After more than two years of rising stock prices, the same economists that utterly failed to see the crisis coming, then were darkly pessimistic as the stock market bottomed out in March of 2009, are now so optimistic that they state that 'nothing can derail the recovery – except a further rise in oil prices to the $150 level'.
The American economy is now strong enough to withstand Middle East turmoil and the Japanese nuclear crisis. Only a big rise in the price of oil could stop it now.
Those are the findings of an Associated Press survey of leading economists, who are increasingly confident in a recovery that is nearly two years old. They expect the economy to grow faster every quarter this year.
It can not be the massive destruction of wealth in Japan after the tsunami either – except for those economists who still believe in the broken window fallacy (you'd be surprised how many of them do – one of the most prominent is even a Nobel Prize recipient – Paul Krugman). It can also not be the recent massive deterioration in the sovereign debt crisis in the euro area's periphery.
So what accounts for it? Simple – the rise in the stock market. Economists have been led astray by rising stock prices many times before. Famed US economist Irving Fisher believed that 'stock prices have reached a permanent plateau' and that 'nothing can stop a further expansion in prosperity' – right at the top in 1929. J.M. Keynes lost his shirt in the stock market after 1929, evidently believing the bear market to be an aberration (not coincidentally, his pleading for government intervention in the economy and the adoption of inflationist policies became very pronounced right after this episode). What did the stock market 'discount' in early September of 1929? We can tell you what it didn't discount: the Great Depression. In fact, by September of 1929, the US economy had been in contraction for well over a month already.
The failure of economists then and now is to realize that a boom due to credit expansion and inflation of the money supply is in fact not an increasing wealth but doing the exact opposite: it consumes wealth. The inflation masks this capital consumption by creating fictitious profits – once the inflationary policy is stopped – as the Federal Reserve finally did in 1929 by raising its discount rate to 6.5% – the wealth destruction is unmasked.
It is however important to realize that it is not the bust that is the destroyer of wealth – it is the boom. The bust merely reveals the investment mistakes of the boom and is a period of reorganization and healing. We know both from economic theory and the countless examples of history that once a bust begins, the best thing that can be done by the government is – absolutely nothing. When the first big government interventionists entered the scene in the form of presidents Hoover and FDR, the economy was deprived of the chance to heal itself and the Great Depression ensued. Robert Murphy has written a highly recommended article that is once again dispelling the falsification of history that is today so popular among the interventionist Left, namely that Hoover was allegedly a 'laissez faire liquidationist'. He was the exact opposite, and as Murphy shows, the pro interventionists don't even seem to realize that in relating what Hoover did and didn't do, they themselves paint the picture of the interventionist Hoover really was. The idea that he trusted the market is preposterous. For this reason we resorted to calling today's interventionist brigade 'Hoover's Heirs' back in 2008.
In any event, one should be extremely suspicious of the show of optimism on the part of economists. The effect of the Fed's monetary pumping on prices is creating an illusion of prosperity that will once again be rendered asunder as soon as the inflation stops. Mainstream economists were very optimistic during the housing bubble as well – very few of them saw the disaster coming. However, we should all have learned a valuable lesson from the bust: namely that the profits generated by inflation are indeed fictitious. The financial sector accounted for 40% of the profits of listed corporations in 2007. Over the next two years all the bubble profits and more disappeared back into thin air.
