They are Still Getting it Wrong on the Recession

By: Gerard Jackson | Sun, Oct 26, 2008
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The recession is deepening and our economic commentariat still cannot get it right. Access Economics economist Chris Richardson is a classic. He figures governments and central banks "just don't have the dollars" to turn things around. The one thing governments and central banks are never short of is money. They can create as much money as they like. Only the threat of an outbreak of massive inflation stops them. In any event, the problem is not one of insufficient funds.

Never mind, Pollyanna Richardson reckons Australia really has nothing to worry about so long as China keeps going. It's only "if China stops being fine, then Australia runs the risk of being buggered ... there is a risk China won't be fine." He then claims that Australia's economic slowdown was largely the fault of the decline in the building industry and a slackening of consumer spending.

And it gets much, much worse. Heather Ridout, Chief Executive, Australian Industry Group issued a media release in which she wheeled out the predictable fallacy that consumption spending is about 60 per cent of economic activity. This was followed by the equally appalling fallacy that Australia was "vulnerable to "the paradox of thrift'". And what is her solution?

The Government should be ready to take up the slack in the economy as business investment and consumer spending retreats. It should prepare to bring forward key investment projects.

The woman is clearly ignorant of what is really happening and what needs to be done. Moreover, she cannot even follow the Australian Industry Group's Performance Manufacturing Index which reported for September that "Manufacturing activity fell for a fourth successive month". This is as a clear an indication of an impending recession as one can get.

Let me make the logic of the AIG's own manufacturing statistics so clear that even Richardson and Ridout can grasp it. If consumption was really responsible for our economic slowdown then it is obvious that firms at the lowest stages of production, those closest to consumption, would have been the first to feel the impact of any slackening in consumer spending.

Instead we find that the higher stages of production -- as predicted by Austrian economic analysis -- started to contract before any fall off in consumer spending. In short, it is not consumer spending that is the driving force in the economy but aggregate business spending. The following Reserve Bank chart makes this fact abundantly clear.

If business spending were disaggregated we would also find that changes in spending in the higher stages of manufacturing becomes the real indicator of whether the economy is facing a recession. The AIG's own manufacturing figures therefore show that the country has been sinking into recession since at least June. And Rudd's sudden spending binge can doing nothing to stop it.

As I have tried to make clear, the economic arguments of Richardson and Ridout are par for the course. I do not believe that a single member of our economic commentariat would disagree with them. Not only that, but quite a few journalists are quite happy to witness the financial crisis. David Nason, The Australian's New York correspondent, gleefully reported that "Greenspan,has finally conceded that the free market philosophy he championed for 40 years has fundamental flaws". ('I made a mistake' admits Alan Greenspan, 25 October 2008).

The flaw is not in the free market, Mr Nason, but in the crummy economics of the central banks. Under their wise guidance the world experienced the largest credit explosion in its history. The global financial system was flooded with masses of bank deposits which the economic geniuses in the newspapers, central banks, money markets, etc., misinterpreted as "excess savings", another dangerous fallacy that the classical economists thought had been permanently disposed of. The effect of this tidal wave of bank-created credit was to generate masses of world-wide malinvestments, economic distortions that would have to be liquidated once the crisis finally emerged.

One need only look at the Reserve Bank's shocking monetary record to see how bad things are. From March 1996 to December 2007 currency rose by 110 per cent, bank deposits by 178 per cent and M1 by 163 per cent. This year's monetary figures are particularly interesting. The chart below shows that monetary policy has been extremely tight since last December. (In fact, for the period of January to May monetary policy was actually deflationary).

The green line represents M1, [currency plus bank deposits] the red
linerepresents bank deposits and the blue line represents currency

These figures indicate that the economy is driving into a brick wall. No amount of spending can put her back on track until the necessary economic adjustments -- painful as they are -- have been made. As for China, it too has been just as reckless as every other central bank. This means that those who think she can be relied on to save Australia from recession are going to get coal in their Christmas stockings.

For ages I have been warning where the Reserve's dangerous monetary policy was leading. All to no avail. I was warning that Australia was definitely heading into recession while the economic commentariat was telling its readers and clients that there was not much to worry about and that economic conditions were "sound". So much for their grasp of economics, not to mention their ignorance of economic history.

*David Nason is a real piece of work. In a 'report' about the Bush economy -- one that suspiciously resembled Democratic Party talking points -- Nason parroted the Dems' lie that millions of children and adults were going hungry. He stated that the USDA (US Department of Agriculture) found that "more than 38 million Americans lived in hungry or 'food insecure' households". (Bush's 'fine' economy sees millions go hungry, 27 February 2006).

What he did not say is that the USDA does not define "food insecurity" as hunger. Its own data showed that vast majority of those defined "food insecure" are overweight with 45 per cent classified as obese. Therefore his claim that millions of American children and adults were going hungry is a vicious libel aimed straight at President Bush. Needless to say, there never any articles in our media about hungry Americans when Clinton was president.

I'm afraid that most of our so-called journalists are a bunch of politically motivated liars.



Author: Gerard Jackson

Gerard Jackson

Gerard Jackson is Brookes economics editor.

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