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Guest Post: Economically Sleepwalking
Guest Post: Casey Research
Economically Sleepwalking
The rebound from the recent recession is the slowest economic comeback in living memory – so slow that some doubt whether it is happening at all. The recession bottomed (the economy stopped shrinking) in June 2009, so the recovery is now two years old. Here’s how things looked 24 months into recovery from the last four recessions.
| Recession Begins | Recession Bottoms | Unemployment Rate 24 Months After Bottom |
| July 1981 |
November 1982
|
7.2%
|
| July 1990 |
March 1991
|
7.0%
|
| March 2001 |
November 2001
|
5.8%
|
| December 2007 |
June 2009
|
9.1% as of May 2011
|
The sleepwalking during the last 24 months is all the more remarkable, given that the economy has been treated with the biggest dose of monetary and fiscal stimulants ever administered in U.S. history. Why the continued weak pulse?
Each recession has its own story – how long it lasts, how deep it gets, industries worst hit, particular bubbles burst. But in every recession, the heart of the problem is the same, namely, an imbalance in the market for cash. Every recession begins when the aggregate amount of cash that people want to hold (given their wealth and the other things they want to own) is more than the amount of cash actually in existence. That imbalance – the demand for cash exceeding the supply – depresses the entire economy because the flip side of the market for cash is the market for everything else. All markets and all industries are hit, and most of them contract because most people are trying to sell more than they buy... which is the only way for anyone to increase his cash holdings and which is impossible for everyone to do at the same time.
In the period from the end of the Civil War to the end of World War II, most recessions began when the government, by plan or by blunder, contracted the supply of cash, so that it fell below the public’s demand for cash. Since World War II, every recession has begun when the government, again by plan or by blunder, allowed the growth in the supply of cash to lag behind the growth in the demand.
The early stages of a typical pre-WWII recession would push some commercial banks into insolvency, which would shrink the supply of cash even further, since insolvency meant that some part of the deposits held by bank customers were lost. As the recession proceeded, an increase in the demand for cash by worried investors, worried business people and worried workers would make the cash shortage even more severe.
Every recession between the Civil War and World War II ended on its own. In no case was a recession brought to an end by the actions of an alert government agency or with the advice of learned economists. Recessions were cured, automatically, by falling prices. Falling prices were the cure because they increased the real value (purchasing power) of whatever amount of cash the public was holding. Prices kept falling until the real value of the existing supply of cash grew to a level that exceeded what the public wanted to hold. Then, as individuals and businesses began to spend the excess, the economy would begin to recover.
Until the Great Depression of the 1930s, the average length of a recession was 21 months. The misery that began in October 1929 lasted five times that long – 105 months. It was the severest recession ever, with unemployment reaching one-third of the workforce, because the shortage of cash that brought it on was the severest ever: the M1 money supply (hand-to-hand currency plus checking deposits) shrank by one-third. But a different factor made it the most prolonged of recessions. Aiming at a symptom of recession rather than at the cause, the government pursued an array of policies to prevent prices from falling, which had the perverse effect of preventing the economy from recovering. The government’s would-be medicine was, in fact, poison.
Even though the government’s first active attempt to end a recession produced a disaster, it did establish a presumption that the government shouldn’t just stand by when the economy turns down. It should do something, and the duty to do something has been assigned to the Federal Reserve.
Since the end of World War II, the Federal Reserve has acted in fire department fashion to cure each recession as soon as it was identified. Relying on a fall in prices to restore prosperity wasn’t an option the Fed wanted to consider. The Fed has attached a variety of labels to its recession-fighting steps, such as “lowering interests,” “easing credit conditions” or, more recently, “quantitative easing.” But they’ve all amounted to the same thing – increasing the public’s supply of cash to a point where it exceeds the public’s demand for cash.
As of the end of June, we are 42 months from the December 2007 start of the last recession. The table below shows the total growth in the M1 money supply during that period and also during the 42 months following each of the preceding three recessions. The most recent downturn has clearly been met with the most aggressive additions to the supply of cash. The July 1990 recession comes close in that regard, but in that case the new cash produced the intended effect; the economy revived. Why is it that, this time around, the new money seems to be accomplishing so little?
| Recession Begins | Unemployment Rate with 24 Months of Recovery |
M1 Growth 42 Months After Recession Begins |
| July 1981 |
7.2%
|
21%
|
| July 1990 |
7.0%
|
39%
|
| March 2001 |
5.8%
|
22%
|
| December 2007 |
9.1% ( May 2011)
|
40%
|
The answer has at least four parts.
