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Source link: http://archive.mises.org/10343/is-the-us-economy-close-to-hitting-bottom/

Is the US Economy Close to Hitting Bottom?

July 24, 2009 by

Most experts and commentators are of the view that the worst of the US recession may be over by year’s end. My own prediction is for an illusory recovery of government-constructed economic indicators, but nothing more than that. FULL ARTICLE

{ 19 comments }

Richard July 24, 2009 at 8:14 am

“For instance, the so-called gross domestic product (GDP), which is pivotal in the analysis of various experts, reflects the rate of growth in money supply.”

By this logic shouldn’t Zimbabwe have a massive GDP?

greg July 24, 2009 at 8:57 am

I believe the S and P will be at 1100 by the end of the year and we will be in a moderate recovery through 2010.

You base your decisions changes in the money supply. While it is an important function, I tend to give more weight to human action. And the collective of this action causes markets to overreact to the down and up sides. This overreaction is caused primarily by the wide exposure the public has to the media and their spin on it.

One thing is certain, every boom has a bust and every bust has a recovery.

Sally Copperwaite July 24, 2009 at 10:48 am

Personally, I think it is more likely that the Fed will maintain its low interest rate policy even in the face of improving statistics. The Fed takes its dual targets of maintaining fulI employment and price stability very seriously (too seriously!). Consequently, I think the Fed, and other central banks around the world, have trapped us in a low interest rate environment for years to come. Living in the UK, I am hopeful that once the Conservatives come to power next year, they may take the necessary action to start cutting public expenditure and gradually raise interest rates. As for America and the rest of the world, there is no such hope for the foreseeable future. But how does this story turn out. Is it Japan writ large or is it worse?

Jonathan Finegold Catalán July 24, 2009 at 10:55 am

I think I suggested something similar in my own blog post ( http://www.economicthought.net/2009/07/the-depression-is-not-over/ ), although I am not as eloquent nor as knowledgeable as Frank Shostak. But, I mean, the conclusion is inevitable, given that the Austrian theory of the business cycle shows that any expansion in the money supply will cause malinvestment unless all the money that is created is saved.

Although not relevant to this article, I know this is a topic commonly pursued here on Mises by the people who read the great articles published here. Also, I post it because the above comment reminded me. It doesn’t cover the past decade, but it shows the correlation between stock prices and aggregate government spending:

http://www.economicthought.net/wp-content/uploads/2009/07/Japanese-spending-vs-stock.jpg

It should offer some hints to the outcome of the surge in government spending under the Obama administration.

Jonathan Finegold Catalán July 24, 2009 at 10:55 am

I think I suggested something similar in my own blog post ( http://www.economicthought.net/2009/07/the-depression-is-not-over/ ), although I am not as eloquent nor as knowledgeable as Frank Shostak. But, I mean, the conclusion is inevitable, given that the Austrian theory of the business cycle shows that any expansion in the money supply will cause malinvestment unless all the money that is created is saved.

Although not relevant to this article, I know this is a topic commonly pursued here on Mises by the people who read the great articles published here. Also, I post it because the above comment reminded me. It doesn’t cover the past decade, but it shows the correlation between stock prices and aggregate government spending:

http://www.economicthought.net/wp-content/uploads/2009/07/Japanese-spending-vs-stock.jpg

It should offer some hints to the outcome of the surge in government spending under the Obama administration.

Octavian July 24, 2009 at 11:37 am

one of the best explanations I’ve seen. It’s like being on drugs, when your high wears off you need a shot or you’ll get the jitters. There are only two possible states: high or low, nothing in between.

Eric July 24, 2009 at 12:16 pm

Eventually the FED will think they have solved the economic problem and will figure it’s time to start slowly raising rates – after all, they’ve done this every time in the past.

It will be quite interesting to see how quickly the economy tanks on the next go round.

But I also wonder if Austrian schooled investors will have time (and the foresight) to shift from whatever the new bubble is and whether the US government will allow them the freedom to do so.

I, for one, will be glued to Frank’s columns as my investment choices are somewhat limited (there’s just not much freedom of choice in my employer supplied pension plan).

jomama July 24, 2009 at 2:24 pm

It looks like Frank was largely right. Bottom not in:

This week’s rail stats.

Econ Guy July 24, 2009 at 2:28 pm

I am interested in Dr. Shostak’s opinion on the U.S. government’s unfunded liabilities.

This article shows the short run economic fundamentals are bleak. However, the long run fundamentals are even worse. Richard Fisher of the Dallas Fed estimates that the government’s unfunded liabilities total 99 trillion dollars. In other words, the government would have to invest 99 trillion dollars today at treasury rates to cover the promises they’ve made. They currently have zero dollars invested.

The government would need over $300,000 from every American to come up with $99 trillion. This is impossible: the only solution is the printing press. All this debt will eventually destroy our currency.

http://www.dallasfed.org/news/speeches/fisher/2009/fs090223.cfm

LightBringer July 24, 2009 at 2:41 pm

Sally: I’m not so sure about your optimism. I would prefer not to trust Cameron to fix everything. I believe that he still wants to maintain Labour’s spending targets, which is obviously not ideal – I can’t really gauge the man though; he seems fairly prone to populist demagoguery rather than a commitment to sound economics. He certainly doesn’t have the guts to go for a full on Thatcherite solution to the recession.

