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