Can Obama Stop the Current Recession?

by: Gerard Jackson December 02, 2008    

Gerard Jackson

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A chart can be worth a thousand words and two charts, I am sure, can be worth vastly more. The country is panicking over the volatile state of the financial markets, in doing so it has lost sight of the vital fact that the financial sector, as it is called, is in fact the financial face of the production structure, that incredibly complex assembly of capital goods that so many smart alecks on Wall Street think have nothing to do with living standards.

The 'financial sector' can only collapse if the production structure (sometimes called the capital structure) has been so disarranged by a central bank's monetary policy that it can no longer sustain the capital values that share prices represent. This, fortunately, is not the case, at least not yet. The following chart shows that in January there developed a steep and sudden drop in industrial production virtually concurrent with the severe drop in the share markets.

Industrial production: Manufacturing (NAICS) (IPMAN)
2008 Federal Reserve Bank of St. Louis: research.stlouisfed.org
Source: Board of Governors of the Federal Reserve System
Now this is somewhat misleading in that manufacturing just does not come to a screaming halt. When an economy enters the last stage of a boom, manufacturers find themselves in a profit squeeze as their costs start rising faster than the demand for their products. Needless to say, this process must eventually lead to layoffs, which should, but never does, signal to the economic commentariat that a recession has begun. Employment statistics make it very clear that manufacturing jobs have been shrinking since October 2006.

Let us delve into this a little more closely. Readers will know that I frequently make use of statistics produced by the US Institute of Supply Management (a non-government body). Its surveys provide vital insights into the condition of manufacturing and hence the direction the economy is moving. The ISM noted that its PMI (performance of manufacturing index) for October was its lowest since 1982. That was the tail-end of a very deep recession where unemployment climbed to nearly 11 per cent in December of that year. I think this fact should be cause for serious worry because at the moment the unemployment stands at 6.5 per cent and rising, suggesting that we can expect a further contraction in manufacturing, as indicated by the chart below.

Data is from the Institute of Supply Management
Source: Westpac Australian Economic Reports
The redline represents manufacturing. We can see from where it has been circled that it is heading into 1978 territory where even though unemployment was 6 per cent inflation was 10 per cent. This was a period of stagflation, an economic malady that is still a mystery to most of the economics profession, including Obama's advisors. It should be stressed that we are not looking at a 1930 industrial implosion.

Nevertheless, it is a grave economic situation with a very low tipping point. So far I have heard nothing said by Obama's economic brain trust that suggests they really understand what is happening. On the contrary, in an evident state of panic Bernanke expanded the monetary base from $980,914 billion on 8 October to $1,233,679, on 5 November, a 24.7 per cent increase. If the Keynesian instincts of this group of economic wizards leads them to conclude that a rapid monetary expansion is a superior alternative to allowing the recession to make the necessary economic adjustments then Mr Obama might indeed end up being a one-term president.

I think it is going to be a very interesting four years for the US and the world at large.

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This article has 7 comments:

  •  
    Dec 02 10:43 AM
    Obama just stated that we can not just continue to print money forever. Thank you Obama!
    Reply | Link to Comment
  •  
    Dec 02 05:58 PM
    Obama may not be a "natural born citizen"...the Supreme Court is scheduled to conference on the matter on Friday. Stay tuned -- he may not be Prez after all.
    Reply | Link to Comment
  •  
    Dec 03 12:42 AM
    If that were so, then opening a new Electoral College would be the next logical step.


    On Dec 02 05:58 PM Socialism cannot compete! wrote:

    > Obama may not be a "natural born citizen"...the Supreme Court is
    > scheduled to conference on the matter on Friday. Stay tuned -- he
    > may not be Prez after all.
    Reply | Link to Comment
  •  
    Dec 03 12:53 AM
    From above:
    'in an evident state of panic Bernanke expanded the monetary base from $980,914 billion on 8 October to $1,233,679, on 5 November, a 24.7 per cent increase.'

    Can anyone stop the D.C. Debt Machine of the Fed, Congress, and new and old administration? Who can say NO to more debt? Must it be the marketplace - old fashion basic supply and demand?

    Also the Fed chairman is too much responsibility for one person, and appears to be too much command and control; so too for current Treasurer. So perhaps the ECB model of a Governing Council would be better, in addition to an executive board. See en.wikipedia.org/wiki/...
    Reply | Link to Comment
  •  
    Dec 03 05:06 PM
    Very much agreed!! And perhaps...it should be an *elected* council?!


    On Dec 03 12:53 AM zanardm wrote:

    > From above:
    > 'in an evident state of panic Bernanke expanded the monetary base
    > from $980,914 billion on 8 October to $1,233,679, on 5 November,
    > a 24.7 per cent increase.'
    >
    > Can anyone stop the D.C. Debt Machine of the Fed, Congress, and new
    > and old administration? Who can say NO to more debt? Must it be the
    > marketplace - old fashion basic supply and demand?
    >
    > Also the Fed chairman is too much responsibility for one person,
    > and appears to be too much command and control; so too for current
    > Treasurer. So perhaps the ECB model of a Governing Council would
    > be better, in addition to an executive board. See en.wikipedia.org/wiki/...
    Reply | Link to Comment
  •  
    Dec 03 08:14 PM
    The answer is, "no."
    Reply | Link to Comment
  •  
    Dec 04 02:40 AM
    Obama, McCain, and even Ron Paul cannot stop the unwind nor is it even a good idea to do so.

    But at least Dr. Paul would ensure it will never happen again whereas all other print-and-spend politicians would work as hard as they could to make it happen again ASAP!

    Anyone who didn't vote for Ron Paul should be ashamed.
    Reply | Link to Comment
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