Thursday, February 18, 2016

More Discussion on the Nature of Recessions

Keith Snyder emails:

Re: Recession Austian Lite, etc
I continue to read the back and forth between one econ and another (let’s say you & Shiff and perhaps Shedlock) in regard whether or not we are, are about ot be or have been, in a recession with a bit of amusement and dismay. At times it seems as though the objective is to out do the other and be proven “right” by some gathering of charts, graphs, and statistics.

My understanding is a recession is defined by two consecutive quarters of negative growth. Since those numbers are generated by our fabulously accurate government stat machine AND one could argue that whatever “growth” that has occurred over the years is only a result of government spending (okay BORROWING and spending), did we ever actually exit any recession? There are a record number of people “out of the work force” which results in the seemingly perfect 5% unemployment rate. Great. Then why are wages static if not depressed (abd not over the last couple years but over a say 10-15 which I regard as a better indication)? Certainly one sector might be flying high while others are sinking. Does that matter when accounting for anything?

I can roll on a bunch of questions regarding this subject but I have one observation that I think puzzles me the most. Unless I am mistaken somewhere around 2007 the unemployment rate was 4.7%, the stock market was flying, the deficit year over year had decreased, and tax revenues were record highs even with the lower rates of the Bush cuts. That seemed to signal by your metric that there was no recession in effect or coming. Am I incorrect in seeing those exact circumstances today save for all the bad signals being on steroids and that in 2 years it could well be 2009 again except for far, far worse?

Isn’t the idea to be able to see what’s coming? If you are just trying to clarify that we are at a top of a boom or in a boom rather than currently in a recession then well maybe I agree. If true then it is the shittiest “boom” I’ve lived through and I do not see it having any legs. In fact I see the beginning of it starting to collapse.

Tell me where I am making my mistake here.

94 million people sitting on their asses? How can record non-participation in the labor force be anything but a problem?

My response:

1. I do not want to give the impression that  my comments with regard to Austrian-lites are aimed at Shedlock and  Schiff. Unless there is a quote at some other site I frequent, I rarely know what their views are on any given subject. The problem that I am thinking of with regard to Asutrian-lites is much broader as evidenced by the comments I see frequently here at EPJ.

2. Charts and graphs are data. It would be very difficult to discuss the current state of the economy without data. That said, there is a big difference when it comes to what data you look at and what theory is used to attempt to understand data.

3.The two consecutive quarters definition is a device of econometricians to put an exactness to recessions based strictly on data without theory. Austrian school business cycle theory is a theory which considers the down phase of the business cycle to occur when not enough money is  pumped by a central bank into the banking sector to prop up the previous misdirected capital heavy structure. It has nothing to do with a specific number of quarters of "negative growth,"--which by the way is not "negative growth"  but simply a period where the economy is moving away from manipulation and misdirection. It is not unlike a shrinking tumor, You can call a shrinking tumor "negative growth," but it is not a bad thing.

The econometricians definition also leads to the possibility of declaring something a recession becasue of two negative quarters that might be caused by something that has nothing to do with the business cycle.

4. Well when in 2007,  the unemployment rate was 4.7%, the stock market was flying, revenues were record highs... That wasn't a period of recession. You might recall that I did warn of the housing crisis, and in 2008 in real time I did warn of the immediately developing recession and financial crisis (SEE: The Fed Flunks)

I state there is no recession now because there isn't one. I am not making a forecast as to the future. When the Fed slows money supply growth for a sufficiently long period, we sure as hell will have another recession. My one objection has been to Austrian-lites who claim that the 25 basis point hike in rates would necessarily cause a recession and that the Fed is "trapped" and won't be able to raise rates. The Fed can raise rates and keep the distorted capital-consumption ratio going as long as the manipulated rates are below what non-manipulated rates would be, If there would be a tendency for non-manipulated rates to climb (and there are many reasons this could happen) it gives the Fed more room to raise rates without causing an immediate recession.

5. Tax cuts have nothing to do with the business cycle.

6. No, economics is not necessarily about forecasts. Economics can teach us how different actions, e.g. minimum wages, impact parts of the economy without making forecasts.  By observing some data (say money supply growth) we can have clues as to trends in the economy if we have correct theory, but this is far from giving us the ability to make extremely exact forecasts.

7. A for "the shittiest" boom, as I have pointed out. there are many things going on in the economy that have nothing to do with the boom-bust business cycle, from high minimum wage laws, to Obamacare to never ending new regulations. These can all cause stagnation in an economy, but have nothing to do with the boom-bust cycle. It is extremely important to understand the limits of business cycle theory.

8. Your implication is that the 94 million out of the workforce implies that markets don't clear. Do you really believe that markets don't clear? Unemployment specifically related to the downside of the business cycle is a theory of very short-term unemployment as people shift to jobs in the restructuring economy. It is not a theory about people not looking for jobs, and btw if you dig into the data there appears to be very legitimate non-business cycle reasons for all who are out of the workforce to be out of the workforce. Markets clear.



  1. "The Fed can raise rates and keep the distorted capital-consumption ratio going as long as the manipulated rates are below what non-manipulated rates would be"

    Is this just another way of explaining mal-investment caused by cheap money?

    1. It's away of saying that those, who say the Fed can't raise rates and will reverse the recent 25 basis point hike, have no idea what they are talking about.

  2. I am not an economist but how can one accept the government generated "unemployment" rate is 4.7% when in fact when one considers the labor participation rate, the REAL WORLD unemployment rate is 16 or 17% or more? Isnt that just wilful ignorance? IMHo, its exactly this type of gross prevarication on the part of the bureaucracy, professional pols and economists that has given us Trump and Sanders. Just saying!

    1. Congratulations, it doesn't appear you understood even one word I wrote. And, yup that's why we get Trump and Sanders.

  3. Shedlock, Schiff, and Wenzel are three of my favorites. Shedlock always said the hyperinflationists were wrong and he's been right so far. I don't see how we're in the "boom" phase. I think we're in the "print money to stave off collapse" phase.

  4. Robert, I would like you to please point to where in terms of publication, article/book/journal that states that the ABCT points to M2 money supply as key component or indicator of the BOOM phase in the economy and therefore by the opposite token, a decrease in the M2 as a indicator of the CRASH. I would love to see that!

    1. That's easy: The Fed Flunks P.53 "A Note on Money Markets and the Calculation of Money Supply"