-- Posted Friday, 18 January 2008 | Digg This Article | Source: GoldSeek.com

by Howard S. Katz

Oh, yesterday upon the stair

I met a recession that wasn’t there.

It wasn’t there again today.

Oh how I wish it would go away.

          Our society has just been the victim of an astonishingly successful public relations campaign, a campaign designed to convince the public that we are on the verge of a recession.  The purpose of this campaign is to persuade the Federal Reserve to ease credit and print money (and the people behind it will undoubtedly prove to have financial interests in favor of such a policy).

          An old Chinese proverb says, “Fool me once, shame on you.  Fool me twice, shame on me.”  Evidently, a great many people today are in need of this advice.  Because the last “recession” officially recorded in this country, the “recession” of 2001, never happened.

          This is not just my opinion.  This is the opinion of those who invented recessions.  In the spirit of appearing scientific, one of these people (Arthur Burns) defined a recession as 2 consecutive quarters decline in real GDP.  If we go to the web site of the Bureau of Economic Analysis, then GDP for 2000-2001 was:

                             real

                             GDP

                             % change

          As you can see, we skirted the definition but never made it.  The “recession” of 2001 never happened.  The reason for this is that economic indicators are frequently revised.  People who rush to conclusions about what these mean usually come up with egg on their face.

          But it is not only the current recession and the recession of ’01 which don’t exist.  The larger problem is that recessions (and their big brother, depressions) in general do not exist.  If you are smart enough to be a gold bug, then you ought to understand this.

          Recessions and depressions are periods when the entire country (meaning the large majority of the people in it) gets poor.  In a recession, they only get a little poor.  In a depression, they get a lot poor.  The Burns definition of 2 consecutive quarters decline in real GDP only works if GDP actually does as it claims and measures the wealth of the country (which is not the case).

          First, let us examine some facts.  Let us look at the great daddy of all such phenomena, the “depression” of the early 1930s.  During this period, you might be interested to learn, the average American ate more meat.  Per capita annual meat consumption went from 129 pounds in 1930 to 143.9 pounds in 1934.  (The source for this is Historical Statistics of the United States, Colonial Times to 1970, published by the Department of Commerce, series G-881, p. 330.)  There were no big health issues at the time; people ate meat because they were richer.  Indeed, eating meat had been a campaign issue in 1928 (as Republicans claimed that they had put “a chicken in every pot”).  This fact, that (the vast majority of the American) people ate more meat in 1934 than they had eaten in 1930, is the first clue that most of what you have been taught is a lie.

          Another important piece of information concerns butter and margarine.  Again at the time no one was aware of a health issue.  Margarine was cheap; butter tasted better.  Poor people ate margarine; middle income and rich people ate butter.  So what happened in the “depression?”

From 1929 to 1934, annual consumption of butter by Americans rose by 1 pound per person.  During the same period annual consumption of margarine fell by 0.8 pounds.  (Same source; series G-888 and G-889, p. 330.)  Butter is very interesting as Historical Statistics has data going back to 1869.  Shortly after the Civil War there was a massive “depression” almost as severe as that of the 1930s.  (These are called secondary post-war “depressions” because they characteristically occur after major wars.)  And yet, during this “depression,” like that of the 1930s, per capita butter consumption rose.  What is the all-time peak in butter consumption in American history?  It is 1896, right in the middle of the silver campaign “depression.”  Indeed, Americans ate more butter per person in 1896 than they eat butter plus margarine today.  Conversely, both World War I and World War II saw a sharp drop in butter consumption in what modern economists will tell you was a boom.  Strange, is it not?  When the economists tell us that we are poor, we act as though we are rich.  And when they tell us we are rich, we act poor.

          A final statistic should wrap up the case.  Poor people are not likely to give to charity.  What happened to American charitable giving during the great “depression?”  It rose from 0.15% in 1929 to 0.20% in 1932.  (Ibid., G-458, p. 319.)  By way of comparison, giving in 1970 was 0.14%.

          If you go back and actually read Adam Smith, the founder of the science of economics, you will find that he does not talk about recessions or periods of economic growth.  Quite the opposite, he talks about cheap years and dear years.  What is a cheap year?  It is a year when the crop is ample, people have plenty to eat and prices are low, a dear year being the opposite.  Adam Smith teaches that a cheap year is good.