I guess we’ll see.

Roberto Valenzuela July 24, 2009 at 3:07 pm

I’m not sure this article’s claims can be historically substantiated.

If I remember the numbers aright, the United States economy has been in recession approximately three times as often *before* the Fed than *after* the Fed (for example, the Long Depression starting in 1873).

As such, it seems historically ignorant at best to claim a correlation between fiat monetary policy and the “bust” in boom-and-bust. If anything, the opposite correlation exists: a fiat monetary policy correlates, historically, with less bust and more boom.

Before I get slaughtered by the resident anarcho-capitalists, take careful stock of what I’m claiming: History falsifies a major claim of the article. I’m *not* saying the correlation in the opposite direction equals causation, since that’s an obvious logical fallacy.

Jonathan Finegold Catalán July 24, 2009 at 3:52 pm

Roberto Valenzuela,

I think that in this case it is important to consider that a central bank can prolong a boom by exponentially increasing the money supply. Ultimately, and inevitably, this will still trigger the macroeconomic mechanisms which lead to a bust (and will lead to hyperinflation), but it allows the credit boom to continue for a longer period of time (and will force the bust to hit harder, as well).

Recessions/depressions have hit harder in the 20th/21st century. In regards to the “Long Depression”, this is an interesting article published in the New York Times ( http://www.nytimes.com/2006/06/02/opinion/02morris.html?ei=5090&en=c97654fb300e789b&ex=1306900800&partner=rssuserland&emc=rss&pagewanted=print ):

Historians long attributed the turmoil to a “great depression of the 1870′s.” But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870′s depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history.

Employment grew strongly, faster than the rate of immigration; consumption of food and other goods rose across the board. On a per capita basis, almost all output measures were up spectacularly. By the end of the decade, people were better housed, better clothed and lived on bigger farms. Department stores were popping up even in medium-sized cities. America was transforming into the world’s first mass consumer society.

I think that the confusion goes with the Keynesian assumption that economic growth cannot exist during periods of price deflation. Neoclassical school of thought (especially Austrian, but Friedman included) believes that real economic growth only occurs when there is some sort of price deflation (see: Jesus Huerta de Soto, Money, Bank Credit and Economic Cycles). Statistics show that during the 1870s GDP and industrial production grew.

Mike July 24, 2009 at 7:05 pm

Historically ignorant would be claiming that no fiat money was printed before the Fed.

Fred Mann July 25, 2009 at 4:31 am

Roberto,
The cause of the boom bust cycle is fiat money/fractional-reserve banking. Fiat money predates the Fed, of course, and there were (smaller) episodes of the boom bust cycle prior to 1913. The Fed merely amplifies the inherent problems of fiat money.

2nd Amendment July 25, 2009 at 1:07 pm

What “bottom” ?

Ever since we have fiat currency, there is no “bottom” in sight.

That’s because they can go into zero and even negative interests.

Look at Japan, still haven’t bottomed yet and they are at negative currency and are talking of ending paper money and replace it with electronic currency.

Our economic systems breed tyranny, wars and genocides.

Fred Mann July 25, 2009 at 8:44 pm

How would we know if the bottom was in anyway? What measure is valid? Not GDP, not employment. All price-based indicators are flawed when you’re dealing with fiat money.

Adrian July 25, 2009 at 10:20 pm

Due to the size of the U.S. government’s rapidly rising debt, I do not believe that the FED will consider curtailing monetary pumping. Only in an inflationary environment is it even remotely possible for the US govt to manage the debt burden. Therefore a reduction in the monetary supply is politically impossible. The FED will only do this if inflation begins to border on hyper.

Bruce Koerber July 26, 2009 at 5:46 pm

Classical Liberalism Protection
Sunday, July 26, 2009

Historic Election Needed When U.S. Collapses!

How ironic it is that in the political world created by the unConstitutional coup that it is not the cream that rises to the top but rather the airhead foam and scum of other types.

In the upside-down world of the unConstitutional coup counterfeiting is considered wealth, war is promoted as the way to peace, bailing out corruption and failure is seen as helpful, and socialism and fascism are seen as modern thinking!

Now the unConstitutional coup has a big problem. People are questioning the citizenship of the one ‘elected’ to be President and their backup, the Vice President, is not only ego-driven but delusional.

As these problems mount and as the economy casts aside the burdens of economic intervention and economic terrorism hoisted upon it by these ego-driven interventionists the possibility of serious unrest is very real.

Eventually the only hope will be to wipe the slate clean, expose the unConstitutional coup and have another election without all of the interference.

Once President, Ron Paul will re-establish the Constitutional Republic and begin the process of releasing the bounties of a classical liberalism society.

Norm July 28, 2009 at 10:06 pm

Ref:”Most experts are of the view that the worst of the US recession may be over by year’s end.”

I am not an expert…but I have not been wrong yet!
By year’s end the worst is yet to come! Have you not followed Obama’s thinking?

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