Yes it does and how.
It was reported on the radio this morning BIS Schrapnel has concluded next year will see a return to economic growth. Their reason is the Rudd Cabinet’s spending spree. As a firm supplying research to businesses, it really should leave the consumption fallacy to keynesians. The real force of their report however is that it is misleading and let’s those responsible for lousy monetary policies and what it causes, recession, off the hook and this is very damaging. It is damaging in another way too, it reinforces the mess the media economics commentariat have made of such grave matters.
The nonsense put out by the commentariat over years now actually betrays Australians. They have every right to expect that the commentariat will accurately analyse and comment and arm in this way arm Australians. Now why should Australians be armed? Because, the RBA and politicians and bureaucrats are answerable to Australians, even though these days they arrogantly pretend that they are not, as we see once again in the case of the CSIRO.
Furthermore, far from correcting the media abuse, Quadrant Magazine, Institute for Public Affairs and the Centre of Independent Studies have only poured out more of the same bilge. In fact, without Brookesnews, Australians can be forgiven for believing there is no such thing as thoroughly sound economic theory, analysis and commentary.
It is for such reasons one leads today’s posts with applying the blow torch to the BIS Schrapnel “economic analysis and forecast”. It is very bad, misleading, very damaging. The only types who can draw confort from it are the sods in the RBA and ignoramuses in Cabinet, principally Kevin Rudd and Wayne Swann. Let’s see.
Why BIS Schrapnel is wrong
Jackson of Brookesnews has demonstrated consumption can rise in a recession. There is nothing more dramatic an instance than consumption rose in the US during the appalling Great Depression. Put another way, are they seriously suggesting consumer spending funds investment? “Economic Growth” in the report boils down to vulgar keynesianism. Consider for example, how do they account for the contraction in production for now over 2 years?
It is important of course to check the radio report against BIS Shrapnel’s published forecast It is worse than the radio report conveyed, Long Term Forecasts 2009-2024, updated February 2010. They assert, “the economy experienced only a minimal setback to output”.
It’s a scary prospect what they consider a greater contraction in manufacturing. In contrast, a firm tracked developments in manufacutring demonstrating how serious the matter is, but that firm did not pretend to argue from within economic theory. It must be stressed the only sources warning of recession from within economic theory were Mr. Jackson and Dr. Shostak on Brookesnews, with Jackson banging down in 2004 his stunning prediction of when it would emerge. (1)
GDP is totally misleading
So why does BIS Schrapnel hold it is the indicator of growth?
GDP is the final value of all goods and services, which is why according to this measure consumption is 70% of spending. This is wrong.
The American Bureau of Statistics does measure total spending and it demonstrates the point, business spending (spending on capital goods) is 2/3 of activity, with consumption only 1/3 of total spending. What is staggering is that there are those who assert this is double accounting - try telling that to firms making and buying capital goods! As for the Australian Bureau of Statistics, it either holds the same crude error or dismisses the important detail of business spending as not worth bothering with and beneath them. (ABS, taken with much else it does not do, presents a good case for why it should be shut-down, which would be a relief to heavily burdened real taxpayers).
The nail in the coffin of BIS Schrapnel’s “ analysis and forecast”
“Falling back on the fallacy that consumption drives the economy, the authors assert that the contraction simply “reflects slower consumer demand”. If this were so then we should expect consumer demand to start falling first and continue to fall followed by a continuous fall in manufacturing output. But this clearly did not happen.
“… it should become apparent that if our economic commentators were right about falling consumption causing a manufacturing recession then not only must the sequence in which the stages of production contract follow a strict order (first consumption contracts, then the next stage of production and so on) but consumption must also be highly variable. That this is not so is made clear by the following chart showing consumption to be highly stable compared with business investment and housing expenditure…” [Economic commentators still clueless about the recession, Jackson, Brookesnews].
Indeed, it has not been happening over the last two years and is still not happening. Where does this leave the report? Totally shredded and buried, that’s where.
BIS Schrapnel attempts to uncover the reason for emergence of bottlenecks
And fails.
What do they mean by this statement:
“However, an upswing in business investment in 12 to 18 months time will result in a synchronisation of investment cycles, at the same time as employment and consumer spending are regaining momentum. This risks exciting a build up of inflationary pressures which the Bank will be required to head off.”
What they seem to mean is rising prices, which they define as inflation instead of what inflation is, monetary expansion by central banks. To speak of rising prices as inflation is more than problematic. Prices of consumer goods, certainly in free markets, fall due to efficient production.
