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Source link: http://archive.mises.org/7604/economic-outlook-2008-darkening-clouds/

Economic Outlook 2008: Darkening Clouds

January 2, 2008 by

'View of Dresden at Full Moon' (1839) by Johan Christian Clausen DahlPresidential election years usually are not recessionary but next year will be an exception. Several economic factors are colliding in an almost perfect storm to markedly slow the general economy and the stock market.

Unfortunately, we will not be able to “inflate” our way out of this recession this time. We will simply have to take our lumps and let market forces liquidate the bulk of the malinvestments caused by the unprecedented Greenspan money bubble. This liquidation process will not be pretty but it is necessary to restore a sustainable economic recovery in the years ahead. FULL ARTICLE

{ 23 comments }

David White January 2, 2008 at 9:08 am

“Unfortunately, we will not be able to inflate our way out of this recession this time.”

True, but that won’t stop the Fed from trying, especially in an election year.

Got gold?

Curt Howland January 2, 2008 at 9:36 am

A serious slump might be good for candidates who advocate sound money.

I’d rather not have the slump at all, but if it has to happen let’s hope there is some sunshine after the rain.

john January 2, 2008 at 9:43 am

You can’t be serious. Our Vice President said Reagan proved deficits don’t matter. And he is an honorable man.

martinf January 2, 2008 at 10:42 am

“The only good news here is that any substantial economic slowdown in 2008 will eventually moderate the price of oil and other commodity prices as well”

See http://mises.org/daily/2773: It shows the connection between monetary policy and commodity prices. Let’s see what the FED will do.
Also, in that article: “[Jim Rogers] argues that commodity prices will go through 10- to 20-year cycles where commodity prices will first rise, then fall. In his book, he points to the experience of the last 100 years as evidence for his prediction”

Jim Rogers think that commodity prices aren’t exactly time-correlated to production, but that “there is a long time lag in most cases” and follow decade-long cycles.

So, this would show that it is not so clear that commodity prices will fall.

M E Hoffer January 2, 2008 at 10:48 am

“We will simply have to take our lumps and let market forces liquidate the bulk of the malinvestments caused by the unprecedented Greenspan money bubble.”

I don’t think we’re going to get off that easy.

If there were to be any serious ‘lump-taking’ to be seen, we’d have seen it by now. The FedRes and associated CBs are intent on providing as much of a ‘liquidity’ cushion, to those mal-investors/investments, as possible..

With that, this: “The only good news here is that any substantial economic slowdown in 2008 will eventually moderate the price of oil and other commodity prices as well.”, I think, is wishful thinking.

D White, above, is, to me, on the right track. The monetary metals have a long way to go on the upside..Other ‘commodities’ have, the varying, upward bias due to: U$D weakness, supply constraints, and small market size v. oceans of Fiat fiduciary media..

Paul Marks January 2, 2008 at 12:33 pm

The key thing is to avoid action by government after the bubble finally bursts.

After all it was not the bust in 1929 that caused the Great Depression – it was the response to the bust, the massive efforts (long before the New Deal) to prevent wages and prices adjusting to the bust.

Had the government done nothing (which is what mythical account of the Hoover Administration falsely claims that Herbert Hoover and Congres did) then the economy would have started to recover after six months or so – just as it did after the bust of 1921.

“The trouble is” the pressure to act will be VAST.

This is due to the huge amount of economic ignorance that exists – sometimes in very odd places.

I have just finished reading a piece written by an economics professor for the Cato Institute – it calls for “international central bank intervention to put a floor under the Dollar”.

Even it one believes in fiat money this is stupid.

Trying to rig exchange rates is absurd. But it seems neither economic theory or experience (for such price rigging has failed again and again) has any effect on most people – including economics professors working with “free market” institutes.

DS January 2, 2008 at 2:48 pm

I think the Fed is going to try and inflate this one away, that’s what they have shown so far. Reading “Helicopter Ben’s” past writings doesn’t give me any reason to doubt this. The Fed and others have been talking themselves into the idea that 1) inflation is not a problem now and 2) inflation will be even lower in the future was economic growth slows. Of course neither of these things are true, but dubious as they are they give cover to the Fed to cut rates in a futile effort to give the economy some “hair of the dog”.