          However, modern economists teach that a cheap year is bad.  Early in this century the Wall Street Journal was trying to scare people with the threat of “deflation.”  Adam Smith teaches that declining prices naturally go along with prosperity.  Modern economists teach that declining prices naturally go along with poverty.

          Anyone who studies economics well enough to get a feel for the subject realizes that there is a natural harmony in the field, and to communicate this natural harmony was Adam Smith’s most important point.  Over and over we find rational man acting in his economic self interest to satisfy his needs.  Then there is a disruption from outside.  Perhaps it is a hurricane, perhaps a drought, perhaps war.  But economic man acts to moderate the disruption and return things to a more normal state.

          My favorite example of this is a medieval city which is put under blockade by an enemy during war.  The laws of economics address the shortage of food by causing the price of food to rise.  If the city fathers have the knowledge of economics to do nothing, then the high price of food will induce outside merchants to smuggle food into the city and also cause the people of the city to economize.  The blockade is broken, and the enemy’s attempt to starve the people fails.  But if the city fathers are ignorant of economics, they will become indignant that food stores are taking advantage of the general distress to raise prices.  They will pass a strict price control law.  No smugglers will appear.  And the city will starve.

          Now, if this great harmony can be found throughout human economic history, how could such an event as a recession occur?  A free economy is like one of those round-bottom dolls.  Which ever way they are knocked, they bounce right back.  That is, a free economy is extremely stable.  How could a destabilizing event, like a recession, come out of nowhere?

          The answer to this is that what are conventionally called recessions are in fact credit contractions.  In the early days, as people were groping their way to the idea of a free market, an important mistake was made.  Bankers were given the special privilege to create money out of nothing.  (That is, commercial banks were given this privilege.  The original savings banks paid interest to depositors and did not create money.)

          When the banker creates money (in the process of making a loan), he makes a profit. He lowers interest rates to make more loans.  His loan customers profit.  The quantity of loans (credit) in the society expands.  This is a money and credit expansion.  Of course, the vast majority of the people in the society have to pay higher prices.

          This money/credit expansion is called economic growth by most of today’s economists.  This is the first lie.  It is growth only for the banker, his loan customers and a few associated special interests.  About 95% of the people are getting poorer so that 5% can get richer.

          Since the privilege to create money is not a free-market institution, it does not follow the above rule of stability.  In the old days, bank runs would force the banks to start a cycle of credit contraction, and this was called a depression.  During these “depressions” wealth was flowing from the banks and their associated vested interests back to the people.

          The central bank was created to assist the commercial banks in their expansion of money and credit.  However, since the central bank is a political institution, it has to contract credit when the public protest against “inflation” gets too strong.  This is the main source of instability in the system at the present time.

          One of the dramatic things about the credit expansion of the early years of the century was that it focused on real estate.  Housing speculators bought houses with NINJA loans (No Income, No Job, no Assets), and this buying drove housing prices so high that the average American can no longer afford the average house.  (Between 1997 and 2007, according to the Case Shiller index, the median home price in the U.S. multiplied by 2.8 in nominal terms and almost doubled in real terms.  In 1997, the average working man had to work for 4.5 years to buy the average house.  In 2007, he had to work 7.3 years to buy the average house.  The intent of the housing speculators was to flip (sell for a quick profit) their houses and thus rake in a quick hundred thousand dollars with minimal effort.

          Home ownership was so important to Americans that it has traditionally been called the American dream.  America was the one country where the majority of the people could afford to own their own homes.  This is no longer true.

          Today the newspapers are full of the sub-prime crisis.  The crisis (in their eyes) consists of the fact that the banks might lose their money.  But this is not a crisis.  The banks deserve to lose.  They made bad loans.  The housing speculators had bad judgement.  They deserve to lose.  The crisis is the fact that houses have gone up so high in price that the average American cannot afford the average home.  To solve the crisis, it is necessary that housing prices come down. 

.         A start was made on solving this problem this past year when housing prices started to decline.  Suddenly, the $500,000 house on which the bank had made the NINJA loan was only worth $400,000.  The housing speculator solved his problem by defaulting on his mortgage.  The bank was stuck with a $500,000 loan and a $400,000 house.

          So what is being done?  Ben Bernanke, the Federal Reserve and the banker economists are trying to lower interest rates back to their lows of 2003 (the peak of the problem).  Their intent is that housing prices go back up so that the banks and the housing speculators are bailed out.  To accomplish his goal, Bernanke is printing large amounts of money.  This will cause average prices to rise and make the average American even poorer.  It is the intent of Bernanke and the supporters of the existing system to make the average American pay for the losses incurred by the banks.