1. Nearly all recessions are exacerbated to some degree by an increase in the public’s demand to hold cash. Recessions produce worry and uncertainty, and cash is the most versatile provision for the unknown and hence is the best anti-anxiety drug. The collapse, in 2008 and 2009, of financial institutions that the public had taken for granted as part of an unshakeable firmament is still a fresh memory. The public wants to hold more cash now than it did going into the last recession because it is still worried. So some part of the 40% increase in M1 has been absorbed by that increase in the demand to hold money.
2. Expected real estate deflation. In the housing market, the U.S. government has repeated the 180-degree wrong-way error of the Great Depression – trying to keep prices from falling. Tax credits for first-time homebuyers, payments to lenders in exchange for rewriting existing mortgages and the inventorying of foreclosed houses by government-dependent banks have prevented house prices from reaching a market-clearing level. The expectation that prices have further to fall is a reason to hold off on buying, and the flip side of delaying a purchase is holding more cash.
3. Unsettled loan portfolios. The echo of vulnerable real estate prices is doubt about bank loan portfolios. As real estate prices decline, losses on mortgages can only increase. Will the banks need to be rescued again? If so, will a deficit-ridden government show up in time? More uncertainty means more demand to hold cash.
4. Uncertainty about tax rates and rules. Much of today’s tax rules will expire at the end of 2012. No one knows what the rules will be after that. Uncertainty about tax rules is a reason for businesses to postpone investing, and a reason to put off investing is a reason to hold cash.
We don’t know how much each of those four factors has added to the demand for money, and, as investors, we don’t need to know. The critical point is that each of the factors adds a quantity to the demand for cash, something finite. So it is a certainty that their total effect can be overcome by yet more increases in the supply of money.
And more increases in the supply of money are what we are going to get until unemployment rates come down. Don’t be distracted by speculation over whether there will be a QE3. QE is just a slogan. It’s the numbers that matter, and the numbers on the money supply will keep growing. The Federal Reserve’s fear that the economy might slip back into recession will keep the numbers growing. The Fed’s need to protect the capital markets from the effect of the Treasury’s trillion-dollar deficits will keep the numbers growing.
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Why no blow out of LIBOR and TED if there is such an issue with Euro trash banks
Euro banks and UK banks are tapping into Central Banks for funding rather than each other. The interbank rates spread over the Central Bank Base rates are nearly as large as they were back in late 2008.
Back then the governments were just about fit to bail them out. Now nothing is apart from printing presses.
With that said, someone is offering to loan at the exsisting rates. I understand what you are saying but at the end of the day, if the interbank loans are not there because of mistrust, then the risk adjusted rate is significantly higher
Fire up the Fighter jets and Reaper Drones.... it's about to get hot up in this bitch.
Yep, good thing we didn't sell those 16's to Taiwan - they might use them against us.
So basically we are screwed?
Gold, bitchez!
Geez, what a way to solve the unemployment incline - initiate a global depression.
And we pay these jokers for this?
"And we pay these jokers for this?"
No, these jokers rob us, then pay themselves. If anyone had a choice in the matter, do you think they would see a single cent?
Actually the FED turns a "profit" and gives it to the treasury each year to pay down the deficit. Obviously there is more than meets the eye here, but that is another story. I think the FED gave the treasury 145B last year.
http://video.cnbc.com/gallery/?video=3000040051
hobbs and cramer go at it this morning......ha ha ha....
you guys want to see some crazy look at this:
"Both Ciner and Grant caution, however, that when it comes to gold prices, no one really knows. That's because gold doesn't have intrinsic value. It doesn't offer an interest rate, like a bond, or represent a share of a company, like a stock. It is inherently speculative as an investment: You only make money if the price goes up."
Sarah DiLorenzio, AP
to give you guys context thats the narrator portion of the editorial between the expert quotes describing golds potential as being in a bubble. is this quote not the most blatant lie ever?
link - http://www.msnbc.msn.com/id/44179875/ns/business-consumer_news/#
i saw the story as headline at coinflation.com. was thinking someone older and wiser here might want to help me explain this to myself. specifically how does gold not have intrinsic value?
ps
anybody here ever chopmark any of their coins?
Gold is the best store of value, but it is that because the the value is relatively stable. You do not expect the value to change much unless what it is being measured against changes in purchasing power.
At this point I view gold as insurance against a monetary crisis, not so much as a speculative investment. Though it could turn out to be that after the great reset.