I think this will be enough in the short term to keep economic growth from going negative. If history gives any clues (1987 and 1998) then at some point in the next year or so CPI inflation is going accelerate beyond the point where the Fed can explain it away and they will start raising interest rates, dramatically in panic mode. But it will be too late to take back all of the liquidity pumped into the system to hold off the “credit crunch”. This will push the economy into recession. But this one will be an inflationary recession because they will not have teh guts to wring the inflation out of the system.

And I have never believed in the idea of high gas prices as a “tax”. They are simply one of many prices rising in the economy.

Juan January 2, 2008 at 4:08 pm

The picture illustrating the article is nice. It’s a picture of Dresden before the anglo-american raid of 1945…

Al Sledgge January 2, 2008 at 5:08 pm

It seems abundantly clear that the FED is attempting to inflate out of the housing crisis, but destroying the dollar in the process. I feel like anything they do will be too little to late. We are already over the cliff, past the tipping point as others would say. The fundamentals of our economy have slowly been destroyed over several years. We produce nothing of value other than agricultural products. Our lead in technology has also been largely lost. All this from central planning mixed with a population who believes that everyone can live well at the expense of others. While many of us hold gold and silver, these commodities only save us from the ravages of inflation. We cannot eat the stuff! I fear greatly for the future of my family and fellow countrymen. On the bright side we will all be millionaires!

George P January 2, 2008 at 7:25 pm

I just watched Lawrence Kudlow and his guests, Author Laffer, Wayne Angel, Brian Wesbury and another former Fed official whose name I forget. Of all the guests it was only Brian Wesbury who has no government experience who even remotely understood that we have just experienced a huge credit expansion. My question is this: Are these folks totally uninformed or are they frankly corrupt? How can Arthur Laffer suggest that what we need right now is another rate cut? He actually suggested that a bank not making interest on its reserves is like a tax. Wayne Angel on the other hand made some vague reference to a long term cyclical structural downturn-whatever that means. I had the feeling during the entire show that I was playing three card monte in the old neighborhood I grew up in Philly. My question is serious, are these people totally unaware of the Austrian School?

David White January 2, 2008 at 8:00 pm

George P:

“My question is serious, are these people totally unaware of the Austrian School?”

No, it’s just that as Keynesians to one extent or another, they reject the Austrian School the same way they do gold — i.e., as a “barbarous relic.”

But to quote Sir Alan, back when he was a lowly but principled commoner (testifying before Congress several years ago):

“Gold still represents the ultimate form of payment in the world. Fiat money, in extremis, is accepted by nobody. Gold is always accepted.”

Better get some while it’s still cheap. Yes, it just breached its nominal high of January 1980. But inflation adjusted, it would need to be around $2,200.

newson January 2, 2008 at 10:14 pm

pm lawrence:
“The first round of enclosures, way back in the 16th century, drove out peasants to free up land for sheep, which were valuable because of the wool export market that became realistic then. But this second round was to grow surplus food for cash sale; it was added to by the demand from the new industrial workers.’

This isn’t something derived from ‘landholders also [having] interests in factories’, it’s from factory workers providing a cash market for foodstuffs. That increased the incentive for landlords to evict peasants so as to have more food to sell,”

first: we don’t have an argument about the availability of food.
where we do have an argument is your linking the expulsion of the peasants from the commons to the demand created by the erstwhile peasants, now factory-hands.

this is the same logic of the rich man’s wealth causing his own robbery. the expropriation of the commons seems to me completely unrelated to the urban industrialization. that there developed a ready market for foodstuffs in the cities is irrelevant: crops could have been exported. that is, had the industrial revolution not provided the urban jobs, mass starvation could easily have occured, the landholders would have found other profitable markets for their produce. i don’t see a causal link between industrialization and the expulsion of the peasants from the commons, so no multiplier effect.

second: once england embarked on industrialization, the reforms set in play competitive pressures amongst her trading partners, and so industrialization spread outwards. nothing novel here, transition-pains notwithstanding.

third: your argument centers primarily about food availability, but i think this line of reasoning ignores the other aspects of moving from an agrarian to an urban setting. much like the first generation of immigrants often struggles just to survive (must create a new social network, learn new skills etc.), the second generation builds on the base left by the first, and so on. many of the first generation are resigned to seeing no improvement in their lot, but are confident that their children will be the beneficiaries of their sacifices.
urbanisation allowed specialization to occur, but developing these new skills didn’t happen overnight. any process of flux creates difficulties, let alone changes of this dimension.