          But wait a minute.  Even banker economics does not justify this.  Crude oil recently traded at $100/bbl.  Gold is above $900.  The CRB index (I refuse to call it CCI) is within a stone’s throw of 500.  The 12-month (Dec.. ’06 to Dec. ’07) Consumer Price Index is up by 4.1%.  This is the highest in 17 years.

          Furthermore, the U.S. dollar is in free fall.  It has dropped from 120 to 75 over the past 7 years.  The nations of the world are giving up the dollar as world currency, and this is exactly what happened to the British pound in 1949.  That was the end of the strong British economy and the era in which the sun never set on the British Empire.

          Since 1972, real wages in the U.S. have been on the decline.  The average American cannot afford to buy the average house.  Toyota makes as good a car as Ford.  Now someone please tell me that this is economic growth.

          The problem faced by Bernanke is that he has decided to bail out the banks (and the housing speculators).  To do this he has to print money like crazy at a time when prices are going through the roof.  What is going to happen when gasoline hits $4.00?  The American public is going to scream for his head.  HE NEEDS POLITICAL COVER.

          This is where the “recession” comes in.  If the media of the country tell it like it is and describe the current period as a credit contraction, that makes it clear that it is bad for the banks.  The public wants prices to go down and is not sympathetic to the banks.  The reason to call this a recession (even though it does not even meet Arthur Burns’ 2 quarter criterion) is to tell the American people that the contraction of money and credit is bad for them.  This is an out and out falsehood, and in the broadest sense it is a lie.

          Over the past few weeks, there have been dozens of forecasts in the newspapers about the possibility of a coming recession.  In most of these, the forecasters have not been identified as anything more than “economic experts,” etc.  What is going on is just a public relation campaign to convince the public that something bad will happen if we do not print money at a faster and faster rate.  Usually no evidence is cited, just “experts say.”  Sometimes there is an incredibly ignorant use of statistics whereby data which will be revised away in a few months is cited as authoritative.  For example, the preliminary employment report for August ’07 showed a drop of 4,000.  This was widely cited as evidence that the economy was heading for recession.  Then the number was revised and is currently listed as an increase of 93,000 (very close to average for the year).  No apology from the recession mongers.  These people pretend to be scientists attempting to predict a recession, but in fact they are public relation shills, working for the bankers, and trying to convince the media to support a central bank policy of easy money and credit.

          According to banker economics, as it evolved over the 20^th century, recession and inflation were opposite things.  A recession was caused by not enough demand.  Inflation was caused by too much demand.  As noted, we currently have $900 gold and $100 crude oil.  The CPI is advancing at the fastest rate in 17 years.  The PPI is advancing at the fastest rate in 27 years.  How, even in their own terms, can these people believe that there is both too much demand (“inflation”) and not enough demand (“recession”) at the same time?

          Currently the stock market is being hammered down by propaganda about the coming recession.  Of course, when the propaganda is successful and Bernanke completes his easing, this will make stocks go up.  Those who listen to the recession propaganda and sell will sell near the bottom.  It was precisely to deal with situations like this that the old timers made the rule, buy when there is blood in the streets.  However, the rule should have been, buy when there is blood in the media because what is happening is not happening in reality, only in people’s minds.  Again, in deciding on a massive easing at a time when the dollar was very weak anyway, Bernanke essentially threw the dollar out the window.  The U.S. central bank has made the decision to trash its own currency.  I don’t have to tell you that this means BUY GOLD.  Unfortunately, most of our sources of information in this society are full of lies.  Their purpose is to make the banks and their other vested interests rich, and to do this they have to make you poor.  Believe the lies, and you are a loser.

          In a very real sense, a recession is like an infestation of witches.  It is an imaginary event.  It can be listed with the belief of the Aztec Indians that, if they did not offer the Sun God a human sacrifice every single day, then the sun would not rise the following morning.  The difference is that the Aztecs never knew what science was.  A century ago our society did understand scientific method, and there is no excuse for letting that knowledge slip away.

          So, dear reader, if you want to be a gold bug, then you must aspire to see reality as it is and not believe the lies reported in the media.  This is my job at One-handed Economist (see my web site www.thegoldbug.net).  Visit us, and see if I can make you a gold bug and put some extra money in your portfolio.

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-- Posted Friday, 18 January 2008 | Digg This Article | Source: GoldSeek.com

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