"Intrinsic value" is one of those slippery-slope mental exercises that, if not approached carefully, lends false credence to Marx's Labor Theory of Value. I believe that Richard Cantillon was one of the first to use this term in economic theory, but upon closer reading, it is more properly recognized as the cost of production of a good.
In the Austrian world, value is correctly recognized as being wholly subjective, because it is up to each individual to determine how much value they perceive in anything, relative to other things (one of which is money). These valuations are constantly changing due to any number of factors which form our decision-making process.
In a human society, only the beliefs/desires of humans create the abstraction of value. It does not exist outside of this mental realm, and thus cannot be considered to be intrinsic to any object.
Now, this isn't to say that money(gold) does not have any subjective value (as the author implies with the intrinsic comment). As Mises demonstrated, money is itself an economic good, complete with supply and demand pressures.
By one line of thinking nothing has "intrinsic value" - value is assigned by the beholder, without which it doesn't exist. Ergo MSNBC isn't lying. And I just bought more physical a few weeks back at $1585. No chopmarks yet, though my 2 year old continues her efforts.
Maybe a better yard stick for financial instruments would be does it exist ...
If I understand your remark about your two year old here is a piece of advice if said asset is accidentally ingested.
When you think that the coin has finally made it's appearance, make use of a zip-lock bag and a freezer. When it solidifies, whack the lump with a hammer and rush what you find to the sink for a quick rinse in hot water.
Parenting is a dirty enterprise.
Wow. Pulverized, freeze-dried poop with a solid gold caramel center. That sh!t is worth alot!
as Marc Faber so eloquently put it: "try giving a copper ring to your girlfriend, I give mine gold".
I am so glad that I now have to work until mid-August to support Amerika. Oop's, I mean Obama's reelection chances. Oop's, I mean his 38th Vacation to Martha's Vineyard. Oop's, I mean his 342nd round of golf. YIPEE.....
I would vote for Jimmy Carter 100 times over than for Obama once.....
*with morpheus voice
Do you think it's votes that count.....
Can you say worst president. Ever.
These damn politicians just cant keep their hands out of the soup, and just end up making it worse time after time.
Nixon was the worst president ever. He broke the illusion that the American government was honest and that the president of the United States could be trusted. Americans (and the rest of the world) have seen the presidency in a different (and suspicious) light ever since.
My vote is for Woodrow Wilson. Signed the Federal Reserve Act. QED! Is it too late to try him for treason?
I vote for LBJ. Guns and butter, bitches. And .......
Either this country elects Dr Ron Paul for president or we can all kiss our ass goodbye......... Can you say "World Government?" "World Tax?"
Obama looks like a Monkey Fucking a Football! This guy is absolutely clueless and and/or corrupt! Take your pick. And people thought Bush was evil/corrupt? HA!
And the next one will be worse.
;-)
http://www.youtube.com/watch?feature=player_embedded&v=PIoALj0csAA#!
Ssssshhhh!!!! You're going to ruin the ending if you keep stating the plot!
Caligula?
Yes I thought having lots of cash would be a great asset buying op from 2009 to now sep the fucking Fed had to prop everything up.
Maybe they'll let us do the propping up this time. (sac off)
As Michael McKay of RadioFreeMarket.com pointed out on LewRockwell.com today, “when the money dies, the middle class is literally wiped out and violence between Neighbor and Neighbor becomes commonplace.”
IOW, this time it’s different.
Says McKay: “Those of us who have been following this for some time and who understand Austrian Business Cycle Theory have been yelling from the roof tops that we are facing hyper-inflation, social disorder and greater political oppression.”
Writes McKay: “In case you missed it, on July 21st 2011 the U.S. Government Accountability Office (GAO) released a 266 page partial audit of the Federal Reserve (FED).
“Here is the punch line: The Federal Reserve secretly kept the Phony-Fiat-Money-System afloat by ‘lending’ out $16 Trillion Dollars to various corporations and banks, many of which were foreign, non-U.S. entities like The Bank of Scotland, UBS (Switzerland), Deutche Bank (Germany) and Societe Generale SA (France) between December 1, 2007 through July 21, 2010 (read this as: Created-Out-Of-Thin-Air and had refused to tell us). The details are on page 133 which you can read here.
“How big is $16 Trillion Dollars? … Try this: 16 Trillion inches equals a bit more than 250 Million miles. That would be 10,000 trips around the planet Earth, nearly 1400 trips to the Moon or nearly three trips to the Sun.
