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----- Original Message ----- 
From: <A 
href="" title=article@xxxxxxxxx>Mises Daily Article 

To: <A href="" 
title=article@xxxxxxxxxxxxxxxxx>Mises Daily Article 
Sent: Tuesday, July 08, 2003 8:12 AM
Subject: Recovery or Boomlet?

<A 
href="">http://www.mises.org/fullstory.asp?control=1265
 
Recovery 
or Boomlet? 

by William L. Anderson
[Posted July 8, 2003]
<IMG align=right border=0 
src="">In recent weeks, the stock 
market has staged a mild rally. Though the most recent unemployment numbers are 
well over six percent, Republicans, as well as a few market analysts, are 
claiming that the long overdue economic recovery has arrived. While I wish that 
were the case, the facts demonstrate otherwise; this is not a recovery, but 
simply an unsustainable mini-boom that makes the long-term economic picture even 
worse.
That is not how we hear things from the government, not 
surprisingly. Administration officials, hopeful that a strong economy next year 
will boost George W. Bush's election chances, have been trumpeting the end to 
the longest economic downturn in this country since the Great Depression of 70 
years ago. His media supporters, such as <A 
href=""><FONT 
size=2>Larry Kudlow, and <A 
href=""><FONT 
size=2>Neil Cavuto also agree and have called for 
the Federal Reserve System literally to open the money spigots. According to 
Kudlow:

