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Obamanomics Hits a Reef

Growth for the fourth quarter has been revised down -- again -- from the original 5.2 per cent to 2.7 per cent, a mere difference of 48 per cent. If this had happened under a Republican president America's corrupt media would be screaming blue murder. Nevertheless, the point must be eventually reached where even these ideological hacks cannot continue to deny that the Obama economy sucks.

I've lost count of the number of emails from Democrats that bragging that the cyclical recovery would be gathering steam by the middle of 2010 and that this will keep both houses in the incapable hands of the corrupt Democrats. (To be truthful, I added the bit about corrupt and incapable.) I politely pointed out that Obama's economic policies were guaranteed to retard recovery if not actually abort it. (I wasn't the only one to stress this fact.) And this is precisely what happened.

Their first mistake was to assume that booms and busts are in fact a cyclical phenomenon. It are not. They then made the additional mistake of assuming that the recovery phase is a natural outcome that emerges irrespective of government policies. Any reasonably informed person would know that the Hoover/Roosevelt experience had long since put that idea to bed.

Although it is true that since WW II recoveries have been fairly rapid what has been overlooked by many is that in each case the administration of the day did not interfere with the process to anything like the extent of the Obama administration. For that one would have to go back to the 1930s, an event from which the Democrats learnt nothing of value.

In the fourth quarter of 2009 GDP came in at 5.7 per cent. The media were ecstatic. Happy days were here again and the Republicans were doomed. Now we find that the first quarter GDP for this year is down to 2.7 per cent. Compare this situation with what happened under Reagan. Things were looking grim in 1982 with GDP at 0.3 per cent for the fourth quarter. (I clearly recall how the media just loved that. Another club with which to beat the imbecilic Reagan.) Then the first quarter of 1983 saw GDP jumping by 5.1 per cent. The second, third and fourth quarters saw it rise at a sizzling 9.3 per cent, 8.1 per cent and 8.5 per cent respectively.

If Reagan had done what Obama has done there would have been no recovery with the result that the media would have crucified him. (They tried to do that anyway.) Nearly 30 years later the same contemptible media is making excuses for Obama's dismal performance.

The better informed could argue that Reagan's recovery was in fact a Keynesian success story, and then produce the monetary evidence in support of their case, which we shall now do. The following chart shows that M1 flattened out in the middle of 1981 and then began to accelerate again. The argument here is that the Reagan deficits (that Democrats were in control of both houses is rarely if every mentioned) were fuelled by a monetary expansion and that this amounted to a successful Keynesian policy. "Supply side economics" had nothing to do with it.

M1 1980-1985

Let us now turn to the monetary situation under Obama. It can be seen that M1 started to flatten in late 2004 and did not begin to expand again until 2008 after which it then rocketed. And what was the latest result? A miserable GDP rate of 2.7 per cent. If these critics were right about Reagan's policy the economy should now be whizzing along. What makes this situation even more curious is that in 1994 Greenspan gave the OK for the banks to introduce sweeps, a process that reclassified bank deposits as savings accounts. The effect was to underestimate the actual growth in M1.

M1 2000-2010

If we use the Austrian definition of the money supply* the situation begins to appear positively bizarre. The money supply rapidly rose from September 2008 to June 2009. It then started to fall until last February. This was followed by a swift acceleration that now appears to be slowing. And this has happened even though Bernanke doubled the monetary base. I doubt if America has ever experienced anything like this before.

Austrian Money Supply

An astute Obama supporter could push his argument further by pointing out that monetary growth under Reagan succeeded because business borrowed and invested and this is why the banking system did not accumulate massive reserves. This raises another problem: Why did business borrow and spend under Reagan but won't under Obama? The answer is obvious. Reagan was always friendly towards business, meaning he was never hostile to investment.

He understood what Obama and his fellow Chicago thugs refuse to consider and that is the way to destroy American prosperity and prestige is to paralyse business. The very idea that anyone at all, let alone blustering buffoons like Pelosi, Frank and Dodd, could direct an economy is something so stupid that it could only be found in a leftwing university faculty or a newsroom.

These are the same clowns that told Americans that massive borrowing and spending was the only way to save the economy. In this they had the support of so-called economists like Larry Summers and Christine Romer. (People like these are Democrats first and economists last.) What was being said is that if Pelosi or Reid tax or borrow from Joe Sixpack and then spend the money this will promote economic growth by expanding aggregate demand.

These people are so stupid they cannot see the obvious: borrowing and taxation amount to a transfer of purchasing power. We measure aggregate spending in terms of dollars. How in heavens name does this process increase the quantity of dollars? What we get is not an increase in demand but a change in the composition of demand, the pattern of spending. Aggregate spending must remain unchanged. The notion pushed by the likes of Summers that $1 of government spending generates $1.50 in additional income is pure Keynesian claptrap. There is no Keynesian multiplier and there never was.

*There are some differences among Austrians as to what ought to be included in a definition of the money supply. I try adhere to Walter Boyd's view who in his open letter to Prime Minister Pitt in 1801 defined money in the following terms:

By the words 'Means of Circulation', 'Circulating Medium', and 'Currency', which are used almost as synonymous terms in this letter, I understand always ready money, whether consisting of Bank Notes or specie, in contradistinction to Bills of Exchange, Navy Bills, Exchequer Bills, or any other negotiable paper, which form no part of the circulating medium, as I have always understood that term. The latter is the Circulator; the former are merely objects of circulation. (Walter Boyd, A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issues in Specie at the Bank of England, on the Prices of Provisions, and other Commodities, 2nd edition, T. Gillet, London, 1801, p. 2).

In simple terms, money is the medium of exchange. Nevertheless, difficulties do arise. Are savings deposits money? This presents the problem of double-counting. If I take $10,000 in cash and deposit it in my savings account it cannot be seriously I argued that I have now expanded the money supply by $10,000. It therefore follows that if the bank lends out that $10,000 the money supply still remains unchanged. We now deduce that credit transactions do not alter the money supply. Whether we include savings deposits in our definition depends on whether or not it involves double-counting.


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