The same media types who screamed blue murder with undisguised glee when unemployment hit 5 per cent under Bush are now telling us that the current 10.2 per cent rate is being driven by rising productivity and so there is little that can be done about it in the near future. I find this reasoning very suspicious. It looks to me as if Obama supporters have resigned themselves to a persistent high rate of unemployment and are looking for an excuse to rationalise it. Now let's take a look at their simplistic reasoning. As two of these brilliant economic analysts put it:

As long as companies can get their workers to produce more, they have little reason to hire — at least until consumer spending picks up. And the squeeze on incomes could depress consumer spending, putting the economic recovery at risk. (Productivity gains may be bad news for job seekers, Martin Crutsinger and Stephen Manning, AP, 5 November).

First and foremost, cap and trade is a carbon tax on capital, which really means a tax on economic growth. To get some understanding of the severe ramifications of Obama's proposed carbon tax we need to get a grip of basic capital theory. In everyday parlance capital has several meanings. It can be what an entrepreneur needs to start a business or what a business needs to expand output. It can also be an individual's assets: his house, savings, investments, etc. Using the term capital in this way is perfectly legitimate. However, in economics capital is something else altogether: it is the material means of production. It consists of those tools by which we eventually transform lower-valued resources into those higher-valued products we call consumer goods.

Unfortunately the vast majority economists tend to treat capital as a homogenous lump in which capital goods are perfect substitutes for each other. When challenged on this approach they readily admit that it is pure fiction. On the other hand, (there's that phrase again) they would argue that from a theoretical point of view it ultimately doesn't matter whether capital is treated as homogeneous or heterogeneous. This is a dreadful error that is preventing economists from grasping the enormity of Obama's insane energy policy.

One doesn't need to be an economic genius to see that the US dollar is in trouble, that Americans are hopelessly confused about what is happening to their currency is no surprise. However, before we get to the point of whether Obama's economics will do the dollar in, I think it is important to provide a brief outline of the history behind the economic thinking that is sometimes used to explain exchange rate movements in the hope that this will give readers a better understanding of the current situation.

Economics is not as easy as some people think, particularly those political activists who are passing themselves off as honest journalists. Unfortunately, most of the economic commentariat are not much better informed. Regardless of what some commentators assert a weak currency does not necessarily reflect a weak economy. More than 80 years ago Mises pointed that those who argue that a strong economy must always mean a strong currency

It is economic theory that informs statistics and not the reverse. In other words, statistics should be interpreted according to theory. Unfortunately the failure of a large number of economists to grasp this fact, including some of the very smart ones, has had the most adverse consequences, consequences that are still with us. The now discredited Phillips curve immediately springs to mind. This little statistical study purported to show an inverse relationship between unemployment and the rate of inflation, despite historical evidence to the contrary and basic economic theory.

It was therefore concluded that all that was needed to prevent unemployment from rising was a little more inflation. Members of the Austrian school warned that the statistics had been misinterpreted and that the recommended monetary policy would eventually result in more inflation and more unemployment. Events proved them correct.

The Reserve Bank of Australia has led the world's central banks in raising rates in the presence of a great deal of unemployment and idle capacity. Clearly the bank is making a pre-emptive strike against inflation. That this was also a strike against Keynesian orthodoxy went unnoticed, even by those who made the decision. According to Keynesian thinking inflation does not pose a danger while there still remains a great amount of idle resources. Evidently the Reserve has correctly concluded otherwise.

Now every economic crisis always supplies a crop of solutions to the problem of the so-called boom-bust cycle, and the current crisis is no exception. Sebastian Becker, an economist with Deutsche Bank in Frankfurt, defines the problem of booming asset prices as one of excess liquidity (fancy language for inflation) which he defines as a quantity of money in excess of an economy's needs. In other words, the supply of money exceeds the demand for money.

While America's corrupt media ties itself in knots trying to put a smiley face on the recession, the economic commentariat is thrashing around in the hope of finding an explanation for the economy's refusal to respond to Obama's policies (most of them overlook the fact that the economy might be doing just that) and Bernanke's criminally loose monetary policy. There is no doubt in my mind that business — big and small — is taking into account Obama's impending flood of taxes as well as the political support he is throwing behind job-destroying unions. I believe an administration — any administration — that ignores business expectations is committing a grave error of judgment.

