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When Obama ran for president I warned that the man is a dogmatic
leftist and Americans — those with any sense, that is — would rue
the day he sat in the Oval Office. Since then I, along with many others, also
pointed out that if unchecked his policies would result in economic
stagnation and inflation. Well, this now seems to be the case.
For quite a while Obama’s media cheer leaders have been hailing
the ‘growth’ in manufacturing output as evidence of recovery and
the success of his economic policies. Only about three weeks ago media hacks
had an organism when the Fed reported that for February the production of
furniture, cars, various appliances had risen again, confirming the view that
manufacturing was leading the recovery.
It is true that according to Austrian business cycle theory
manufacturing should be the first ‘sector’ to recover. But
Austrian theory is microeconomic, not macroeconomic. It does not see manufacturing
as somehow separate from the rest of the economy. Moreover, it treats
manufacturing not as a homogeneous sector but as an incredibly complex
structure consisting of stages of production and made up of integrated
heterogeneous capital goods.
This is why Austrian economists consider the pattern of production to
be so important. They warn that if governments attempt to recover from a
recession by stimulating consumption this could increase the demand for more
consumer goods. The result would be a change in the structure of relative
prices and the shifting of more resources into the lower stages of production
at the expense of the higher stages production. If such a policy was
continually pressed it would shorten the production structure and reduce the
height of real wages. In other words, the capital-labour
ratio would shrink as investment in the higher stages of production fell.
For this reason Austrians treat with great caution production figures
that focus on consumer goods. We need to know what is happening elsewhere.
And what we do know at the moment does not make for a pretty picture, no
matter what the Democrats’ media stooges assert. Fourth quarter figures
show the economy slowing. So while the demand for consumer goods rose the demand by industry for capital goods and primary
metals fell, leaving orthodox economists floundering for an explanation.
Their discomfort is compounded by the fact that real consumption spending
continues to rise and is now higher than it has ever been.
The fundamental root of the problem is the Fed’s devotion to
vulgar Keynesianism, the idea that if you print enough money the economy will
right itself. I reckon just about everyone now knows that Bernanke massively
increased the money supply in an effort bailout Obama. What they don’t
know is that it hasn’t stopped. Since last November he has expanded the
monetary base by over $325 billion. His reckless monetary policy is driving
down the dollar and driving up commodity prices.
Because commodities are at the highest stage of production — the
furthest point in time from consumption — they are very sensitive to
‘cheap money’ policies. To run such a policy the central bank has
to continue to expand the money supply. As the dollar is a reserve currency
this is bound to rapidly raise the demand for commodities, a situation that
is aggravated by other central banks running the same policy.
As predicted by the Austrians Bernanke’s monetary policy is
lifting the producer price index, with food rising by 1.6 per cent in
February and energy by 3.4 per cent, a yearly average of nearly 20 per cent
and more than 40 per cent respectively. Over the last 12 months intermediate
goods, those unfinished items that move from firm to firm before reaching
their final destination, rose by 7.8 per cent.
Needless to say, the CPI is now averaging about 6 per cent a year.
Based on December, January and February figures the PPI is now racing ahead
at 14 per cent per annum. Right now the US economy could be looking at an
impending dose of stagflation. The rise in commodity prices and intermediate
goods are bound to impose a profits squeeze on companies, an
usual situation in the absence of an investment boom.
Austrians define growth as net capital accumulation in excess of the
population. Using that definition we find that there has been no growth at
all under Obama. Not only has net capital accumulation been anaemic it was actually negative for the whole of 2009.
The chart below shows net business investment starting to dive in 2007. Obama
certainly cannot be blamed for that. Moreover, the end of 2009 shows a sharp
increase, suggesting that recovery is underway. But if this is so, why the
drop in demand for capital goods? The
answer lies in the quarterly
figures.
The next chart shows a steady increase in net investment for the first
three quarters of 2010. However, the third quarter experienced a sharp
downturn. Although this is not an uncommon event we must nevertheless bear in
mind that it might be signalling a contraction. If
the squeeze on profits is tightening one can expect the demand for capital
goods to fall further and net investment with it.
The monetarists and just about everyone else expected Bernanke’s
monetary policy to send the US economy roaring out of recession. Republicans
were scared stiff that by 2011 Obama would be riding a recovery to a second
term in 2012. My view was that Obama is a profoundly ignorant man whose
extremely narrow view of the world has been shaped by leftists who are just
as ignorant as he is. This, I warned, would result in policies and direct
meddling in the economy that would retard recovery if not result in
stagnation.
The world is uncertain enough without arrogant meddlers like Obama
making it worse. Under his administration businesses have become increasingly
reluctant to invest. Not knowing what future policies this man will implement
with respect to taxes, unions, regulations, energy production, so-called
financial reforms, and anything else that obsesses leftists, they have done
what any sensible would do: They took cover.
When it comes to regulations every business man knows that the devil really is in the details. Because of that
they know from experience what greedy lawyers, zealous
bureaucrats, leftwing judges and business-hating politicians are prepared to
do to get their way, irrespective of what it costs the country. After all,
did not Obama say he would use the financial crisis to “transform our
economy”. That he was not elected to do that
doesn’t faze him. After all, as thuggish Democrats in Wisconsin made
perfectly clear, elections only count when they win them.
Gerard Jackson
Brookesnews.com
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