Why We Are Not in a Recession, Yet, and What a Recession Will Look Like

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Many commentators
continue to be on recession watch. They report every new piece of
economic data in an attempt to confirm, or unconfirm, whether we
are in a recession.

The cause of
this focus is the subprime crash. There is no question the sub
prime crisis was fueled by Fed money printing. Without the Fed money
printing of the Alan Greenspan era, the money to fuel the subprime
boom would not have existed, but I believe the crash of the sub
prime market is sector specific and not the result of the end of
the Fed printing. It was caused by some early on subtle changes
in subprime regulations, making it more difficult for some to get
subprime loans, and then, of course, we now have the adjustable
rate mortgages starting to adjust, crushing many who had taken out
subprime loans. This to me points to the beginning of and cause
of the boom and bust of the subprime market.

It can be argued,
though, that the Fed has slowed money printing and that this is
a factor that is causing the subprime crisis. Gary North, who is
one of the best money watchers around, is watching the adjusted
monetary base. He
writes
that “the adjusted monetary base has risen at [only]
about 1.6% per annum since mid-March.” This fact can not be ignored.
But looking at the adjusted monetary base is looking at the ingredients
of a dish before it is cooked in the oven. I prefer to look at a
dish after it is cooked, for me this is the M2 (non-seasonally adjusted)
Fed money number. M2NSA
is growing at roughly a 6.0% annualized rate. Ron Paul, the only
presidential candidate to understand economics (and probably the
only candidate to actually look at money supply numbers) watches
MZM money supply data. According
to Dr. Paul
, MZM money supply is growing at a 12% annualized
rate. Thus, only Gary North’s adjusted money growth figure can justify
the subprime crash as being a business cyclical crash.

If, indeed,
the M2NSA numbers or the MZM numbers are more accurate, then it
suggests that the money that was going into the subprime sector
is simply being re-directed and we will be in for a doozie of a
recession once the business cycle does hit.

Here’s a quick
lesson on business cycles. The Federal Reserve prints money out
of thin air and this distorts the economy as this newly printed
money enters the monetary system, usually headed into the capital
goods sector. When the printing stops, the capital goods sector
crashes. Voil, the business cycle. Why does the Fed eventually
stop printing? Because all the money printing eventually causes
serious price inflation that forces the Fed to stop printing before
a runaway inflation begins. We are near this point now, with oil
near $100 per barrel and gold over $800 per ounce. It’s business
cycle bust or runaway inflation, as choices for Mr. Bernanke.

So assuming
that M2NSA and MZM numbers are somewhere in the ballpark, if the
Fed starts to truly slow money growth and we are in a recession,
how will you know? These are the types of headlines you will see
when the downturn in the overall economy hits:

  • GOOGLE STOCK
    HITS 52-WEEK LOW
  • FOR THE
    FIRST TIME EVER, BOTH DOMESTIC AND FOREIGN AUTOMAKERS REPORT LOWER
    SALES IN THE U.S.
  • MICROSOFT
    ANNOUNCES BROAD-BASED LAYOFFS
  • IT’S A DOUBLE
    DIP DOWNTURN FOR THE HOUSING INDUSTRY: Battling Back from the
    SubPrime Crisis, Housing Falls Again on Broad-Based Economic Downturn
  • U.S. BUDGET
    AT CRISIS STAGE: The Slowing Economy has Reduced Corporate Tax
    Revenues By a Remarkable Rate
  • SOCIAL SECURITY
    IN CRISIS: Social Security Inflow Has Slowed Dramatically, Econometricians
    say “We Knew There Was a Problem With Social Security But Our
    Equations Said It Wouldn’t Hit For Another 20 Years”
  • CONGRESS
    CONSIDERS INTERNET TAX IN A DESPERATE MOVE TO FIND A SOURCE OF
    TAX REVENUE
  • DESPITE
    A SLOWING ECONOMY INTEREST RATES ON LONG-TERM BONDS REMAIN STUBBORNLY
    HIGH
  • REAL ESTATE
    DOWNTURN ALSO TAKES COMMERCIAL PROPERTIES DOWN THIS TIME
  • BUSINESS
    TRAVEL HAS DECLINED DRAMATICALLY: For Those Still Holding Jobs,
    They Can Find Unheard of Travel Bargains, Airlines and Hotels
    Are Cutting Rates, Sometimes by 70%, to Fill Empty Rooms and Seats
    that Are Not Being Used by Business Travellers

If Gary North
is correct and the monetary base is the best indicator to determine
how much money is being added to the system, you will still see
the same headlines only sooner.

November
9, 2007

Robert
Wallach [send him mail]
is editor and publisher of EconomicsBriefing.com.

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