Monday 22 June 2009
The Institute for Supply Management reports that May was the "16th consecutive month of contraction in the manufacturing sector". Even though the contraction appears to be slowing the demand for capital goods continues to drop with no sign of a reversal in sight as of yet. Of course, this fall in demand has hit the producers of capital goods. In the meantime unemployment continues to rise with some commentators expecting it to reach 11 per cent before the year is out and maybe even climb to 12 per cent next year. Therefore the current signs suggest the US could be sliding into an actual depression, if it isn't there already.
It seems that Obama's borrow, spend and inflate policy is proving to be a complete failure. The idea that government borrowing is counter to recession was always a myth. The notion that transferring purchasing power from individuals to bureaucrats and politicians would expand aggregate demand is so stupid that — as George Orwell said with respect to another matter — only the intelligentsia could "believe a thing like that: no ordinary man could be such a fool". And Keynes was no fool. When he spoke of deficits and borrowing it was always with reference to monetary expansion. It's his disciples who keep getting it wrong.
Part of the current problem is that the US economy has accumulated masses of malinvestments that need to liquidated. Pumping money into these failures will sabotage economic recovery, a lesson that Obama and his economic advisors seem incapable of grasping. Of course they could argue — as some are now doing — that the fall in consumer spending combined with the rise in the personal savings rate is holding back recovery. On the contrary, more real savings is just what the economy needs, not less.
A reduction in the demand for consumer goods makes more resources readily available for production and makes it easier to get rid of malinvestments. However, what is being called savings is — in my opinion — largely an increase in the demand to hold cash balances. Given the uncertain state of the economy and the level of personal debt this is a perfectly rational thing to do. Anyone who argues that this process damages recovery is revealing an ignorance of how recessionary forces work themselves out if not hindered or even checked by political decision-makers as happened during the 1930s.
Nevertheless, the myth that the consumer is the economy's saviour lives on. As I tirelessly point out, consumer spending is only about one-third of total spending. It is the fallacious rule that intermediate spending should be excluded from the national accounts that conceals this fact. This has led to the grave error that consumer spending is the driving force behind the economy instead of business spending.
Now if intermediate spending was included we would immediately see that not only is the drop in consumer spending very small in relation to the drop in aggregate business spending but that it followed the latter. Yet the same people who ignore this fact nevertheless call attention to the fall in demand for inputs, which are really intermediate goods. Evidently the contradiction completely eludes them. Therefore "the need for households to return to a normal tendency to consume in order to ensure recovery" is an erroneous prescription.
Unfortunately America is being governed by the most anti-business administration since F. D. Roosevelt. Obama inherited a $4.5 billion deficit and then immediately transformed it into a $1.8 trillion deficit which is about 12 per cent of GDP. Not satisfied with that he set about implementing a borrowing and spending regime that was not only unprecedented and unnecessary but also reckless to the point of smacking of criminal negligence. He then did the manly thing and blamed his predecessor for the mischief. (Obama cultists still mindlessly send me emails asserting that Bush did it. I will get round to Obama's outrageous lying on this matter in a later article).
As I have said before, watch out for monetary policy. Virtually overnight the very accommodating Bernanke doubled the country's monetary base and in doing so planted an inflationary time bomb. No wonder Chinese students laughed when Geithner told them that China's dollar assets were safe. A monetary expansion of this magnitude would undermine any currency and those students know that. Moreover, so does Geithner.
The Fed's criminally loose monetary policy is closely tied to Obama's unsustainable fiscal policy. John Taylor, a professor of economics at Stanford University, estimated that because of Obama's spending plans the government would to impose a 60 per cent across-the-board tax increase to balance the budget by 2019. Read that again: 60 per cent. There is no way to support this colossal spending binge without resorting to the printing press, which is exactly what the Fed is doing.
The weakening dollar and bond prices are clear evidence that the markets are taking Bernanke's monetary shenanigans into account. (Nor should we ignore the fact that China is Surreptitiously accumulating gold and commodities as well as trying to buy into other real assets. It seems that Russia might be doing likewise). True as it is that the growth in the monetary base has yet to make itself fully felt it has nevertheless contributed to a weakening in the demand for US Treasuries.
When the expanded monetary base turns from a trickle into a river there will be no checking the inflationary pressure. This will lead to an irresistible rise in interest rates which in turn will force down bond prices. What is a central banker to do in the face of accelerating Inflationary and the government's insatiable demand for credit? The only way to force rates down would be to buy bonds. But the only way the Fed can do this is by printing more money, which will see investors dropping more bonds. This is not really a dilemma. It is not a choice between equally undesirable alternatives but between sound monetary management and the Fed's grotesque monetary mismanagement.
However, sound monetary management is not sufficient. What is also needed is a return to free market solutions. (It wasn't free markets that created the present crisis but the lousy economics that central banks practise and what politicians mindlessly parrot). Instead the brilliant Obama and his merry band of clever dicks have chosen the path of the statist thug. Free markets are to be severely curbed, regulated and bled by taxation. And why? Because in the fevered imagination of Obama's leftists mind only the state can deliver economic growth.
Gerard Jackson is Brookesnews' economics editor