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Good job figures point to gloomy times ahead
Gerard Jackson
Statistics do not speak for themselves, particularly if they concern economic variables. One of the fundamental problems we have with economics today is the obsession with aggregates. If aggregate spending holds up, everything is OK. The same goes for output, investment and jobs. What is clearly not realised is that aggregates are extremely deceptive.
For example, what matters is not the level of output but the pattern of production. If output is expanding in a situation of full employment (no matter how it is defined) where prices are scarcely moving our economic commentariat would immediately declare that Nirvana has arrived. But what these commentators do not see (and don't you ever try telling them otherwise) is that the Reserve's monetary policy could be distorting the capital structure. This means that imbalances would be accumulating that at a later date would have to be liquidated.
If this proposition were not true then countries that maintained stable price levels would never experience the so-called boom-bust-cycle. But this is clearly not the case. The US economy of the 1920s is such an example and one that is not really understood by most of today's economists. Irving Fisher's reputation was shredded by his publically stated opinion that the US had entered a "new era" and that "stock prices have reached what looks like a permanently high plateau". (He also lost his fortune. At least he put his money where his theories were).
Nevertheless the economics profession did not learn the lesson. Despite the fact that Fisher had been proven wrong in a spectacular and painful fashion, the vast majority of economists still cling to the view that a stable price level will make an economy recession proof. The fallacy here is the not so obvious one that a 'stable' price level is incompatible with inflation.
Economics has degenerated to the point where an inflation rate of 3 per cent is considered acceptable. The absurdity of this position is that in order to hold it one needs to believe that money is neutral, meaning that the capital structure is immune to monetary-induced changes in interest rates. And this is precisely the situation in Australia. (It's even worse because our economic commentators do not even believe there is such a thing as a production structure).
It is this kind of 'thinking' that has financial writers arguing that the Australian economy is doing fine because only New South Wales is in recession. They do admit that unemployment in Victoria is also on the rise, at which point they move on to something else. What is being missed is that both these states hold most of Australia's manufacturing base — or what's left of it. This means that rising unemployment in these states could very well be heralding a national rise in the level of unemployment.
We have been told that the Reserve Bank's statistics on unemployment is painting a fairly benign picture of the economic landscape. Let us now look at the Reserve's monetary statistics, the ones our highly paid economic commentators make a point of ignoring. I have pointed out a number of times that M1 peaked 231.3 last December, after which it contracted to where it was 216.3 in May, a 6.5 per cent deflation in five months. I also pointed out that the June figure of 224.7 suggested that the Reserve was trying to reflate. It turns out I was right. The latest statistics show that the June figure has been revised upward to 232.5 and now stands at 232.6 for July. None of this is good or clever.
In my opinion the contraction had a significant effect on shares and manufacturing. Moreover, the decline in manufacturing cannot be reversed by the current reflation*. When dealing with the boom-bust-cycle Austrians stress that the first signs of an impending recession appear in the higher stages of production. This means manufacturing will be hit first. It is there that unemployment will begin to rise — even if aggregate unemployment is falling.
This is exactly what happened during the Clinton recession that politically bigoted 'journalists' like to blame on President Bush. Moreover, when aggregate unemployment finally began to rise consumption spending continued to increase and did so throughout the recession. According to our economic pundits, this is not supposed to happen. So they did what they always do when confronted by facts that confound their sacred fallacies: they ignore them.
Regardless of what our Panglossian economic commentators are saying: one-third of Australia is not in recession. What we are seeing is the first material signs of a genuine recession.
*It is always possible that in order to reverse the decline in manufacturing the Reserve might once again come down hard on the monetary accelerator, just as it did in 2000 when it sent M1 rocketing by 22 per cent from January to December. Whether it would succeed a second time is a matter for speculation. Even if the decline in manufacturing was reversed by such a desperate policy it would only be temporary because real forces would once again make themselves felt.
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 22 September 2008