<font face="Verdana" size="1" color="#002864">http://www.mises.org/fullstory.asp?control=1007</font>




<font face="Verdana" color="#002864" size="5"><strong>The Revenge of Reality</strong></font>




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<font size="4">by Frank&nbsp;Shostak</font>




<font size="2">[Posted July 24, 2002]</font>




<font size="2"> </font>




<font size="3">In this regard, history provides us with an important reminder.
The excess money M1 rate of growth accurately captured the October 1929 stock
market crash.</font>


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<font size="3">It seems that the current strength of economic indicators has
convinced most experts that there is no need to fear a recession and that the
stock market may be sending false alarms. But&nbsp;the issue of recessions as
such is not about an economy's strength, nor about people's psychology, nor
about the strength of the stock market. (As was shown above, the stock market
only evaluates&nbsp;the facts of reality.) It is about business
activities that sprang up on the back of loose monetary policies conducted by
the central bank in the latter half of the 1990s.</font>




<font size="3">Whenever a central bank loosens its monetary stance, it sets
in motion an economic boom by means of diverting real funding from
wealth-generating activities toward various false activities that a free,
unhampered market would not facilitate otherwise.&nbsp;When&nbsp;monetary
pumping slows, this also slows down or puts to an end the diversion of funding
toward false activities, and that, in turn, undermines their existence. In short,
the trigger to boom-bust cycles is central bank monetary policies.</font>




<font size="3">The severity of a recession is dictated by the intensity of
the previous boom that was brought about by monetary pumping and the associated
artificial lowering of interest rates--i.e., by the percentage of"false
activities" relative to total activities. The larger this percentage is,
the more severe the recession will be, since more liquidations will have take
place.</font>




<font size="3">Even if one were to accept that a boom is caused by loose
monetary policy, a bust requires a tighter monetary stance on the part of the
Fed. This is&nbsp;not the case at present, however. So on what grounds can one
argue that the economy may be heading into recession? If the pool of real
funding (real savings) is still growing while the Fed maintains its loose
interest-rate stance and the money rate of growth remains strong, then the
economy will not fall into a recession. In short, if the real pool of savings is
still growing, then the emergence of a recession requires a slowdown in the rate
of monetary growth.</font>




<font size="3">If, however, the real pool of funding is falling, then the
economy will plunge into a severe slump, regardless of the Fed's monetary stance.
Currently, due to a low CPI rate of growth and a shaky stock market, it is
highly unlikely that the Fed will alter its monetary stance. The only source of
a possible slowdown in the money rate of growth may come from commercial bank
lending. In this regard,&nbsp;year-on-year business loans fell by 5.7 percent in
the first week of July, after a fall of 6.3 percent at the end of June. This was
the 12^th&nbsp;consecutive monthly decline.</font>


<p align="center"><font size="3"> </font>




<font size="3">Also, the interest rate differential between the yield on the
10-year T-Bond and the yield on the&nbsp;three-month T-Bill narrowed to 2.7
percent, down from 3.1 percent at the end of June and 3.6 percent at the end of
March. This narrowing in the differential doesn't bode well for economic
activity in the months ahead (see chart).</font>


<p align="center"><font size="3"> </font>




<font size="3">Furthermore, as a rule, loose monetary policy gives rise to
overinvestment in the production of capital goods relative to the production of
consumer goods. The June production data show that the capital goods-to-consumer
goods ratio stood at 1.34 against a similar figure in May. This ratio would have
to fall to around 0.8 before a sustained economic recovery could emerge (see
chart).</font>


<p align="center"><font size="3"> </font>




<font size="3">Also, the home mortgages-to-GDP ratio climbed to 0.53 in Q1
from 0.52 in Q4 2001 and 0.49 in Q1 2001 (see chart).</font>


<p align="center"><font size="3">[img][/img] </font>




<font size="3">Conclusion</font>




<font size="3">Contrary to popular ways of understanding, the stock market
doesn't have causative powers so far as economic activity is concerned. The
prices of stocks only reflect&nbsp;individuals' assessments regarding the
facts of reality. As a result of central bank monetary pumping, these
assessments tend to be erroneous. But once the money rate of growth starts to
fall, individuals can see much more clearly what the actual facts of reality are
and can scale down previously distorted evaluations.&nbsp;</font>




<font size="3">While individuals can change their evaluations of the facts,
they cannot alter the actual facts themselves--i.e., the facts that influence
the future course of events. Our analysis continues to indicate that the pace of
economic activity is likely to decelerate sharply by the year's end--if not
earlier.&nbsp;</font>




<font size="3">Also, a flattening in the yield curve points to a likely
softening in economic activity in the months ahead. As a rule, loose monetary
policy gives rise to overinvestment in the production of capital goods relative
to the production of consumer goods, and as we have shown, the ratio of capital
goods to consumer goods still remains at lofty levels. This, in turn, precludes
any meaningful economic recovery soon.&nbsp;</font>




<font size="3">There is a high likelihood that the real pool of savings--the
driving force of the economy--is in trouble. Without an adequate buildup in the
real pool of savings, no sustainable economic recovery is possible. In short, if
real savings are in trouble, then regardless of what the Fed does, economic
activity will decline.</font>


<hr align="left" width="33%" SIZE="1">


<font size="2">Frank Shostak is an adjunct scholar of the Mises Institute and
a frequent contributor to Mises.org. Send him&nbsp;<font color="#000080" size="2">MAIL</font>&nbsp;and
see his outstanding Mises.org&nbsp;<font color="#3571ca" size="2">Articles
Archive</font>. You can follow the financial markets at Mises.org
Financials.&nbsp;Dr. Shostak expresses gratitude to Michael Ryan for helpful
comments during the writing of this article.