in summary, to me it’s only a lag-time debate. mortality figures started improving from the 1850′s onwards, and have not yet regressed. the industrial revolution ended at the beginning of the 20th century. there’s a 50 year delay before the benefits of industrialization completely overwhelm the payoffs, and show up in increased per-capita prosperity.

newson January 2, 2008 at 10:23 pm

er, sorry folks. pm lawrence and i were supposed to be getting together in “ricardo in the stables”. wrong button.

lucky i didn’t touch the missile panel.

fundamentalist January 2, 2008 at 10:34 pm

George: “are these people totally unaware of the Austrian School?”

They definately are ignorant of econ. Mankiw admitted it on his web site. He said he had read “Road to Serdom” and that’s all. He assumed that anything important that Austrian econ had to say had been incorporated into mainstream econ, so he didn’t bother to read any Austrian econ. If a Harvard econ professor doesn’t know anything about it, we can’t expect talking heads to know much. I earned a masters degree in econ and never heard Hayek, Rothbard, Mises or anything Austrian even mentioned, which really makes me angry.

DS January 3, 2008 at 1:14 am

“I just watched Lawrence Kudlow and his guests, Author Laffer, Wayne Angel, Brian Wesbury and another former Fed official whose name I forget. Of all the guests it was only Brian Wesbury who has no government experience who even remotely understood that we have just experienced a huge credit expansion.”

Larry Kudlow used to “get it”, he has talked about Von Mises and Hayek at times in the past. I started watching him back in the early 90′s on CNBC and I learned a lot about monetary economics from him. But back then, during the Clinton years he was consistently critical of the Fed for being too loose, at least a year before they started hiking rates in 1994. But like Greenspan, he lost his way after spending too much time in Washington.

I have been reading Brian Wesbury for a couple of years now and his predictions have been right more times than not. He is a good analytical economist that understands how the system we operate under works. He has consistently said that the Fed has been too loose for years, even when they were raising interest rates. I don’t know if he an “Austrian” or not, I haven’t seen him get into any debates about abolishing the Fed or re-instituting the golds standard. But he has been very good at predicting how the economy will perform with the current institutions, when most people have been wrong.

George P January 3, 2008 at 9:25 pm

“They definately are ignorant of econ. Mankiw admitted it on his web site. He said he had read “Road to Serdom” and that’s all. He assumed that anything important that Austrian econ had to say had been incorporated into mainstream econ, so he didn’t bother to read any Austrian econ”

That is absolutely horrifying. A Harvard Economics professor unaware of an alternative school of thought in his area of study.

MJ January 4, 2008 at 5:00 am

With the Fed trying to inflate their way out of trouble, D.T. Armentano missed the fact that countries holding US Dollar reserves (like China, Japan, Russia, Singapore, S. Arabia) will insteading of holding treasuries will acquire stakes (which they already have done) in large US companies e.g. Citigroup, M. Lynch, B. of America and eventually they’ll acquire more & more US assets, politicans will moan about foreign ownership of America but in the end when push comes to shove they will be trapped because their welfare schemes and wars are non-existant without the printing press. So they won’t be able to stop the disease causing the problem.

So the US trade deficit may slightly improve with the declining dollar but the current account deficit will progressively get worse, the public will have to shoulder more and more debt, whilst owning less and less of America.

The printing press is the root of all evil. Period.
Is what the fed’s debasement ethical….? No.
Is what the fed is doing illegal in the US consititution? …..Yes.
Are all the other central banks copying the Fed?
…..Yes.

Inflation is back!! 1970s Style.
I bet Bernanke’s favorite program is ‘That 70′s Show’!!

Investors beware, periodically over the last 100+ years the Dow Jones/Gold ratio seems to revert back to one every 30 years or so, the same can be said of platinum and palladium. In fact both of these are better, safer investments then gold due to their scarcity and IMF accounting. I think they could surge tech-stock style in the next few weeks!!
See this link (the chart is a bit old, sorry, but you will see that since the late 1990s the DJI/gold ratio is slowly heading to one)
http://www.sharelynx.com/chartsfixed/115yeardowgoldratio.gif

If we could bring some wise old heads back from the past such as C. Mackay, Dickens, Twain, Hemmingway, Mises, Voltaire etc they would think that we are either crazy or stupid for tolerating modern central banking.

