"No warning can save people determined to grow suddently rich" - Lord Overstone

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The US Economy ain't Looking Too Bright

Despite the mighty efforts of a deeply corrupt media to portray the American economy as being on the eve of an economic miracle the American people know otherwise. They know that something is seriously wrong. If only most economists were as perceptive as poor ol' Joe Sixpack who has to rely on his "lying eyes" to get at the truth. How could Mr Sixpack possible know more than those highly educated economists who declared victory for the Obama administration by pronouncing the end of the recession thanks to the wonderful effects of his stimulus.

The only thing missing was a rousing chorus of Happy Days are Here Again. Adding even more intellectual authority to this announcement was Kenneth Goldstein, an economist at the Conference Board in New York, who cheerfully stated that "We've averted the worst, and there are clear signs the stimulus is working". (This lot remind me of the old British NCOs -- drill sergeants to you Americans -- who used to abuse draftees with degrees as being educated beyond their intelligence. I now know what they meant).

No sooner had these "best of the brightest" made public the results of their tea-leaf readings than the real figures came in, showing that not only had sales dropped in July but that unemployment also defied the predictions of these brilliant prognosticators by rising, with 558,000 more people filing for unemployment benefits. So far the economy has lost about 6.7 million jobs since December 2007. So much for these economists' rosy prediction of 2 per cent or more growth in GDP for the next "four straight quarters through June".

But hey! Things have gotta be looking up. The Dow is rising and productivity is on the up along with profits. If only things were that simple. The Dow reached its bottom of 41.63 on 5 July 1932 after which it rose -- with some severe fluctuations -- reaching 194.15 on 1 March 1937. Right through this period and into the early days of WWII unemployment remained tragically high.

A little known fact is that productivity also rose, particularly in the early stages of the depression. This is because manufacturers closed marginal operations and shut down inefficient plants in a desperate effort to slash costs. My point is obvious: a rising Dow and productivity do not necessarily mean recovery is underway. Moreover, profits are being made not by increasing revenue over sales but by slashing costs. If profits were due to increased sales one should expect capacity utilisation to rise. Instead we find it lingering around the 68 per cent level, the lowest since the late 1930s. (The slight uptick in capacity utilisation was due to the ridiculous "cash for clunkers" scheme).

Irrespective of screams of outrage from the Obamabots who insist on calling me a "fascist" and a "racist" -- among other things -- for daring to point out their hero's intellectual shortcomings in the fields of economics and economic history, facts are facts. Once again, Obama is leading the most anti-business administration since Roosevelt. And he is just as profoundly ignorant of economics.

Obama and his happy band of economic vandals are out to reverse the Bush tax cuts, nearly double the capital gains tax, raise income taxes even further while planning to push energy prices through the roof. To top it off, someone is even floating the idea of a national value added tax. How in heavens name are these policies and proposals supposed to put the economy on the road of sustained economic growth? The question answers itself.

In a situation like this businesses batten down the hatches and do what they can to cuts costs -- and that means cutting back on labour. No wonder want ads are disappearing. What America is experiencing is defensive action by business in order to stay in business.

In the meantime, Obama is being advised that a second stimulus is necessary to expand demand by promoting consumption. How many times does one after to say this: production, not consumption, drives demand. But this fallacy is being preached even by some of Obama's most fervent opponents.

It is argued that since the end of WWII the world has prospered on the coattails of the American consumer. This is nonsense. The post-war boom had nothing to do with consumer incomes. Thanks to the war the shackles that Roosevelt had used to hold back the economy were shattered. The regulatory apparatus that restricted output was gone, along with nearly all of the New Dealers, and market clearing wage rates were once again allowd to prevail. War-time inflation repealed the minimum wage and rapid capital accumulation expanded the capital stock.

Pent up demand was not in the form of money savings and higher money incomes, as economic folklore has it, but production directed to war-time use. Once peace had been declared there was a massive redirection of production -- the true source of demand -- to satisfying consumer wants. The sudden unleashing of this "pent up demand" gave America its post-war boom.

What the vast number of Americans do not know is that between 1945 and 1947 the Truman government slashed Federal annual spending from $95 billion to $36 billion -- a $59 billion cut in two years, a 62 per cent reduction that amounted to 26 per cent of GDP as it stood in 1945. According to the Keynesians of the time, including Paul Samuelson, this colossal cut in government spending should have created mass unemployment. Instead of learning from this pivotal event America's brilliant Harvard-trained economists are trying to sell Americans the exact opposite message. Only Mr and Mrs Joe Sixpack ain't buying.

We now get to it. Anything that retards production will retard demand because -- as the classical economists were prone to say -- "supplies constitute demands". The Keynesian key to unlocking demand is to inflate it by expanding the money supply. And this is where the banks come in. If we were living in normal economic circumstances the banks would be holding about $60 billion in reserves. They are in fact holding about $800 billion in reserves and Bernanke and Obama want them released into the economy. If this pair succeed in opening the monetary floodgates Americans will quickly find themselves facing surging inflation.


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