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Norman-
Thanks for your practical and useful
comments.
Chas
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Norman
Winski
To: <A
href=""
title=realtraders@xxxxxxxxxxxxxxx>realtraders@xxxxxxxxxxxxxxx
Sent: Tuesday, July 08, 2003 9:28
AM
Subject: Re: [RT] GEN: VON MISES &
THE ECONOMY
Charles,
Higher inflation will lead to a
shrinkage in stock P.E. ratios. So, even if the economy recovers on this
basis, the stock market is likely to underperform under this scenario.
If you buy this scenario, the way to go is to buy commodities and sell out of
the money calls or be straight out short the stock market. Firms
that rely on cheap commodities for their profits, will get a
triple whammy as their profit margins get squeezed, they report
lower than expected earnings, and their stock PE shrinks from all factors
above.
Frankly, a disillusionment with the
current fixation on economic recovery is just a few days to a few weeks
away.. After the current mini-bust, we can think about a possible
recovery in 2004. I recommend reading Donald Bradley's
book,
"Stock Market Prediction".
Regards,
Norman
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Charles Meyer
To: <A
href=""
title=realtraders@xxxxxxxxxxxxxxx>REAL TRADERS
Sent: Tuesday, July 08, 2003 9:54
AM
Subject: [RT] GEN: VON MISES & THE
ECONOMY
----- 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
<FONT color=#002864
size=1>
<FONT
color=#002864>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]<FONT
size=2>
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 –
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.
<A href=""
name=_edn1 title="">[i] Larry Kudlow,
“Pour it On,” <FONT
size=2>www.townhall.com, June 17, 2003.
<A
href="">[Print
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