Tuesday, February 24, 2009

Kellner: The Economy's Worst May Be Past

Irwin Kellner, chief economist for MarketWatch, seems to be the only economist that is viewing the current economy from the same perspective I am. I fully expect this recession to be over much sooner than most expect. Here's a bit of what Kellner says:

Although you wouldn't know it from the behavior of the stock market, the economic outlook is turning just a bit less gloomy.

Prosperity may not be just around the corner, but statistical evidence is mounting to suggest that the worst of this recession may soon be past.

And before you inundate me with email alleging that I am out of touch with the real world, let me say right at the top that I am not for one moment saying that the economy has stopped sliding. I am only suggesting that it appears to be contracting at a slower pace.

Clearly, this has nothing whatsoever to do with the stimulus package that the president signed into law last week. As a matter of fact, if the recession does end within the next few months, it will probably be in spite of this package, rather than because of it.

If you want a policy to credit, it's monetary policy. The combination of liquidity that the Federal Reserve has pumped into the economy, along with its special lending programs and capital injections into the banks, is largely responsible.

If anything, I may be a bit more positive than Kellner, as I believe the economy may be bottoming out right now and that the recession is just about over. I further concur that the "stimulus" package has nothing to do with the rebound and that it is completely monetary policy that is reversing the downtrend. I hasten to add that this will ultimately be highly inflationary and that this is not the way I would take the economy out of recession, since as Fed chairman I would forever freeze the quantity of money, and thus stop Federal Reserve money supply and interest rate manipulations. That said, in the world of realeconomik, we have a Fed manipulated "recovery" coming that will plant the seeds for severe inflation and a further distortion of the structure of production.

The rest of Kellner's column is worth reading as it details the data that suggests the worst is over. You can read it here.


  1. Hmm, but in this case, is the recession ending actually a "good" thing, or is it merely a state-change towards massive inflationary woes? And will "real" economic growth pick up, or will it just be growth in nominal figures?


  2. Do you see another recession or depression imminent after the USD hyperinflates?

  3. @hpx83

    It will be a distorted "recovery". The economic numbers will look better, But it will be just setting us up for rampant inflation or a further more severe downturn--at a later point.

  4. @No Axe

    It is always tough to say how the Fed will play things out. For example, I never expected Bernanke to tighten through out the sumer of '08.

    Ultimately, the Fed is in a big mess. If they continue to pump it will be very inflationary, if they stop it will cause a severe crash. We could end up in a year or two with stagflation. That is inflation, with the Fed printing but not enough to maintain the original manipulated structure of production.

  5. So, what you are saying is NOT that the economy has recovered, but that it will stutter on at a lower level, and then - due to continued idiocy of the key decision makers at the FED and the political level - it will start stalling again.

  6. @ James Rothfeld

    I think the "recovery" could possibly be rocket like to the upside, given the amount of money the Fed is pouring into the system.

    However, the inflation that will eventually hit will also be explosive. At that point the Fed has three choices:

    1. Continue out of control money printing--which will lead to hyper-inflation.

    2. Slow money printing just a bit--which will lead to stagflation.

    3. Slow money dramatically--which will make the current recession look like a cakewalk.

    My guess is that the most likely scenario is #2 miserable, ugly stagflation.

  7. When you say "rocket-like" to the upside - I am not sure what you are referring to. Stock prices? I wouldn't disagree, but that's just another way of saying that we'll see another massive bubble building up as a result of inflationary policies by the government and the FED. But, that's not economic recovery in the Austrian sense, right?

    As soon as bubblenomics is going to rule the day again, savings will again drop from the currently encouraging levels of increase, people will pile up more debt - and 'invest' more of their remaining savings into the stock market, only to have them wiped out even more by the unavoidable collapse.

    Public debt is increasing significantly, requiring a significant increase in either direct taxation or inflation, further reducing the income of people, and hence their ability to save, and consequently the capacity of the economy to truly recover.

    At this point, all I wonder about is whether gold is going to continue its bull-run over the medium-term (1 year+) or not...

    any thoughts?

  8. @ James Rothfeld

    The stock market is the most liquid market, so it is the market that reacts most quickly to monetary changes. However, this doesn't mean that other closely watched data such as GDP and employment numbers won't eventually follow in stride.

    An "Austrian prescribed" recovery would be a recovery where there is no money supply manipulation. There has never been such a thing since, at least, the birth of the Federal Reserve.

    My guess there is a lot of money printing ahead, which will mean a much higher gold price.

  9. Agreed. Which is why I continue to buy regularly. One ounce, two ounce, .... :)