All the best in 2008.

Rob January 4, 2008 at 8:02 pm

MJ,

I too used to think that everyone inside the Beltway was “crazy or stupid”.

Now I realize that they are acting at the behest of unseen masters.

They are not stupid one bit. Just dishonest and criminal in their actions.

The “subprime mortgage crisis” is only the most recent of many traps that have been set for honest (read: “Dumb”) people to fall into.

The folks behind the CFR, WTO, et. al. are licking their chops at our demise. Shame on them!

Rob January 4, 2008 at 8:31 pm

I’m sorry,

I just complained before, and offered no solution.

If you have an income stream outside of “the markets”, I would suggest that you find a suitable shoebox, and stuff that under your bed.

Yes, it will depreciate, rapidly if it’s USD. But at least you’re not “feeding” this beast!

IMHO, this beast will consume you long before you profit from it.

MJ January 5, 2008 at 1:39 am

Hey Rob, your right “stupid” is probably a bit mean. Actually a while back I stumbled across something interesting instead of just putting cash in a shoebox it is actually an investment or hedge to put mint, absolutely uncirculated bank notes from now deceased currencies, in a special hiding place.

Now this might sound a bit bizzar from an Austrian/Libertarian but surprisingly people are willing to pay good $ for uncirculated notes in currencies that can no longer be debased!!! Such as French Francs, D.Marks, Liras, Shillings etc. Preferably with famous people on them. Or pre-decimalization Australian or New Zealand old pound banknotes (in high grades). The other one is very old stamps. Both have the advantage of averaging better then bonds, no tax, and can be slipped in and out of the country. So when the government tries to put in place fx controls to inflate and over heat the economy, you can easily slip an old stamp or banknote worth one pound from 1903 past customs check points without them nowing!!

Still sugar and palladium are better investment hedges right now, just ask Jim Rogers.

Don’t you mean “feeding the creature”?

All the best

Matt January 10, 2008 at 9:20 pm

Juan,
“The picture illustrating the article is nice. It’s a picture of Dresden before the anglo-american raid of 1945…”

Interesting insight…However now it will be Ben
with his Helicopters dropping Dollars instead of Bombs..there will be destruction nonetheless.
We had another Boom now comes the Crackup Boom.
Can the FED pull it off again? They have often in the past, however the limits of this type of theft are nearer than ever.

Robin Anderson January 15, 2008 at 4:08 pm

While I agree with most of the Armentano article, including the ridiculous behavior by the Fed, there are a few odd things I noted:

1 – Why would 2008 be the year of the auction? It could easily be more like 2007 where sellers resisted selling at lower prices. The “auction” could be spread over several years.

2 – Why do lower house prices “hurt” the economy but lower oil prices are “good news”? In both cases there is an item with a buyer and seller voluntarily making a trade.

3 – Basing a recession prediction on laid off housing industry workers doesn’t make much sense. They are a small % of overall workforce, and unemployment remains at historic lows.

4 – Local governments having fewer tax dollars in their coffers is good news, not bad. (I think Mises would agree here.)

5 – Oil prices do not act as a “tax”. The spending on oil is used for more investments in oil production, or other investments. This is true even of state owned oil companies. Spending on of actual taxes is directed by politicians and of course very wasteful. When oil went from $20 to $30 I remember many “economists” claiming $40 crude would surely cause a recession. It didn’t. Did higher housing prices act as a “tax”? No.

6 – Why are lower oil prices “good news”? Higher prices encourage conservation (without government mandate) and encourage more production of most important commodity in the world. Besides, in gold, oil’s price is about the same as it was in 2003.

7 – Linking the Iraq War to the declining dollar is quite a stretch. The dollar would have likely declined similar amounts with or without that war.

Frankly, I was a little surprised to see these kind of statements in a Mises Daily article.

Inquisitor January 15, 2008 at 7:26 pm

Anderson, thanks for taking the time to highlight these oddities. It’s strange that an economist of Armentano’s calibre would make such errors.

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