Australia's Impending Recession? It's Already Here

"Manufacturing records weakest result in 16 years." So said the AIG (Australian Industry Group) in their October report on manufacturing. Their PMI (performance manufacturing index) showed that manufacturing has been contracting for five months. As expected, construction and the higher stages of production have borne the blunt of the monetary crisis that the Reserve Bank has visited on the economy.

Last May manufacturing output stood at 51.2 (anything above 50 indicates expansion). Last month it was 40.4, a 21 per cent drop. Falling output has been followed by falling demand for labour. In May employment was 51.2 per cent according to the PMI. Last month it stood at a 37.6, a drop of 25.4 per cent.

Using Austrian analysis I predicted that the impending recession would first make itself felt in manufacturing. This is exactly what has happened. So while our economic commentariat was mesmerised by the financial crisis real factors where clearly signalling that recession had arrived. Despite this fact economic commentators are still unable to connect the dots - and that includes the mob that runs the Reserve Bank.

Let's look at this graphically. Austrian analysis predicts that before manufacturing contracts prices for its inputs will rise significantly thereby squeezing profits. Moreover, input prices will rise faster than consumer prices. In other words, the prices of these input would rise relative to consumer prices. The following charts are taken from the Reserve's Producer Price Indicators - G3.

Comparing the two charts we can easily see that the prices of inputs rose faster than the CPI. From March 1996 - January 2008 input prices rose by 73 per cent while consumer prices rose by 43 per cent. The third chart plots the money supply. Note that in 2001 there was a sudden monetary surge that increased M1 by 21 per cent. This was in response to the slowdown in manufacturing that had been caused by previous increases in the money supply. (The same thing happened in the US). Since then there has been a steady monetary expansion - until last December when M1 peaked, after which it fell. According to the Reserve's figures M1 was no higher in August in then it was last December, in fact there was a real deflation for several months which Reserve managed to reverse.

Terry McCrann, business writer for the Herald Sun, epitomises the wrongheadedness that runs through the economic commentariat and that's why it is worth focusing on him for the moment. He confidently stated that there is now a "growing fear of recession in the real economy". Combine what is happening to the "real economy" with what has happened to "financial system" and we have a much worse situation. (Ford, a victim of the boom times, 17 October 2008).

This really is bad stuff. There is no such thing as two economies: a real one and a financial one. There is only the one economy. It's thoroughly absurd to think that one can divorce financial transaction from other business activities. We have seen that it was real factors that signalled an impending recession and not the financial crisis. Therefore McCrann's assertion that it was "the global financial meltdown" that triggered the recession is pure baloney and prima facie evidence that he - along with the rest of the economic commentariat - never even bothered to acquaint himself with the statistical evidence.

A massive and unprecedented credit expansion on a global scale is what created the present mess. Central banks forced interest rates below their market clearing levels, thereby signalling to businesses that there was more "real capital" (genuine savings) available than actually existed. It was this criminally loose monetary policy that sparked the boom. It was inevitable that the global flood of 'cheap money' would fuel a boom in share prices and trigger a real estate boom.

So much credit was created that idle deposits began to appear. This was a sure-fire warning that a severe monetary disorder was emerging. Displaying an inexcusable ignorance of the history of economic thought our economic commentators resurrected another fallacy: This time it was surplus savings, proving that this lot cannot make the vital distinction between real savings and excess bank credit.

Ramming home the dismal fact that central bankers are clueless on the important and intimately connected subjects of monetary and capital theory they are now trying to trigger another boom by once again imposing low interest rates and - like the Reserve - buying a widened range of paper assets.

Austrianism is the only school of economics that has correctly analysed the boom-bust 'cycle'. It is the only one that is able to provide workable predictions concerning the course of booms. However, Austrian thinking is not welcome in our think tanks or our newspapers. These people would sooner see the economy tank rather than admit they are hopelessly wrong.