“But why should you care? After all, what is a few – even many – additional Trillion Dollars when the US has already admitted to counterfeiting so many Trillions by whacking on the ZERO Key of their Money-Creating-Computer like a drunken monkey on a piano?
“Well, for one thing, most Americans still have the quaint idea that we are supposed to know, or be able to find out, what our Governing Entities are up to. For many years the FED has gotten a free ride with the public a) not really knowing what the heck it is or does, and b) why we should even care. But as Dr. Gary North has brilliantly pointed out, here, those "Free Ride" days of Mass Stupification are over. The toothpaste of knowledge is out of the tube, and there is no way to put us all back to sleep. Heck, even Newt Gingrich at the Republican Presidential Debate in Ames, Iowa on August 11th 2011 called for the full Audit of the Fed! …”
http://www.lewrockwell.com/orig12/mckay-m2.1.1.html
“How big is $16 Trillion Dollars? … in inches?
For the 960 days in question, its roughly $2.38 per day per human on the planet. Maybe on
average they are better off for it being spent(or created out of thin air?)
Relevant? Not particularly, but a lot more relevant than 10,000 trips around the world in inches.
Why not furlongs per fortnight!
Here’s the way President Ronald Reagan put it in his State of the Union Address, February 18, 1981:
“Our national debt is approaching $1 trillion. A few weeks ago, I called such a figure – a trillion dollars—incomprehensible. I’ve been trying to think of a way to illustrate how big it really is. The best I could come up with is to say that a stack of $1,000 bills in your hand only four inches high would make you a millionaire. A trillion dollars would be a stack of $1,000 bills 67 miles high.”
Relevant? Well, maybe not to the billions it’s costing “roughly $2.38 per day per human on the planet” - except in places like Egypt where more than 40 million Egyptian citizens live on less than $2 per day, of course - but to the few hands into which it is falling, like Soros’, it must seem like manna from Heaven. :-)
"Heck, even Newt Gingrich at the Republican Presidential Debate in Ames, Iowa on August 11th 2011 called for the full Audit of the Fed!"
And thats saying something for that fucking insider slug.
He's just posing. Look for repug candidates to try and steal some of Ron Paul's ideas to stand out.
"Try this: 16 Trillion inches equals a bit more than 250 Million miles. That would be 10,000 trips around the planet Earth, nearly 1400 trips to the Moon or nearly three trips to the Sun"
Hmmm... so 16 trillion Benny buks would be 1500 million miles long end to end, complete 60,000 trips around the rock, almost 8400 trips to the big cheese ball in the sky (Cheesey would like that)or almost 18 trips to the fireball. That's a lot of scratch.
Obama is a cooler, more insidious type of corruption and evil. But he is evil nonetheless. Evil that does not know how evil it really is. The worst type of evil. Absolute un-aware evil, thinking it is doing good, and convincing many of the same.
I don't believe in the ignorance angle. I believe evil is defined differently by Obama and his ilk. I think that's a big difference.
How about pretending it's not evil, while ignoring the dirty details?
Besides, these people just have to make decisions that hurt people, with the doctrine of the Greater Good to uphold.
From broken eggs to omelets...
Humans often define other creatures as evil based on what those creatures do to others.
A snake swallows a mouse whole, and digests it as it lay squirming in it's stomach.
To us that's evil, to the snake it's lunch.
Excellent analogy.
Don't worry,
Michele Bachmann has promised to bring back $2 gas. For all you enviromentalists, she has also confirmed that CO2 is not a harmful gas.
Also the 2 Dollar, Sausage Job is making its way to the streets again ?
What she didn't tell ya: we have to conquer Iran, Kuwait, Qatar and the UAE to do it. And, oh, you might have to pedal part of the way.
I actually built a bicycle powered by a two-stroke Chinese motor. Pedaling is definately required. My son rides it. I ride a regular bike.
Us trash banks are worse but protected by unlimited printing rights of BB at FED. Simple as that.
Actually more protected by CONgress as they get special mark to unicorn accounting rules while the rest of us have to use GAAP. US banks are not the only ones with access to FED liquidity. A certain 16T loaned out around the world under the cover of darkness comes to mind.
We're all fucked, bitchez.