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Leider hat der Herr auch das Hirn, das er verdient. Denn wer schreibt denn so was:

"There is a high likelihood that the real pool of savings--the
driving force of the economy--is in trouble. Without an adequate buildup in the
real pool of savings, no sustainable economic recovery is possible. In short, if
real savings are in trouble, then regardless of what the Fed does, economic
activity will decline."

The (!) real (!) pool (!) of savings (!) - der arme Ludwig dreht sich im Grabe um.

Die Mises-Leutchen schänden das Andenken an den Meister.

Es ist das inzwischen offenbar weltweit grassierende Elend: Zu behaupten, es gebe so etwas wie"Savings" wirklich (they're real, ain't they?)

Hat der Pool vier Ecken? Ist er rund? Oval wäre auch nicht übel.

ICH kann in meinen real pool of money plantschen. Pool-Farbe lila (CHF, €).

Den schönen Pool als"Savings" an die Bank abtreten? Lachhaft. Die müsste mir schon die ganze Bahnhofstrasse plus die Zeil plus die City plus Manhattan dagegen abtreten. Eventuell überleg ich's mir dann.

Der Unfug wird nicht dadurch gefugt, dass er vom Mises Institute kommt.

Holy cow!

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>"There is a high likelihood that the real pool of savings--the
> driving force of the economy--is in trouble. Without an adequate buildup in the
> real pool of savings, no sustainable economic recovery is possible. In short, if
> real savings are in trouble, then regardless of what the Fed does, economic
> activity will decline."
>The (!) real (!) pool (!) of savings (!) - der arme Ludwig dreht sich im Grabe um.
>Die Mises-Leutchen schänden das Andenken an den Meister.
>Es ist das inzwischen offenbar weltweit grassierende Elend: Zu behaupten, es gebe so etwas wie"Savings" wirklich (they're real, ain't they?)
>Hat der Pool vier Ecken? Ist er rund? Oval wäre auch nicht übel.
>ICH kann in meinen real pool of money plantschen. Pool-Farbe lila (CHF, €).
>Den schönen Pool als"Savings" an die Bank abtreten? Lachhaft. Die müsste mir schon die ganze Bahnhofstrasse plus die Zeil plus die City plus Manhattan dagegen abtreten. Eventuell überleg ich's mir dann.
>Der Unfug wird nicht dadurch gefugt, dass er vom Mises Institute kommt.
>Holy cow!

Da hätte ich wohl doch besser alles lesen sollen - sorry.#
Bisher habe ich drauf vertraut, dass auch Misis drin ist, wo Mises drauf steht...

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(Summe aller Beleihungsgrenzen) minus (Summe aller Pfandbriefvolumen)

Oder nicht?

Jedenfalls würde ich"real savings" nicht in Geld messen, da gar nicht alle Wirtschaftssubjekte real in Geld sparen können. Irgendein Geldmengenaggregat hatte der Autor wohl auch gar nicht im Sinn. Die"real savings" müssen daher mit den noch nicht ausgenutzten Kreditlinien zu tun haben,

mutmasst Ecki1

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(Summe aller Beleihungsgrenzen) minus (Summe aller Pfandbriefvolumen)

Oder nicht?

Jedenfalls würde ich"real savings" nicht in Geld messen, da gar nicht alle Wirtschaftssubjekte real in Geld sparen können. Irgendein Geldmengenaggregat hatte der Autor wohl auch gar nicht im Sinn. Die"real savings" müssen daher mit den noch nicht ausgenutzten Kreditlinien zu tun haben,

mutmasst Ecki1

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>(Summe aller Beleihungsgrenzen) minus (Summe aller Pfandbriefvolumen)
>Oder nicht?

Nein, Ecki1, leider. Text lautet:

"There is a high likelihood that the real pool of savings--the driving force of the economy--is in trouble."

Kreditlinien können kein"Driver" sein. Mit Linien kann man nichts"driven". Wie denn?

Was"driven" kann, können nur gewährte Kredite sein, die dann etwas"driven" (Investitionsgüter nachfragen, worauf der Herr Autor auch abhebt).

Er denkt doch so: Irgendwie kann jemand was auf die"Seite" legen. Er füllt damit den Pool. Wenn der Pool schön"voll" ist, schöpfen aus dem Pool dann jene, die die economy mit DEM aus dem Pool GESCHÃ-PFTEN"driven".

Dieses Denken ist komplett falsch.

>Jedenfalls würde ich"real savings" nicht in Geld messen, da gar nicht alle Wirtschaftssubjekte real in Geld sparen können.

Nicht in Geld gemessene"Savings" sind nicht vorstellbar. Nähmen wir an, es wären"real things", dann würden die doch schon beim"Saver" liegen (sein neuer Kühlschrank zum Beispiel). Wie Kühlschränke an jemand verleihen, der nicht den"real gesaften" Kühlschrank haben, sondern einen Computer kaufen will?

>Irgendein Geldmengenaggregat hatte der Autor wohl auch gar nicht im Sinn. Die"real savings" müssen daher mit den noch nicht ausgenutzten Kreditlinien zu tun haben,
>mutmasst Ecki1

Zwischen Kreditlinie und"Driven" mit Hilfe eines vergebenen Kredits besteht ein im wahrsten Sinn des Wortes realer Unterschied,

glaube ich zu wissen.

Gruß!


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