Wednesday, March 10, 2010

Recovery? Must be around the **next** corner [update 7]

ManWearingBarrel[6] Remember that economic recovery you've been told is already under way? 

Turns out it wasn’t around the last corner, and is unlikely to be around the next.

Strong economic recovery is some way off, data suggests:
    “A raft of economic data suggests a strong bounce back from the recession is still some way off.”

Says the report, economists (many of whom were front and centre talking up “recovery” and cheering on government “stimulus”) now admit that “recent consumer spending and unemployment figures have been more disappointing than predicted” – not to mention figures showing production, if they even bother to look at those.

    “A UMR Consumer Confidence Index survey of 1000 people has found nearly two-thirds remain wary about buying new goods.
    “Official figures on electronic card transactions show core retail spending, which excludes fuel and car-related purchases, fell a seasonally adjusted 0.2% to $3.2 billion in February.
    “It is the second consecutive monthly drop.
    “ANZ National Bank has ditched its assessment that the first half of the year will record solid growth and now says it will be early 2011 before the economy fires up.
    “ANZ Chief economist, Cameron Bagrie, says with the unemployment rate still rising and consumers not spending, the economy is clearly still stagnant.”

Good to see economists actually admitting their crystal ball is broken—admitting what everybody in business knows who looks at their own situation instead of the pronouncements of the various economic sooth-sayers.

And Bagrie also admits that this is still an economy "not firing on all cylinders" – and how could it  be ? Recession should be just another word for recovery—that time in the business cycle when  all the malinvestments due to “irrational exuberance” are liquidated and things readjusted back onto an even keel.  But government policy has been focussed on resisting that necessary adjustment process.

Explains Murray Rothbard in America's Great Depression (which you can, and should, read online here in PDF),

    “The ‘boom’ ... [was] actually a period of wasteful misinvestment. It is the time when errors are made, due to bank credit's tampering with the free market. The "crisis" arrives when the consumers come to reestablish their desired proportions. The "depression" is actually the process by which the economy adjusts to the wastes and errors of the boom, and reestablishes efficient service of consumer desires…
    “The adjustment process consists in rapid liquidation of the wasteful investments. Some of these will be abandoned altogether (like the Western ghost towns constructed in the boom of 1816–1818 and deserted during the Panic of 1819); others will be shifted to other uses.”

Resources were misallocated during the boom.  The process of adjustment reallocates resources to more productive uses—that has to happen to have any “strong bounce back,” and it hasn’t.

It hasn’t, because  the  job of adjustment here and overseas has been made much harder by all the government work, all the government subsidies, and all the government "stimulus"—all of which has changed the economy’s price signals and made it harder for the necessary readjustments to take place.

The mainstream economists and government cheerleaders failed to heed the point of Eugen von Beohm-Bawerk, a giant of the Austrian School of economics: 

    "Either we let economic law run its course or we destroy the engine of prosperity. We must defer or we make matters worse by attempting to control society."

They have made things worse.  By trying to avoid economic law running its course, they have ensured that resources have remained misallocated instead of being put to more productive use.  By holding down interest rates to below inflationary levels, they have ensured that capital continues to be consumed instead of being profitably reproduced.  And, tragically, with all their bluster and boosterism, the crystal-ball gazers have ensured that many, many businesses in delicate positions have listened to the talk of existent “green shoots,” and instead of readjusting themselves to the new economic situation, they’ve been borrowing to maintain their unstable positions. 

That can’t last. 

As this blog was saying while all thestimuluswas being talked up, there is no choice at all about the pain of recession—the only choice is how long the pain is going to take:

    “There is no choice at all about experiencing the pain of retrenchment and slump -- the only choice is whether recovery is allowed to be short and quick (by rapid liquidation of malinvestments) or, like Japan in the nineties, those malinvestments are propped up like corporate 'Weekend at Bernies' survivors that drain the economy for years to come.”

Your governments have made the choice for you. Everything that’s been done has ensured the pain is not going to go away any time soon. 

PSPlus ce change . . . here’s a classic cartoon from 1935 showing NZ’s then-Prime Minister Forbes and his Finance Minister Coates …

And remember, New Zealand was one who emerged first from the Great Depression.

UPDATE 1:  Christchurch blog readers should be excited to hear about a new economics study group organised by the local Mises Circle, starting tonight:

WHAT: Discussion and drinks
WHERE: 113D Tancred Street, Linwood.
WHEN: Wednesday 10th March, 7pm.

Discussion will centre around Frederic Bastiat’s article ‘What is Seen and Unseen,’ available on-line here. http://mises.org/resources/2735.

“Come along and learn all about the Broken Window Fallacy,” says organiser Michael Darby.

UPDATE 2: Crikey, even “The Sranded” gets it:

    “The world’s economy has not truly recovered from the recession, it has just been artificially reanimated by vast injections of Government bailout money.”

True!

    “Capitalism has been rescued by good old fashioned Socialist Big Government, and the bill is being sent to we the taxpayers. . . ”

Well, almost.  Capitalism isn’t being rescued, it’s being smothered.

UPDATE 3:  Courtesy of Bernard Hickey:

A member of the European Central Bank, Jurgen Stark, has warned the global economy faces a ‘Japanese style’ lost decade because of a failure of many to restructure their budget situations.”

About friggin’ time the central bankers started noticing the bleeding obvious.

UPDATE 4: Even CNBC’s talking heads are starting to realise the obvious (around twenty-six months too late): “  Economic Stimulus Was a Waste of Time.”  And Keynes is wrong again.

UPDATE 5: Oh, and on a somewhat related note: 

Govt Debt 'The Most Dangerous Market' Now: Loomis Sayles .

    “There is some particularly good news on the capital goods front. The prices for capital goods continued to fall – they dropped 8.5% for the quarter, the largest quarterly fall since March 2003. This follows decreases of 7.2% and 5.2% for the previous two quarters.
    “This is partly driven by the high New Zealand dollar, and partly by suppliers overseas dropping prices in the face of the global recession.
    “That is not, in itself, particularly good news. What makes it so is when the volume figures for capital goods imports are looked at.
    “Capital goods imports rose 8.2% for the quarter, and these were the largest single component in the overall rise in import volumes. The main contributor within capital goods was increases of capital machinery and plant, which rose 4.3%.
    “That means New Zealand firms are, firstly, making use of the high New Zealand dollar and the other drivers of lower prices to boost their investment in plant and machinery.
    “That should pay off in higher productively as the economy turns around.”

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