Sophomoric. The author's key point seems to be that the demand for cash is a constant, therefore a money supply increase can eventually overcome it. This might be true until you get to pushing on a string stage, whereby the increase in money supply does not go to those demanding cash, but instead spins off into speculative feedback loops. This then becomes the driver for commodity inflation that impacts consumers. This is where we are at now. The other consequence of easy money is that it devalues credit - the obligation to repay debt becomes meaningless. People observe governments defaulting, banks getting bailouts, everything related to 'easy money' and they want (and then take) theirs too. This creates a collapse in both credit supply and credit repayments. Therefore, the mechanisms by which money supply is supposed to reach the people who demand cash become broken. Traditional credit is killed, and all the attempts to put supply into the market just go into the speculative loops instead. You get into a series of feedback loops, whereby speculation accelerates more and more and borrowing and repayment slow down more and more. The real economy dies while the speculative economy goes haywire.
See this for a diagram and explanation of these loops: http://willanystand.blogspot.com/2009/11/when-owing-money-means-nothing-and.html
Agreed, the idea that "demand for money" necessitates "growth of money supply" is nonsense. Demand for money can just as well be stated as a lack of demand for everything else.
I'm not too familiar with Terry Coxon, but I'm mildly surprised to see this kind of analysis coming out of Casey Research. It reads like any other Freidmanite money supply targeted-inflation promotion/defense.
Instead of blaming recession on government for contracting the money supply, how about noting the true cause from their expansion of it? Or better yet, why not compare it to periods of non-fiat money?
All busts (=recessions) were preceded by a boom which invariably was fueled by cheap money, or easy credit. Since 1913 its been the FED that's fueled the booms by making money available, at below what the market would normally dictate, and thus responsible for each recession.
END THE FED!
Sorry. This is an overly simplistic explanation of the current recession that misses the big picture. In part because it still views the current recession through the prism of past experiences: like when the US was on the gold standard, or when energy was still cheap. It fails to grasp the global dimensions, and the larger economic cycle since world war 2. And in so doing it makes the medicine for recovery too simplistic: as soon as people want to spend cash instead of holding it the recession will end? Good luck with that.
Forget Joe Sixpack spending cash. He's got no money and no job.
And of the 1000 richest corporations and 100,000 richest people who corner trillions of cash between them: they aren't going to spend much more than they are now, they have been and will continue to hoard capital.
So yes, its a lost cause.
+1 for so many reasons
i didn't get that he was pushing a recovery or anything more than a placebo, basically. he says there is an increased demand for cash not credit, CE, and that is deflationary.
so they have an invention, and this writer sez they will use it and print (QE or whatever the fuk the magic genie comes up with next) "until unemployment rates come down"
get it? we're on japanese time? Johnny Mathis - The Twelfth Of Never - YouTube
The FED's theme song for money. Just replace "love" with "print". It fits.
So I wasn't really old enough to understand what was going on for Nixon and Ford. I remember Carter but I was pretty young. I liked Reagan and still do, even though he caused some problems we have to deal with now I still credit him with crushing the Soviet Union. Bush Sr. was ok. Clinton I wasn't too fond of, but only because I disagreed with his politics. Bush Jr. though, in my mind he's the worst president in my lifetime, and the worst out of any I've studied. He ruined our economy big time. Obama only got voted in because everyone wanted the opposite of Bush Jr. He got handed a big mess and he's muddling along. I wouldn't call him another Lincoln, but calling him the worst ever just doesn't seem justified.
Sorry: it's the "worst ever" from now on 'til the system breaks. Read King Lear.
Couldn't say it better.
Tricky Dick was the best by far. Credit him with lots of what we have today. He was smiling as Marine one whisked him away.
Unfortunately, that's life.
You inherit a piece of shit, and it becomes your piece of shit. Nobody remembers the previous fuck up who fucked off back to neverland to jerk himself off for a living.
You could actually trust the unemployment stats in 1981. Not now.
Fantastic article and comments, as usual. Fascinating when you stop and actually think about the amounts that the Fed has dealt out...goes to show that we all get a little punch drunk with the numbers and overall situation. Perhaps the real Fed success to date is that they kept the sky from falling down...and short of that everyone moves on with their lives.
So I guess we'll see if there is any interest in smashing the mkt in the morning.......Find it a little strange with all the problems in the world and the mkt on the ropes at down 500 pts, that we did not drop another 5 or 6 hundred. That door was wide open yet there was no interest. I seriously think S&P's can trade 850 before its over or lower but with a day like today you almost want to fade it or buy aggressively in the morning if there is some incremental low with no follow through.
$1849.52/ $41.13
houston! we have ignition!
It appears they now want their paper/digital margin calls covered in G/S.
How barbarous ;-)