If the Economy is Recovering Maybe the Feds Will Reduce their Stimulus

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Well, it’s a new world, after all…

Maybe we were wrong. Maybe the mainstream economists are right.

You know, up to now all they’ve been good at was explaining why the forecasts they made in the past didn’t work out. But maybe they’re right, after all. Maybe up IS down. Maybe better IS worse. Maybe you can squander trillions of dollars and yet have more!

It is all too much for us. Our head aches thinking about it. But there it is, right there on the front page of the weekend news:

“US growth accelerates…” announces The International Herald Tribune.

Right there in black and white. And it must be true. The newspapers wouldn’t lie, would they? And, the economists who fiddle the numbers for the US government wouldn’t hit a false note on purpose, would they?

Nah, that never happens. But how is it possible for the economy to go right back to Bubble Era growth rates after taking only a couple percentage points off of US GDP? We all know it was a credit bubble, right? We all know it couldn’t last, right? We all know, too, that the fuel for that growth – bubbly gases coming out of the banks and the real estate sectors – has disappeared. So where is this growth coming from?

On Friday morning, the stock market got excited about the stronger- than-forecast growth numbers, along with news that Ben Bernanke was around for another four years. The Dow rose more than 100 points. But by the afternoon, investors were asking questions again.

If the economy really is recovering, maybe the feds will reduce their stimulus…

If the economy really is heating up, mightn’t it melt all that money and credit frozen by the depression? Doesn’t that increase the odds of inflation – and higher rates from the Fed…?

If the feds tighten, won’t the US economy fall back into the second part of the W-shaped recession…just like Paul Krugman says?

By the close of business the Dow had lost 53 points, which makes us think the final push to the bottom has begun. Even good news can’t stop it. When 5.7% growth – after the worst slump since the ’30s – doesn’t get investors excited, there’s something wrong.

Wait a minute…

“The biggest lift to economic activity,” continues The New York Times, “came because businesses ran down their stocks of unsold goods at a much slower rate than earlier in the year…”

In other words, the ‘growth’ came because businesses restocked their shelves at a faster rate. So, there’s more on the shelves to buy. Hmmm. Wonder if it will sell…?

The only way you could have real, sustained growth is with a recovery in employment – and earnings. Looking at it broadly, Americans were earning a certain amount of money in 2007. Then, they discovered that much of what they were doing was not worth doing. They were building houses for people who couldn’t afford them, for example. And they were spending money that was “taken out” of their houses. At the peak, a substantial part of US GDP – and virtually ALL the growth – came from these sources.

That money has disappeared. People aren’t getting paid to build houses that no one will buy anymore. And shops aren’t selling to people who pay with money from mortgage equity extraction. They’ve already extracted so much that there’s nothing left. Or less than nothing. Many homeowners have net negative equity.

What does this mean? It means that people are earning less, borrowing less, and spending less. What else could it mean? A substantial part of the economy, 2003-2007, was fraudulent – in which excessive consumer credit masqueraded as real purchasing power. That part of the economy has gone away. So should that portion of the GDP. In theory, GDP should go down and stay down until new industries, businesses, and jobs are found.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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