The reverse can be a signal for entrepreneurs acting serve consumers by rectifying this. Needless to say, there are those who hold falling prices is deflation - imagine the consquences of policies to halt this. Oh, alright, let’s spell it out: it means impoverishing Australians. One policy that can do this is “anti-cartel laws”, which when “enforced” do break up efficient capital scale.
If they mean factor prices will rise, it could mean factors of production are being allocated to production in which they have higher marginal values of product. Now this can be problematic for firms in which factors have lower marginal values of product. Would BIS Schrapnel propose that Australians be made poorer by hampering intricate market processes to, what? Prevent this?
However, rising prices can also signal continuing damage caused by the lousy policies of the RBA that hits manufacturing right from the beginning of any recession it causes. In this case, the question becomes how great is the damage caused to manufacturing?
Before continuing, economists reading this item might conclude the above criticisms are inadequate. However, I am a layman in economics and stepping through what stands out as wrong with the report from this position. Continuing, therefore:
BIS Schrapnel on “bottlenecks” and “capacity constraints”
Only “bottles” itself up further under great intellectual “constraints”. What do they mean by this statement:
[A] “Over a longer horizon, the re-emergence of capacity constraints is expected to see the economy experience truncated growth cycles
[B] “interrupted by debt-induced downturns in consumer spending and dwelling construction.
[C] “Understanding the nature of the situation is critical to successful business planning, and will continue to be important as many of these problems are set to become perennial features of the Australian economy.”
B. Reasserts, of course, the consumption fallacy.
A. Is a misconception of causality. Genuine growth, which is capital accumulation, does not cause “bottlenecks” and “constraints”. Rotten monetary expansion by central banks do because it induces factor allocation away from sound investments into unsupported production of lower values for the period.
The real problem is, of course, the distortion of the market signal that is interest rates by central banks. This is crucial and for this reason a section on interest rates is given below and what is amusing is, a layman can write it so what is BIS Schrapnel doing?
What they assume is of course the business cycle, which is caused by monetary expansion. Unless central banks are cured of their lousy monetary policies, marked by a return to sound money, it is reasonable to bet central banks will continue to repeatedly engage in recession causing inflation in the future. How businesses are supposed to “plan” to cater for this danger is a mystery, since all actions are based on prices.
Put it another way, if it were possible to ‘plan” to counter it, what would this really mean? Secondly, given the long history of “business cycles”, it might be assumed entrepreneurs would by now be able to well do this. Why can’t they?
C. They are ‘perennial problems” is a rather pedestrian observation which analyses nothing. Next, they miss the crucial point, they can be eradicated by a return to sound money.
That is the calibre of BIS Shrapnel’s economic analysis and forecast? It’s useless and, consequently, leaves entrepreneurs in the dark as to what they face and, importantly, what might be done to rectify a lousy cause of economic havoc. They might carefully consider, for example:
Bottlenecks and monetary policies: more economic fallacies that damage economies
How central banks destabilized the world’ s economies
The Reserve’s reckless monetary policy caused the financial crisis
What of the “Stimulus driven growth”?
It distorts production again and wastes savings simply by politicians taking savings from Australians and throwing it down what they decide to consume. It is redistribution that adds nothing to investment. What is needed is savings accumulation matched by politicians and bureaucrats getting off the back capital and markets.
On idle capacity, something else is idle in rather many quarters
Economic reasoning.
“On the other hand, nineteenth century economists were very much aware of the existence of excess capacity. Unlike today’s economists they did not confuse cause with effect. They knew that the emergence of idle capacity and widespread unemployment was a symptom of depression not a cause just as they knew that deflation is the product of a monetary contraction.” [Is excess capacity dragging the world economy down?]
It’s more problematic, as Dr. Shostak demonstrates in, eg, Can an increase in spare capacity reduce the rate of inflation? The shocking conclusion that escaped BIS Schrapnel’s analysts is that idle capacity can, as it were, remain ‘idle’. Again, from Jackson:
“If consumer spending were to rapidly expand the result would be a highly unbalanced recovery that would keep the higher stages of production depressed resulting in another “rustbelt”.” [What is really happening to the US economy?]
Gentle Advice to BIS Schrapnel
At the kindest assessment, their report is worthless. It would not be too bad if it had been filed in the ‘foget it bin’ and not acted on. The public impact of its release makes it very damaging. It is totally misleading, and only gives comfort to those guilty of lousy, destructive economic policies.