  No matter what the investment -- be it corporate profits paid 
  out as dividends, or capital gains, or new capital-goods orders and shipments 
  by large and small businesses, or new high-risk venture start-ups -- higher 
  after-tax investor-class returns will place new liquidity demands on the 
  financial system. The Fed must accommodate them. 
  A shock-and-awe liquidity-expansion policy from the Fed will 
  counter our underperforming economic recovery, offset the forces of worldwide 
  deflation and recession, and stomp out deflation fears at home. An aggressive 
  liquidity stance will also accommodate rising transaction demands following 
  the latest Bush tax cut. And it will even counter the negative effects of any 
  potential breakdowns in the investment portfolios of Freddie Mac and Fannie 
  Mae, the troubled loan institutions.<A 
  href="" name=_ednref1 
  title="">[i] 
Of course, "liquidity expansion" in Kudlow-speak is nothing more 
than a burst of inflation, and the Federal Reserve has followed suit, lowering 
its discount rate to something not much above zero. (Kudlow and the other 
inflationists wanted the Fed to cut its rates by more than what was actually 
done, but it would seem that the next logical step for the Fed would be simply 
to dump money from helicopters or hand it to passers by at the street 
corners.)
Kudlow is hardly the only offender here, and while his "shock 
and awe" analogies are over the top, the truth is that economists and pundits, 
both left and right, have been calling for basically the same solution: 
inflation, and more inflation. This not only reflects the total misunderstanding 
of the current economic situation by both the economic mainstream and political 
pundits (Well, what would we expect?), but also demonstrates ignorance both of 
business cycles and of money itself. 
As Murray Rothbard and Ludwig von Mises tirelessly pointed out, 
an economic recovery occurs when consumers and investors begin to direct 
investment into sustainable lines of production. A recovery can only happen 
after the malinvestments that accumulated during the previous boom 
are substantially liquidated. Of course, <A 
href=""><FONT 
size=2>a liquidation must be permitted to occur in 
the first place, something that the Bush Administration and the Fed have fought 
at every turn, which <A 
href=""><FONT 
size=2>I note in previous articles.
Given that the government has done everything in its power to 
prevent the full liquidation of malinvested capital, and given that the Bush 
Administration and Congress have substantially increased the burden of 
government that must be borne by individuals, it seems clear that the U.S. 
economy is not poised for a recovery. Indeed, from airlines to manufacturing, 
the liquidation has a long way to go before the economic downturn hits 
bottom.
Thus, any upturn whether in economic statistics or in the stock 
market is almost certain to follow the patterns not of economic recovery but 
rather a mini-boom. I say "mini" because there is no way that this particular 
boom, as pathetic as it is, can be sustained for a long time, unlike the boom of 
the late 1990s. In fact, the Fed's recent actions can only force more 
malinvestments which themselves will have to be liquidated in the 
future.
There is historical precedence for a mini-boom. During the early 
days of the Franklin D. Roosevelt Administration, which were marked by the 
passage of legislation like the <A 
href="">National 
Industrial Recovery Act and the Agricultural 
Adjustment Act, the economy also experienced a small boom. In fact, the rate of 
unemployment, which stood at about 25 percent when FDR took office in 1933, fell 
to about 15 percent two years later.
The Roosevelt Administration was not the only active entity in 
Washington. The Federal Reserve System had lowered its discount rates to 
near-zero and the government was trying to force up the inflation rate, using 
tactics like destroying the gold standard and confiscating all gold money that 
individuals possessed. 
The strategy worked, sort of. As noted earlier, some people were 
put back to work (although thousands also found employment doing 
government-sponsored tasks), but the boom was only temporary. Government was 
growing quickly, along with the tax burden, the regulatory state was taking 
form, and FDR openly savaged businessmen and his comments, as <A 
href=""><FONT 
size=2>Robert Higgs has written, had a dampening 
effect upon the private investment needed to bring real recovery.
Roosevelt's mini-boom came to a screeching halt by late 1937, as 
the economy fell into the trenches again, the unemployment rate zooming to about 
20 percent. To put it another way, FDR achieved a first: he helped to create a 
depression within a depression.
One hopes that the Bush Administration does not seek to emulate 
FDR, although, like Roosevelt, this administration has forced through huge 
increases in government expenditures and with the recent Medicare bill, has 
dumped a gargantuan unfunded liability upon U.S. taxpayers. (At least FDR did 
not send the armed forces all over the world &#8211; at least during the 1930s. In the 
1940s he helped launch the biggest and most destructive war in world 
history.)
As we hear the political pundits and mainstream economists 
debate the current economic climate, perhaps terms like "shock and awe" truly 
are appropriate. One is shocked at the economic ignorance that is demonstrated 
time and again by the "experts," who are still stuck in a Keynesian time warp 
that while discredited, still seems to rule the intellectual roost. And one is 
in awe of the truly bad policy prescriptions that emanate from the White House, 
Congress, and the mainstream press.
Yes, 2004 is an election year, and the Bush Administration is 
desperate to make voters believe that the long-awaited recovery finally is here. 
Furthermore, there is no shortfall of Republican pundits trying to publicly make 
the case that the economic policies of Bush II really are better than the policy 
disasters of Bush I.
However, there simply is no way that the policies of the Fed and 
the Bush Administration are going to give us an economic recovery. As Mises and 
Rothbard wrote time and again, an economic recovery within a free market economy 
occurs as a matter of course once the government steps out of the 
way. That clearly has not happened for the past three years, and now 
that Bush is desperate to manipulate the economy in order to pave the way for 
re-election, it is not politically possible for this president and his 
underlings to take the needed hands-off approach to the economy.
Instead, we will be given the news that the wise policies of the 
Fed and the meager and back loaded tax cuts that the Republicans have given us 
will be enough to bring recovery. However, pay no attention to the man behind 
the curtain (whether it be George W. Bush or Alan Greenspan), for he does not 
know what he is doing. We are not in recovery; it is nothing more than a little 
boom that ultimately will turn into a bigger bust.




William Anderson, an adjunct scholar of the Mises Institute, 
teaches economics at Frostburg State University. Send him <A 
href=""><FONT color=#000080 
size=2>MAIL. See his Mises.org <A 
href="" 
target=_blank>Articles Archive<FONT 
size=2>. 

<A href="" name=_edn1 
title="">[i] Larry Kudlow, &#8220;Pour it On,&#8221; 
<FONT 
size=2>www.townhall.com, June 17, 2003.

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