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The Dow Jones Industrial Average ended at 8000.86, down 148.15 points,
or 1.82 per cent, off 0.95 per cent for the week and 8.84 per cent for the
month. It was the worst January in its 113-year history [emphasis
added] and the fifth consecutive month of declines. The 31 per cent decline
over the five months was the sharpest since the five months ended December
1937. (Annalena Lobb, January Was Dow’s Worst in 113 Years, Wall
Street Journal, 31 January 2009)
And things are not getting any better. On January 19 the Dow was
8205.30. On February 22 it was 7365.67, a fall of 10.23 per cent. It gets
worse. Factory production fell by 2.5 per cent in January and capacity
utilisation fell to 72 per cent, the lowest level since February 1983. Things
are getting grimmer and Obama and his pack of economic and cultural vandals
are going to make it worse.
It is self-evidently true that markets drop during recessions just as
production does. But there is something else going on here. The
straightforward link between recession and declining markets is not operating
as it should. If one tracks recent market trends it seems to me that they
correlate not with changes in the "real economy" but with the rise
and election of Obama. In short, the markets are not signalling that
recession is here: They are signalling that Obama's economic policy will
damage the US economy. Never ever forget that markets always look to the future.
And what the markets now see they don't like.
So what would the market have seen? Well they would know that Rep.
Paul Ryan (R-WI) Requested that the Congressional Budget Office estimate the
cost of making permanent 20 of the most 'acceptable' provisions of the
stimulus package. The result? $3.27 trillion over 10 years. This is truly
enormous and is bound to have serious economic consequences. (If anyone
believes that any of the Democrats' provisions are meant to be temporary then
they have been living in an alternative universe).
No amount of blustering by Obama and his media groupies can alter the
fact that the markets have publicly tried him for economic incompetence and
found him guilty. And he has been president for little more than a month. His
comments on spending, taxes, salaries and investment have rightly persuaded
markets that he is a complete economic ignoramus. It can be argued —
and rightly so — that this is par for the course when it comes to
American presidents. But Obama is different in that he has successfully
conveyed the impression that he either thinks economics is complete bunk or
that he doesn't give a damn about economic laws. Either way, his attitude
— unless he changes it — poses a grave threat to the economic
welfare of the United States.
Share prices represent anticipated future earnings. This is why they
fall in a recession and start rise once a recovery begins. By imposing on
Americans the biggest pork barrel in their history Obama has driven share
prices down lower than they would otherwise be. This is because markets
capitalise the effects of government economic policies. Let us take an
extreme example. What would happen if Obama implemented a 100 per cent
profits tax? Share prices would collapse. Although he has no intention of implementing
such a stupid proposal — or even contemplating it — his stimulus
lowered share prices because it is believed it will lower economic
performance and hence returns to business.
His pork barrel will require a massive amount of borrowing. This must
eventually have a negative effect on investment. Economists call this
"crowding out". Obama's spending proposals means that huge amounts
of resources are going to be directed to consumption. And what is consumed
cannot be invested. This means businesses trying to invest will be competing
against his massive spending binge thereby killing off marginal investments.
(In a situation like this we should expect interest rates to rise. However,
if business is sufficiently depressed interest rates could stay low, meaning
that the rate of interest does not always tell the whole story).
What this amounts to is that the markets believe that Obama's spending
splurge will stuff up the economy.
Aggravating this situation is the environment of uncertainty and fear
that Obama has recklessly created. He and his mates might think it is clever
politics. It is not. It is stupid and it is politically dangerous. Bill
Clinton is obviously aware of the political risks and that is why he warned
Obama to stop being negative about the economy. I doubt if he will listen.
Obama's defenders can argue that uncertainty is part of life for
businessmen. These people would be missing the point. Of course there is the
uncertainty of the market place. It is the role of the entrepreneur to successfully
deal with this. Then there is the uncertainty created by politicians.
Business men are not going to invest if they believe they will be punished
for their success. They are not going to invest if they believe some
blustering thug like Pelosi, Schumer or Barney Frank is going to start
telling them how to run their businesses.
When this kind of climate emerges — a climate that borders on
intimidation — the wisest thing for business to do is batten down the
hatches. And this is just what might be happening. The public thinks —
thanks to America's one-party media — that bank lending has dried up.
Not at all. During the last few months banks actually increased their
lending. We shouldn't be surprised at this. After all, Bernanke caused the
monetary base to explode, causing a massive build up in bank reserves.
The result is that since last September the money supply has been
expanding at an annual rate of about 20 per cent. But business is not the one
doing the borrowing. Most Americans are unaware of the fact that the nonbank
credit market is massive. This market is not lending and its usual clients
are not borrowing and there is nothing the thuggish Barney Frank, Chris Dodd,
Chuck Schumer or Nancy Pelosi can do about it, apart from making a bad situation
far, far worse.
This the political factor and only fools ignore it, which is why the
media are still misreading the economic signs.
The markets are aware of how fast the money supply is expanding. From
this they will have concluded that the US is heading for a nasty bout of
inflation. They know it defies common sense to think that the Fed can expand
the money supply at this rate without triggering inflation. They also know
how damaging inflation can be. Combine this with Obama's fear-mongering, his
criminal spending proposals and his contempt for sound economics and you find
yourself with a toxic cocktail.
No wonder there has been a near vertical rise in gold prices since
last November. Now what could have happened back then that would have triggered
a gold rush?
Gerard Jackson
Brookesnews.com
Gerard Jackson is Brookesnews Economics Editor
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