The economy is in recession and has been for several months, and yet our brilliant economic commentariat are still debating when it will happen. In the meantime they are losing their hair over the "global financial meltdown". The confusion is aggravated by their belief in the spectre of the "dual economy". But like all spectres this one is also a figment of the imagination.
The problem is that this lot believe that the financial side of the economy is separate from the real side of the economy. This is pure baloney. To argue that credit and shares are somehow separate from the "real economy" is like saying air has nothing to do with breathing. The so-called real economy is built on finance, and to treat them as separate entities is absurd.
Unfortunately this nonsense is not confined to the media or stockbrokers. A couple of years ago Ken Henry, Secretary to the federal Treasury, said that we have another "two speed" economy. Peter Costello, the then Treasurer, parroted this nonsense with the comment that we now have a "two track" economy.
None of this twaddle is surprising. More than three years ago the very same Ken Henry, warned the Reserve Bank that raising interest rates could cause a recession. It evidently did not occur to Dr Henry that recessions are ultimately caused by central banks artificially forcing interest rates down below their market rates. (Forget media comments about "neutral monetary policy" and "neutral interest rates": like the "dual economy" notion they too are complete rot).
What is not understood here is that the boom-bust cycle is marked by certain characteristics that are forever being overlooked. Far from being separate from the real economy it is -- starting with the Reserve Bank -- the so-called financial side that the economy that triggers the boom. So it is safe to say that though the boom is triggered by credit expansion the boom largely consists of real factors nearly all of which are to be found in manufacturing as well as construction.
There are basically two reasons why this easily checked fact gets overlooked. The first being the fallacious belief that because consumption is something like 66 per cent to 70 per cent of GDP it must be the main engine of growth. In actual fact consumption is not only about 33 per cent of total economic activity but it is the end product of growth.
As some classical economists said: Consumption is the annihilation of value. It is not and never can be investment in the sense that it raises productivity. The second reason is related to time. Every country has a production structure. One might say that it is interest -- the price of time -- that shapes the structure. Forcing the rate of interest below its market rate distorts the structure. Eventually real forces act to reverse the process and re-establish the market rate. The consequences of this movement are first felt in time consuming processes. These processes are largely found in manufacturing. It is their time-consuming nature that makes them sensitive to changes in interest rates¹. (This is alsowhy construction tends to move in tandem with manufacturing during a boom).
While there is a sequence with respect to the adjustment process there is no time table. It had become clear more than two years ago that manufacturing was feeling the effects of the Reserve Bank's criminally loose monetary policy. However, the minerals boom and an over-valued currency (see Is monetary policy destroying the country's manufacturing base?) obscured the process and caused confusion among our economic commentators. Things have not improved.
Morgan Stanley's Gerard Minack writes of Australia reaching the end of a "debt-fuelled 20-year super-cycle". This is a very superficial way of treating the problem. It conveys the false impression that if so much had not been borrowed there would have been no boom and hence no financial crisis and recession. But the real point is that this massive credit expansion was created out of nothing by the Reserve Bank of Australia with the sole purpose of putting the economy on a monetary bender. Well, the party is over.
Peter Jonson (aka Henry Thornton) is another member of the economic commentariat who just doesn't get it. He wrote in The Australian that
The best diagnosis we have is that the current crisis is the inevitable result of decades of over-consumptions financed by over-borrowing. (Weak and the strong, 14 November 2008)
Complete rot. Even a half-decent diagnosis would nail the Reserve Bank's lousy economics as the real culprit. To argue otherwise is to admit complete ignorance as to what has been really happening. Jonson inadvertently exposed the true depth of his ignorance with the absurd opinion that "Anatole Kaletsky ... provides one of the best analyses of the financial crisis we have seen". This is what the brilliant Kaletsky had to say:
They must support -- and if necessary -- subsidise banks, to create conditions for easier lending and borrowing terms and to do their utmost to encourage consumption. The obvious ways to do this are to slash interest rates and taxes, especially taxes on consumption and on lower income households, who are most likely to spend rather than save any extra money governments allow them to keep. (Revive consumers, restore growth, fix the problems, The Australian, 14 November 2008).
In even plainer English, he wants central banks to work overtime in printing money to throw at consumers. This is called inflation. It has other names but Brookesnews does not publish profanities. Kaletsky² is nothing but a vulgar Keynesian who cannot grasp that his monetary cure for what is a monetary disorder amounts to giving a drug addict a good dose of cocaine. As for Peter Jonson, anyone who seriously recommends this rubbish -- as he did -- has no businesscalling himself Henry Thornton.
¹ Unfortunately the process is somewhat more complicated than this.
² Kaletsky is the associate editor of the London Times. He is also the same dolt who argued that a destructive carbon tax is to be welcomed because it would "have the effect on the world economy comparable to a large-scale war". That's right, folks. Having its cities bombed is just the pickup an ailing economy needs. The historical thinking behind America's credit crunch.