• 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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