That this is precisely what Obama and his Chicago cronies are doing is supported by rumours that they are ignoring the counsel of Rubin, Volcker and the rest of the White House economic advisors. No one should be surprised at this since leftwing ideologues have never had any real time for economics. For them, politics trumps all, including economic laws — or so they think.

What gives? The Obama administration no sooner assures Americans that labour markets had finally stabilised and mass job losses were at an end when the Bureau for Labor Statistics comes out last Wednesday and ruins the party with the bad news that mass layoffs leapt by over 20 per cent in August. An earlier report estimated that manufacturing accounted for 31 per cent of the layoffs. (I have stressed numerous times that manufacturing always bears the blunt of the boom-bust-cycle).

It certainly looks like manufacturing is undergoing a very ugly shakeout. That the jobs situation is grim was further underlined by a report from the United States Department of Labor for the week ending 19 September which revealed that the 4-week moving average for jobs claims at 553,500. How can this be? The share markets have been moving upwards for some months and the ISM index has turned positive.

Trying to spark a debate in Australia about the nature of the boom-bust-cycle is worse than talking to a brick wall. Our establishment rightwing stubbornly refuse to consider any theories that fall outside their own narrow views on the subject. For example, John Stone — former head of the Australian Treasury — argues that we are experiencing "not a conventional recession but a much rarer 'balance sheet' recession, in which the main focus of firms or householders is de-leveraging or debt repayment" (Old formulas don't fit, John Stone, The Australian, 26 May 2009). Much as I fear to contradict the eminent Mr Stone, he is, nevertheless, dead wrong. The recession fits the normal pattern perfectly.

When speaking of the boom-bust-cycle we are referring to a specific economic phenomenon. The first sign that a boom has run its course is a decline in manufacturing output (a vital fact that classical economists noted and one that today's economists ignore). Even as manufacturing contracts and sheds labour, aggregate unemployment can still fall while aggregate GDP continues to rise, leading some economic observers to conclude that a "dual economy" has emerged. This is exactly what happened in the US in the period 1999-2000. Now if Mr Stone is correct, then the Australian experience should be very different. It isn't, as the following chart clearly shows.

I like reading Larry Kudlow's columns even though I do not always agree with him. In a recent column he wrote that "free-market economies are resilient and self-correcting" and the "Friedmanite monetary stimulus — which has been substantial — is gradually exerting a powerful impact on economic growth". (Hey Conservatives, We’re Recovering, National Review Online, 1 September 2009). Kudlow is making a serious error. Markets are only "self-correcting" when they are left alone. The tragedy of the 1930s provides more proof than one needs of the truth of this statement.

Kudlow said that "4 percent growth is a lot lower than the 7 to 8 percent growth one would expect after a deep recession". But this kind of increased output is not growth. We have hardcore Dems like Charles W. McMillion, a former contributing editor of the Harvard Business Review, pushing the same fallacy by arguing that Roosevelt's disastrous policies were actually a roaring success because GDP took off under his presidency. Naturally, this committed Keynesian is 100 per cent behind Obama's economic spend and tax policies.

While America's one-party media strive to convince the population that a new and wonderful economic dawn is about to break, many economic observers are more inclined to see twilight. The awful truth is that the so-called mainstream media is so hopelessly corrupt they cannot even be trusted to tell the truth about the time of day. This is the result of the left's relentless efforts to politicise every aspect of American life. That this situation is a threat to democracy should go without saying. It is the free flow of information that makes for an informed public. Where the public has been badly informed — or even deceived — the results can have disastrous political and economic consequences. Fortunately the emergence of the net has gone a long way to countering the statist propaganda that the so-called media try to pass off as news.

More and more Americans are coming to realise that there is no quick fix for the economy. Furthermore, they instinctively feel that the Obama administration's policy of greater spending, borrowing and massive interventionism is not going to put the country on the road to prosperity. But what people need to learn right now is not just how America, but also the rest of the world, got into this mess. Unless the lesson is learnt, the process will repeat itself. In this sense the old joke about not being able "to get there from here" has some substance in that most of the economic commentariat have yet to discover where "here" is.