The best thing BIS Shcrapnel could do is to ask Mr. Jackson and Dr. Shostak to write their economics analyses and forecasts. These two gentlemen do have a solid record of proven predictions worked up from within a solid framwork of theory. Best of all, BIS Schrapnel could ask these two gentlemen whether they could simply reproduce their articles entire, for they contain all that BIS Schrapnel and those it advises needs.
They won’t if they adopted this sound advice mislead the public and cause great damage. And, bonus! They won’t be embarrassed by a report written in economic fallacies and illiteracy that are highly embarrassing to reveal, and can to some modest extent be demolished by even a layman in economics.
Interest Rates
Interest rates are not ‘prices of money’. The price of sound money is given in its basis, a commodity such as gold. A valued good exchangeable for other goods, its properties rendering it suitable for use as money. Real money is generated out of production. It has been interesting to observe those shifting into not only gold but also oil as a defence against debasment of money by central banks.
Interest rates, as Jackson carefully explained in, The nature of interest rates and why it’s dangerous to manipulate them, are the prices of time, given in preferences for present goods and savings. Böhm-Bawerk killed false explanations of interest and founded the theory of interest - the time preference of theory.
“Keynes just could not grasp that interest exists because people value present goods more than future goods (time preference). And so interest determines the supply of and demand for capital goods.”
The rate of interest is established by:
“… the marginal efficiency of capital [expected rate of return] is the rate of interest. This is the natural rate of interest and a price on the time market.”
The rate of interest not only equates supply of capital with demand for it. It is a process that occurs with time, capital goods are allocated over time. Keynes’ account of interest and money totally debases both, reducing them to mere “monetary phenomenon” of “supply and demand for money”.
Credit expansion distorts the natural market rate of interest signal informing entrepreneurs in establishing capital allocation priorities, based on the marginal productivity of capital. Every entrepreneur in planning capital allocation, while not working from economic theory, does exactly this through financial analysis.
Thus, to make explicit, interest rates balances production and consumption with time.
Credit expansion delivers the paradox:
“…gives rise to the consumption of goods which is not preceded by production. It generates exactly the same results as the counterfeit money. For under these conditions the buyer of goods does not use them to support his own production. In fact he consumes and produces nothing. Consequently the buyer of the money/or seller of goods can never realize his money, for the means of sustenance to support these newly created money was never produced. Any attempt then, to lengthen the production structure by means of an expansion in the money stock must always fail.”
Consumption rises, though the country is in recession.
Footnote
(1) More Confirmation of Manufacturing is collapsing
[The “EL Consult Australia’s Demand Index” report of 2008. This item was written the day following its release in September 2008]
Yesterday, Mr. Montgomery of EL Consult Australia, interviewed on ABC radio on unemployment trends, related devastating evidence in EL Consult Australia’s Demand Index:
“Executive employment records its tenth fall in twelve months:
“Employment opportunities for executives have dropped further last month now showing a total of ten monthly falls over the last year.
“According to the EL Executive Demand Index this now equates to a total decline in available executive positions over the past year of over seventeen percent (17.34%).
“According to the EL Executive Demand Index this now equates to a total decline in available executive positions over the past year of over seventeen percent (17.34%).
“Produced since 1992, the EL Executive Demand Index has been found to be highly predictive of the direction of the general job market.”
Analysis of the EL Executive Demand Index and Report
What is crucial about the EL Executive Demand Index? Non-executive employment trends lags behind hiring of executives. The Index is an indicator of what will follow these trends in non executive hiring.
It is a relationship that I have observed and analysed anecdotally, because what is also important about any firm’s payroll planning is that it is important evidence of its production and investments plans for a period ahead. Now, what we have is a consulting firm, EL Consult Australia, that has developed an Index of this relationship.
The killer blow is where the nearly 20% fall in hiring of executives is, engineering. It is in the production of capital goods. Montgomery related that it is not simply a fall in hiring. Engineering executives are also not being replaced. In the radio interview, Mr. Montgomery himself stated the obvious conclusion: new investment in capital is not simply coming to a grinding halt.
There is a very grave contraction and reduction of capital in production of capital goods. It has been occurring for over a long period to date and is continuing. This means, as Montgomery also observed, the capacity to produce goods in the future is being extinguished.
Montgomery lifted out the above with the telling point:
Engineers are required for production of capital goods, the building of plant and their maintenance for production. This is not occurring. It follows, all other types of labour hired for these operations will be cut. Hiring will fall at a shockingly high rate. For the manufacturing states, Victoria and NSW, what is in train is devastating.
[What do we see since 2008? Rivers of blood in manufacturing. This, it goes without saying, also shreds the BIS Schrapnel report.]