Economic storm clouds gather as Clinton leaves

By Gerard Jackson
web posted December 18, 2000

Bad economic news is beginning to sound like a mantra. Nevertheless, there is no escaping it as the economic barometer drops and the winds of recession start to blow throughout the economy. What is now alarming many is that households are catching cold as the consumer stages of production start contracting, the most prominent being the car industry which is laying off workers. Compounding the gloom is more news of companies experiencing falling profits.

And of course, our old friend consumer spending is charged as the culprit, never mind that the beginnings of the recession in terms of output and capacity go back a number of months. What's the betting that those companies closest to consumption will still tend to be the most profitable?

While the economy is catching a cold that is in danger of becoming pneumonia many analysts are still mesmerized by the CPI. If it's so modest what's the problem? Well, for one, the CPI doesn't measure inflation. And two, inflation is likes one of those diseases in which visible symptoms do not emerge for a time and the victim still appears to be in robust health despite what is happening to his system.

Failure to understand the true nature of inflation has led members of the economics profession to substitute past events for economic analysis. Hence it is seriously argued that because recessions or depressions have nearly always followed rapidly rising prices there is no danger of a recession today. Such people are forgetting the Great Depression followed a period in which the CPI remained comparatively stable while the opposite holds for the 1920-21 financial crisis. The moral: don't put your faith in indexes.

Still, this is 2000 and things are different, so we are told. No they ain't. Virtually all analysts become completely stuck when it comes to understanding the relationship between inflation and recession. One argument (I refuse to call it an analysis) is that inflation generates enormous tax revenues which reduce purchasing power. This is just too much, even for someone with my somewhat dark sense of humour. The effect of accumulated taxes, so long as they are not spent, is to reduce inflationary pressures.

Other side of this argument is that because inflation leads to rising interest rates these rates cut off credit and thus bring on a recession. The Queen of Hearts must have thought of this one. It's true that interest rates eventually rise during inflationary periods. It is equally true that these rises tend to be nominal. For much of the inflationary period real interest rates can be quite low. What usually cuts off the flow of credit is when the central bank decides to restrict monetary growth. A brief study of the Weimar inflation will confirm this fact. Even though nominal interest rates reached 90 per cent borrowing continued unabated — until Dr Schacht decided to call an end to the party.

It's generally understood that inflation is bad. What is not generally understood is what inflation really is. This is where Alan Greenspan does, I believe, have some understanding and that is why his sometimes gloomy announcements and cryptic comments about imbalances elude so many economic commentators.

The unpalatable truth is the recession is unavoidable. Even if a monetary injection of such gigantic proportions was sufficient to stimulate the economy it would only provide temporary relief, as did the massive monetary injection that took place late last year.

Let us hope that Bush will be able to implement his taxation policies and that there will be enough Democrats on the Hill prepared to put country first and Party last.

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

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