Despite the mighty efforts of a deeply corrupt media to portray the American economy as being on the eve of an economic miracle the American people know otherwise. They know that something is seriously wrong. If only most economists were as perceptive as poor ol' Joe Sixpack who has to rely on his "lying eyes" to get at the truth. How could Mr Sixpack possible know more than those highly educated economists who declared victory for the Obama administration by pronouncing the end of the recession thanks to the wonderful effects of his stimulus.

The only thing missing was a rousing chorus of Happy Days are Here Again. Adding even more intellectual authority to this announcement was Kenneth Goldstein, an economist at the Conference Board in New York, who cheerfully stated that "We've averted the worst, and there are clear signs the stimulus is working". (This lot remind me of the old British NCOs — drill sergeants to you Americans — who used to abuse draftees with degrees as being educated beyond their intelligence. I now know what they meant.)

Quite a few economic commentators are hesitant about the direction of the US economy, uncertain about whether it will stagnate or recover. Some are making gloomy comparisons between the current state of the US and the Japanese economy of the 1990s: others are more optimistic. Overlooked by these commentators is the fact that the monetary policy that generated Japan's 1980s boom is basically the same one that generated the US boom of the 1990s and the subsequent bust. In fact, this policy has generated every boom-and-bust cycle I know of. It's called credit expansion.

What we need to know is whether Obama's economic policy will result in another boom or economic stagnation. Let us start with some economic history. In May 1989 the Bank of Japan started to raise interest rates, with very little response at first. The Tokyo market continued to roar ahead while many commentators spoke sagely of permanently rising share values, though others were realistic enough to know that shares were seriously overvalued. By the end of the year the Nikkei index stood at 38,915 and average price-earnings ratios were 70. It was January 1990 when stock prices first began to slide only to accelerate their decline with the Nikkei falling to 28,000 by March, a 30 per cent drop, triggering a panic. The end of the year saw the market about 40 per cent lower.

Quite a few economic commentators are hesitant about the direction of the US economy, uncertain about whether it will stagnate or recover. Some are making gloomy comparisons between the current state of the US and the Japanese economy of the 1990s: others are more optimistic. Overlooked by these commentators is the fact that the monetary policy that generated Japan's 1980s boom is basically the same one that generated the US boom of the 1990s and the subsequent bust. In fact, this policy has generated every boom-and-bust cycle I know of. It's called credit expansion.

What we need to know is whether Obama's economic policy will result in another boom or economic stagnation. Let us start with some economic history. In May 1989, the Bank of Japan started to raise interest rates, with very little response at first. The Tokyo market continued to roar ahead while many commentators spoke sagely of permanently rising share values, though others were realistic enough to know that shares were seriously overvalued. By the end of the year the Nikkei index stood at 38,915 and average price-earnings ratios were 70. It was January 1990 when stock prices first began to slide only to accelerate their decline with the Nikkei falling to 28,000 by March, a 30 per cent drop, triggering a panic. The end of the year saw the market about 40 percent lower.

I'm inclined to the view that the Great Depression was a seminal turning point in the history of economic thought. Thanks to that politically-induced tragedy something like 150 years of sound economic reasoning was overturned by two mercantilist fallacies that we now call Keynesianism, the first of which was the demand deficiency fallacy. This clearly leads to the second fallacy that increased government spending can promote growth, especially by encouraging consumer spending (1, 2). Both fallacies are responsible for the present economic crisis.

I have been publishing data for years that refutes both fallacies. Unfortunately Keynesianism seems to have taken on the characteristics of a cult that brooks no opposition — including contradictory evidence. Nevertheless, facts are facts and the idea that a high level of consumption as a proportion of GDP is needed to prevent unemployment from rising has been thoroughly refuted by statistical evidence as the following table amply demonstrates.

