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The economy is in recession and it's getting worse
Gerard Jackson
That our economic commentariat is still wondering whether Australia will "go into recession" is proof positive just how clueless they are. The recession is here and it's going to get worse. For month after month manufacturing has been contracting and shedding labour. Manufacturing is a leading indicating yet economic commentators still refer to GDP and consumer spending, oblivious to the statistical fact that consumer spending is invariably stable and that business spending is the great variable.
Because GDP is based on the final price of products it ignores spending on intermediate goods. The result is that GDP can be positive — as it is now — while the economy sinks into recession, which is exactly what has happened. So the focus on GDP figures is completely misleading. The government's economic advisors are every bit as bad which is why the Treasurer Wayne Swan denied that Australia is in recession. Any member of the Austrian school of economics could have told him that recession had already arrived.
I have continually stated that manufacturing is the leading indicator. Therefore we should expect the manufacturing states to start declining first. The chart below clearly shows this to be the case1.
Now and then commentators refer to the Reserve's monetary policy without giving the slightest indication that they have any understanding of monetary theory. That the same commentators never mention monetary aggregates does — in my opinion — prove my contention. As I have pointed out in other articles M12 peaked in December 2007 and then contracted. And yet not a single one of our economic commentators apparently saw any economic significance in this fact.
It should have been obviously that a sudden halt to monetary expansion would lead to an economic slowdown starting with manufacturing. Since then the Reserve has tried to reflate. From last June to November M1 expanded by 3.3 per cent, bank deposits by 2.1 per cent and currency by 8.3 per cent. Beginning in September, as shown by the chart below, the Reserve's holdings of assets rapidly increased, indicating a determined effort to accelerate monetary expansion
These facts indicate that the recession has a long way to go and Employment Minister Julia Gillard is right to warn Australians that unemployment will keep on rising throughout this year. Clearly, this is not the time (as if there is ever one) to start arbitrarily raising labour costs. But this is precisely what the Labor Government's Fair Work Bill will do, though I myself can seeing nothing fair in pricing people out of work.
In Wage hikes a major recession risk Peter Jonson (aka Henry Thornton) argued that "massive wage hikes now would turn a slowdown into a full-blown recession in no time flat." Very true but also very misleading in that wage hikes are not necessary for the creation of "a full-blown recession". All that is needed is the Reserves' current monetary policy. Jonson3 is making it very clear that he is as clueless on these matters as are Treasury and Reserve officials.
Moreover, Jonson's statement is dangerous in the sense that the emergence of recession in the absence of wage hikes could be used as proof by the ACTU that wage rates are not linked to rising unemployment. John Roskam, Executive Director of the IPA and aspiring Liberal Party politician, took exactly the same line (Wage rises will cost jobs) and in doing so made it plain that he is as clueless as Jonson4.
The country is in recession and not a single member of the right's little club can tell us why. All they can do is warn about wage hikes as if they and recessions are inextricably linked.
1. Those of you who are somewhat familiar with Austrian capital theory might think that the primary states should have declined first because their mining activities are at the highest stage of the production structure. This would miss the point that a country's capital structure need not be entirely within its own geographical boundaries. Much of this highest stage is serving the Chinese economy and this is why these states economies were not the first to contract.
2. Australia's M1 is equal to the Austrian definition of the money supply.
3 The Bush-hating Mr Jonson is the same genius who thought it would be a great idea to put Nancy Pelosi in charge of the US economy. He also referred readers to an article, that he evidently approved of, in The Economist that was a vicious and thoroughly dishonest attack on President Bush. Compare this venomous rant with Thomas Sowell's considered view, one free of bile and bigoted statements. What a telling reflection on Jonson.
4.Jonson and Roskam are making a big song and dance about the dangers of 'excessive wages' but this pair could not be found when the H. R. Nicholls Society was writing the most appalling nonsense in favour of labour market deregulation. Now Why was that, Messrs Jonson and Roskam?
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 19 January 2009
Source: Reserve Bank of Australia