the dollars" to turn things around. The one thing governments and central banks are never short of is money. They can create as much money as they like. Only the threat of an outbreak of massive inflation stops them. In any event, the problem is not one of insufficient funds.


Never mind, Pollyanna Richardson reckons Australia really has nothing to worry about so long as China keeps going. It's only "if China stops being fine, then Australia runs the risk of being buggered ... there is a risk China won't be fine." He then claims that Australia's economic slowdown was largely the fault of the decline in the building industry and a slackening of consumer spending.

And it gets much, much worse. Heather Ridout , Chief Executive, Australian Industry Group issued a media release in which she wheeled out the predictable fallacy that consumption spending is about 60 per cent of economic activity. This was followed by the equally appalling fallacy that Australia was "vulnerable to "the paradox of thrift'". And what is her solution?

The Government should be ready to take up the slack in the economy as business investment and consumer spending retreats. It should prepare to bring forward key investment projects.

The woman is clearly ignorant of what is really happening and what needs to be done. Moreover, she cannot even follow the Australian Industry Group's Performance Manufacturing Index which reported for September that "Manufacturing activity fell for a fourth successive month". This is as a clear an indication of an impending recession as one can get.

Let me make the logic of the AIG's own manufacturing statistics so clear that even Richardson and Ridout can grasp it. If consumption was really responsible for our economic slowdown then it is obvious that firms at the lowest stages of production, those closest to consumption, would have been the first to feel the impact of any slackening in consumer spending.

Instead we find that the higher stages of production -- as predicted by Austrian economic analysis -- started to contract before any fall off in consumer spending. In short, it is not consumer spending that is the driving force in the economy but aggregate business spending. The following Reserve Bank chart makes this fact abundantly clear.

If business spending were disaggregated we would also find that changes in spending in the higher stages of manufacturing becomes the real indicator of whether the economy is facing a recession. The AIG's own manufacturing figures therefore show that the country has been sinking into recession since at least June. And Rudd's sudden spending binge can doing nothing to stop it.

As I have tried to make clear, the economic arguments of Richardson and Ridout are par for the course. I do not believe that a single member of our economic commentariat would disagree with them. Not only that, but quite a few journalists are quite happy to witness the financial crisis. David Nason, The Australian's New York correspondent, gleefully reported that "Greenspan,has finally conceded that the free market philosophy he championed for 40 years has fundamental flaws". ( 'I made a mistake' admits Alan Greenspan , 25 October 2008).

The flaw is not in the free market, Mr Nason, but in the crummy economics of the central banks. Under their wise guidance the world experienced the largest credit explosion in its history. The global financial system was flooded with masses of bank deposits which the economic geniuses in the newspapers, central banks, money markets, etc., misinterpreted as "excess savings", another dangerous fallacy that the classical economists thought had been permanently disposed of. The effect of this tidal wave of bank-created credit was to generate masses of world-wide malinvestments, economic distortions that would have to be liquidated once the crisis finally emerged.

One need only look at the Reserve Bank's shocking monetary record to see how bad things are. From March 1996 to December 2007 currency rose by 110 per cent, bank deposits by 178 per cent and M1 by 163 per cent. This year's monetary figures are particularly interesting. The chart below shows that monetary policy has been extremely tight since last December. (In fact, for the period of January to May monetary policy was actually deflationary).


The green line represents M1, [currency plus bank deposits] the red
linerepresents bank deposits and the blue line represents currency

These figures indicate that the economy is driving into a brick wall. No amount of spending can put her back on track until the necessary economic adjustments -- painful as they are -- have been made. As for China, it too has been just as reckless as every other central bank. This means that those who think she can be relied on to save Australia from recession are going to get coal in their Christmas stockings.

For ages I have been warning where the Reserve's dangerous monetary policy was leading. All to no avail. I was warning that Australia was definitely heading into recession while the economic commentariat was telling its readers and clients that there was not much to worry about and that economic conditions were "sound". So much for their grasp of economics, not to mention their ignorance of economic history.

*David Nason is a real piece of work. In a 'report' about the Bush economy -- one that suspiciously resembled Democratic Party talking points -- Nason parroted the Dems' lie that millions of children and adults were going hungry. He stated that the USDA (US Department of Agriculture) found that "more than 38 million Americans lived in hungry or 'food insecure' households". ( Bush's 'fine' economy sees millions go hungry , 27 February 2006).

What he did not say is that the USDA does not define "food insecurity" as hunger. Its own data showed that vast majority of those defined "food insecure" are overweight with 45 per cent classified as obese. Therefore his claim that millions of American children and adults were going hungry is a vicious libel aimed straight at President Bush. Needless to say, there never any articles in our media about hungry Americans when Clinton was president.

I'm afraid that most of our so-called journalists are a bunch of politically motivated liars.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

© 2005-2022 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