The Dow has passed the 9000 barrier. This has gotta be a recovery, right? After all, "the share market is forward looking". I'm afraid these people have confused forward looking with foresight. Never look to share markets as harbingers of growth or recession. Market watchers would know this if they paid more attention to history and less to charts. The American economy, for example, had already shown distinct signs of contracting several months before the Great Crash of 1929.

Although the Dow (which was more representative of the economy in the 1930s than it is now) rose from its low of 42.84 in June 1932 to 150.24 in December 1939, an increase of 250.7 per cent, unemployment averaged 16.7 per cent for that year against 3.3 per cent for 1929 while the industrial production index (1923-25) had fallen to 92 in April and May before rising to 103 the following August.

Americans have been assured that without swift action by the Fed and massive increases in government spending the US economy would have sank into depression. No less a person than the celebrated Warren Buffett said so, along with a number of lesser luminaries. In support of this contention advocates of the current fiscal assault on the economy are continually conjuring up the ghost of the Great Depression as evidence that increased government spending is an effective counter-recessionary tool. Unfortunately for them the evidence from the Great Depression points in the opposite direction, as the table below shows.

Lawrence Summers is Obama's chief economic advisor and by all accounts a very smart man. But if he is what passes for smart in the beltway then God help America. Let's take a look at some of the brilliant Mr. Summers' economic proposals. He states that the future of the US economy depends on "more export-oriented and less consumption-oriented" policies. Just in case you didn't get it, Summers is proposing that the state direct the pattern of production and consumption.

This is called central planning. It is also pure hubris and betrays a total ignorance of why state economic planning must always fail. The seminal works of Mises, Hayek and Coase exploded the idea that economic direction by any central authority could ever prove superior to the market process. As Coase pointed out, state planning

Any reasonably intelligent person understands that if the demand for a product increases then (all things being equal, as the economist would say) its price will rise. The same holds in the case of borrowing, except for congressional Democrats. These people seem to think that economics laws are a vicious Republican plot.

Poll figures are now showing that the American public is growing alarmed by the Democrats' utterly reckless fiscal policy. Unfortunately, few people understand just how grave the danger really is. In less than five months Obama increased the national debt by more than $800 million and lumbered the economy with a $1.8 trillion deficit that looks like growing even bigger. (I still get silly emails from Obama cultists who were evidently screaming into their computer monitors: "Bush did!" Pathetic doesn't begin to describe these people). In 2003 Thomas Laubach, the US Federal Reserve’s senior economist, produced New Evidence on the Interest Rate Effects of Budget Deficits and Debt, a paper containing calculations for long-term interest rates based on historical evidence. He concluded that

Obama's failure to tackle the recession is becoming more and more apparent with each passing day. His childish mantra of blaming Bush for every lousy economic statistic that emerges no longer washes with the great majority of Americans. Perhaps the time is not far off when it will be seen that the Democrats' relentless commitment to building a statist juggernaut is the real obstacle to a sustained recovery that will bring prosperity in its wake.

Meanwhile the economy's deepening recession has not caused Fed officials to reflect on their economic prescriptions. Janet Yellen, President of the San Francisco Fed, appears completely baffled as why anyone should be silly enough to think America could be facing a severe inflation. Let me give her a clue. Bernanke doubled the monetary base virtually overnight, the fastest increase in US monetary history.

For sometime now I have been pointing out that things would be bad, not because I prefer gloom to joy but because the Fed's disgraceful monetary shenanigans over the years made the current situation inevitable. In the meantime, the profoundly ignorant Obama and his statist cronies are making things far worse. And what do we get from the Fed? Well, allow me to refer you to Janet Yellen, President of the San Francisco Fed, who opined that the US can look forward a very slow recovery marked by high unemployment.

What was particularly interesting was her other comment: "It's not outside the realm of possibility that the fed funds rate could stay at zero for the next couple of years". It seems to me that Yellen is telegraphing economic stagnation. When a sustained recovery gets underway interests tend to rise. Keeping rates low for too long would cause inflation to accelerate, forcing the Fed to prematurely slap on the monetary brakes. So if the Fed thinks it will have to keep rates low for at least two years, one must presume the worst. This cannot be good news for Obama, let alone the rest of the country.