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Source link: http://archive.mises.org/11645/the-depression-is-not-over/

The Depression Is Not Over

February 10, 2010 by

The bounce in the growth momentum of both real and nominal GDP is due to the Fed’s massive money expansion. It is an illusion. Neither the Fed nor the government can grow the economy. FULL ARTICLE by Frank Shostak

{ 24 comments }

Nick Bradley February 10, 2010 at 8:34 am

Can anybody tell me where Mr. Shostak observed a falling rate of money supply growth? I went to the TMS index and saw no such thing:

http://mises.org/content/nofed/chart.aspx?series=TMS

Mises Daily February 10, 2010 at 8:43 am
Nick Bradley February 10, 2010 at 9:13 am

Mises Daily,

if that is the case, then the article needs to be corrected. He cites AMS, which is the same as TMS and is referenced in the PDF at the bottom of the page.

Bill Sims February 10, 2010 at 9:15 am

I’m having trouble comprehending “US real GDP increased at an annual rate of 5.7% in Q4 — the fastest pace in more than six years. The yearly rate of growth climbed to 0.1% in Q4 from −2.6% in Q3.”

Was something left out naming the second rate of growth?

A. Viirlaid February 10, 2010 at 9:33 am

Intelligent article — thank you!

“Those commentators who subscribe to the view that an increase in government spending can fix things hold that something can be created out of nothing.”

Actually the truth (as implied by the article) is the opposite:

“… an increase in government spending, in today’s circumstances, will create Nothing out of Something!”

The reason?

Please see Antal E. Fekete’s article titled “The Marginal Productivity of Debt” at http://www.safehaven.com/article-12962.htm

Christopher February 10, 2010 at 9:37 am

“Once the central bank raises the pace of money expansion in order to lift the economy out of a recession, it prevents the demise of various false activities. It also gives rise to new false activities. The outcome of such so-called economic growth is nothing more than the strengthening of wealth consumers and renewed pressure on wealth generators..”

Isn’t this exactly what the voting public is asking gov’t to do? Jobs, Jobs, Jobs. Hence the dilema.

Jackson Brown February 10, 2010 at 10:15 am

Prof Shostak,

What do you make of the argument of some Modern Monetary Theorists that there has been significant growth in real wealth over the past decades and so the money supply should be expanded proportionately? They are apparently not confusing wealth with GDP or so they claim. How can we really measure “wealth”?

Horatio Bottomley February 10, 2010 at 10:25 am

I find it strange that the public asks the government to create jobs. After all, it is the government who killed all those jobs in the first place through taxes, regulations, trade barriers, union laws, etc.

It’s like asking a murderer to resurrect the dead, it’s just not gonna happen.

Christopher February 10, 2010 at 11:05 am

Horatio Bottomley,

Is it ignorance or willful attempt to “get their spot at the trough”?

Jonathan Finegold Catalan February 10, 2010 at 11:25 am

Nick Bradley,

Can anybody tell me where Mr. Shostak observed a falling rate of money supply growth? I went to the TMS index and saw no such thing:

Mr. Shostak refers to a fall in the growth momentum; i.e. a deceleration of credit expansion.

Nick Bradley February 10, 2010 at 11:51 am

Jonathan Finegold Catalan,

Thanks — I knew it was about momentum — just couldn’t plot it (I can now).

Does the YoY change in TMS have to revert back to norm (pre-Fall 2008) for the bubble to pop?

Also, has any research been done on the lag time between monetary deceleration and GDP Deceleration? It looks to me like its about 2 years from deceleration to downturn.

Jonathan Finegold Catalán February 10, 2010 at 12:41 pm

Nick,

I’m not sure if any empirical or econometric research has been conducted in that field. Theoretically, at least, the bubble will pop at some point soon after the deceleration of credit expansion. So, the YoY Δ does not have to equal any specific amount, so long as the rate of Δ slows or flattens.

The time it takes for malinvestment to reveal itself may also be dependent on when the individual businesses account for losses. So, if financial statements are prepared at point X, but the deceleration in credit expansion occurred at point x-y, then it may take y time for malinvestment to be revealed.

There were signs before the actual official declaration of recession, in any case, like slowing investment, et cetera. The time during which these symptons occurred may also be useful to consider recessionary (departing from the GDP-definition of recession).

Does this make sense, or am I talking out of my rear end?

Jonathan

Jeff Harding February 10, 2010 at 1:04 pm

The monetary data is also showing up in M1, on a YoY percentage change.

What I don’t understand from this article is that if credit is declining, and money supply is declining, how can he conclude that the bump in Q4 was due to money pumping. Doesn’t make sense.

What does make sense is that it was due to fiscal stimulus and normal, organic, business cycle effects (the drive for efficiency, draw down of inventory, etc.). I understand that Clunkers didn’t create wealth, it only redistributed cash. But it will be paid for later by the Treasury deficit financing.

