"Recovery" continues to elude economy
After rallying earlier in the week, stocks to
another fall on Thursday—despite robust earnings from big industrial
companies. Earnings or no earnings, it appears that first-quarter growth came
below expectations. Surprise, surprise.
Growth was expected at around 4%, to match the
3.8% of the last quarter of 2004. Turned out it was only 3.1%, a fall of about
18% in the rate of growth. What is most disturbing is that no one here in
America (at least no one in the press) seems to have clue about why this
happening. You would think, judging by the reports coming from news and business
websites, that movements in the economy, the ebb and flow of productions and
sales, were dark mysteries that baffle even the greatest intellects. Yet it is
so obvious what is going on. The economy cannot experience a full-fledged
recovery until it gets all the bad debt out of its
system.
What prevents business people
and economists from seeing this? Wishful thinking? Refusal to admit that they
are wrong? Or bad theories? I suspect it is largely the latter. Keynesianism may
be regarded as suspect by most business people and many economists, but the
intellectual effects of its doctrines, especially as applied to the relation of
the money supply and debt to the economy as a whole, still linger. Many people
still believe there is little or no connection between raising purchasing power
or liquidity on the one side, and the long-term health of the economy on the
other. Ironically, monetarism, which at least should insist on a relation
between these variables, has, through its overly mechanical model of the
economy, expressed in its notorious equation of exchange, MV=PT, merely obscured
what is going on. Because the price level has not risen dramatically, it is
assumed either that the money supply has not increased or that the Keynesians
are correct when they deny that any such relation exists at all between the M
and P. Here the older non-mathematical schools of economy, from the currency
school to the Austrians, show much greater insight, understanding, as they for
the most part do, that the issue revolves around credit, which, for all intents
and purposes, is money, and when expanded, leads to onerous debt levels and
other unpleasantries. The failure, then, to grasp what is going on stems from
the acceptance of poorly conceived theories, whether Keynesian or monetarist or
Walrasian neo-classical, by the economic profession.
Posted: Sun - May 1, 2005 at 12:47 AM