It's still doom and gloom for the US economy

By Gerard Jackson
web posted August 16, 1999

Well, it's doom and gloom time again. The markets are as jittery as ever and net stocks took a dive. But is it all bad? I'm afraid it is. I have frequently pointed out that the American economy is being driven by a consumer boom fuelled by the Fed's loose monetary policy. The monetary estimates I just received have brought home the full force of the Fed's monetary delinquency. Though M2 [M2 is defined as near-monies which are certain highly liquid financial assets such as non-chequable savings accounts, term deposits, and short term government securities that, although they do not directly function as a medium of exchange, can be readily converted to currency or chequable deposits - Editor] has grown by nearly 25 per cent since December 1995, the 1995-1999 period saw Financial institutions' credit grow by more than 80 per cent and commercial bank credit expand by about 50 per cent. These appalling figures and not Wall Street hype explain America's boom times.

Since credit expansion started heading north in 1991 the consequences have been sadly predictable, except to those who are paid to know better. Having flooded the economy with credit the Fed sparked off a consumer boom, which nearly every economics commentator in the country has confused with prosperity. The monetary boom had the additional effect of fuelling a current account deficit and inflating the stock market, causing the Dow Jones Industrials to rise by over 140 per cent in less than 4 years.

What this comes down to is an old fashioned inflationary boom, though many think otherwise because the CPI has risen so slowly. But inflation, like still waters, can run deep. this means that though the CPI is subdued inflation-created forces are bubbling away under the surface, as the monetary estimates clearly indicate. It is these forces that are causing Greenspan's "imbalances". One can be clearly seen and even measured with some accuracy; the other, and the more dangerous of the two, is invisible until the final stage of the boom begins to play itself out.

The trade deficit is the only imbalance that is ever referred to, particularly since it has reached record levels. But given the monetary figures what else should be expected? Masses of credit have been released to consumers which in turn sucked in imports. Clearly, rather than being the sign of a strong economy, the trade deficit is an inflationary symptom which has helped hold down the CPI and thus deceive a great many into believing that inflation poses no danger to the economy. It says much for the sorry state of much economic thinking that this fact has largely gone unobserved. Perhaps if some of these commentators recalled that the Asian tigers also ran heavy current account deficits before their economies imploded they would not be so sanguine about America's record balance of trade deficit.

Malinvestment is, of course, the other and more dangerous imbalance that I have constantly referred to. The Fed's credit policy has also created masses of malinvestments, investments that are not justified by market conditions. When the economy slows these malinvestments will make their presence felt in the form of idle capital and labour. Once again commentators will tell woeful tales of excess investments weighing down the economy and creating unemployment. And once again they will be wrong. There is no excess investment. There is only misdirected investment, the blame for which must be firmly laid at the feet of the Fed.

The yield on 30-year bonds is up, the market had its worst week for a year, the trade balance is at a record high and credit expansion has been rocketing. Not good. Not good at all.

Gerard Jackson is editor and publisher of the peerless The New Australian. Reprinted with TNA's kind permission.

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