Louise February 10, 2010 at 1:27 pm

Until the fed stops printing money, which they are trying to inflate themselves out of the problems, this country has little future. And the taxpayers cannot control the value of the dollar unless they can at any time and with no commission or fee, convert it into some real item, like gold. Power to the people………but this is not a comfortable subject for seemingly any of the commentators on the news, nor congress, not even Fox……….Can’t solve the problem, folks, ’cause then the above would be very limited in their ranting news..

Louise February 10, 2010 at 1:34 pm

By the way, on my last post as Louise, I am a proud descendant of one of the Signers of the Declaration of Independence. And they realized the value of very limited federal govt. Alas, today’s kids are not taught that document or the Bill of Rights……..Our enemy is within, not outside the country. And our downfall is the pursuit of control and money.
Comments, folks?

Sally C. February 10, 2010 at 4:04 pm

Dr. Shostak,
I noticed an interesting article about savings in the UK in the Sunday Times 7th Feb. In the UK, most savers save with a building society. Anyway, some building societies are starting to raise their Standard Variable Rates for mortgages. According to the article, ‘ The moves come as building societies face a growing cash crisis. Savers withdrew £7.6 billion more from building society accounts than they deposited in 2009, the Building Societies Association said last week. This is the largest amount in any year since records began in 1955, the Building Society Association said.’
I wondered what the situation is in Japan, where interest rates have been so low for so long, that you might think that the savings base must be in real trouble.

iamse7en February 10, 2010 at 4:59 pm

That was a brilliant article. Thank you.

A very clear and concise explanation of how productive and non-productive activities need funding from real savings. Money expansion stimulates non-productive activity and kills wealth-generating activity. The higher GDP numbers are a result of this artificial stimulus. We will feel the pain of such inducement in the future.

Thank you!

Craig February 10, 2010 at 6:39 pm

Also, has any research been done on the lag time between monetary deceleration and GDP Deceleration? It looks to me like its about 2 years from deceleration to downturn.

I’m sure research has been conducted, but I’d be surprised if it was by Austrians. At best, such research might point to some interesting historical similarities; but since economic decisions are made by hundreds of millions of individuals, the past would not necessarily predict the future.

That’s a game played by the Krugmans of the world — with self-evident poor results thus far.

Nick Bradley February 11, 2010 at 9:02 am

Craig,

Just looking for a YoYΔ deceleration lag time, just like we have the “12 – 18 months” rule of thumb for monetary pumping.

billwald February 11, 2010 at 1:50 pm

Is there any economic reason why the unemployment rate can’t stabilize around 10%?

Would the unemployment rate decrease if the workers were willing to accept a lower compensation in terms of buying power e.g. accept a lower standard of living? Is that what is happening?

Stephen Grossman February 11, 2010 at 2:52 pm

GDP is an aggregate and thus an error, acc/to Mark Skousen, in _Structure of Production_. He likes GDO (output) in which the productivity of the temporal stages of production is included. And in which spending is much less. I may not properly understand this and welcome comments. But I think that GDP is misleading. I hope Skousen posts here.

Jens Meder February 13, 2010 at 12:43 am

Wealth CREATION (different from wealth redistribution through gambling or speculation) is physically impossible without someone’s sacrifice of hand-to-mouth consumption (potential), or saving. for reserves, investment and debt repayments.
A lot of the Western Worlds trouble at present is in its unwillingness (or inability) to save enough for those purposes, and an economically more healthy future is in addressing this “disease”.

Mark Humphrey February 13, 2010 at 2:38 pm

Some time back, Dr. Shostak wrote he had estimated the lag between growth in money and rising prices at about 18 months. This is my recollection, which might be off. The lag between money inflating and GDP must be shorter, because the new money increases sales immediately (for some wealth consumers) but increases costs (that hurt wealth producers) after a lag. This is why inflating always temporarily raises the rate of profit.

Unemployment will stay high, because employment is funded by real savings, which are falling. Real wage rates will fall too–and have been falling–as real savings decline. Shrinking real savings leads inevitably to capital consumption, because depreciating business assets must be funded through real savings. Capital consumption inevitably leads to falling real wage rates, because capital is necessary to the production of goods. So when real production falls in response to capital consumption, money wage rates purchase fewer real goods. Moreover, competition establishes average market clearing wages in accordance with productivity, which falls as capital is de-cumulated.

A considerable slowdown or even a long pause in the rate of new money growth causes a slump in economic activity. In other words, if the money supply grows at a slower rate than before, or the rate of growth stops accelerating for a considerable time, wealth consuming activities will stop making money. Past increases in money bid costs higher, but only after revenues increased. Revenues grew, because the new money funded higher sales. Costs rise, because the new sales fund additional bidding for scarce materials and tools by wealth consumers. Wealth producers can’t afford the higher costs, so they decline. When the rate of money expansion stops rising so fast, the revenues of wealth consumers stop increasing, or even decline. For their customers have been hurt by higher costs. Meanwhile, costs stay high, reflecting scarcity.

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