主题：04/01/2009 Market View -- 宁子

The National ISM and the State of the Recession

Tuesday the Chicago PMI fell below expectations and the prior month, upsetting the attempt for the important Midwest region to string together some back to back improvement in manufacturing. On Wednesday the ISM was a better than expected 36.3 (36.0 expected), and up over February's 35.8. That marked the second straight improvement in the number and led to the question of whether the economy was trying to turn.

As chronicled here for the past couple of months, there is a broad firming of economic data spanning many reports. Manufacturing, factory orders, durable orders, home sales, retail sales, same store sales. All are showing improvement. Nothing positive, no shooting back into the black, just a slowing of the nasty declines. Of course, the turn has to start somewhere, so you never look at a slowing of the decline as meaningless.

Thus there is some improvement already taking place in the economy even as the new Administration took the reins to the economic crisis it, as we all know by the constant repetition, inherited.

What concerns us, indeed what really scares us, is how the policies adopted and yet to be enacted by the new Administration are the very kinds of policies that historically, in our own past, have led to further economic malaise. In other words, these policies don't solve the economic problems but in reality prolong them beyond the time they would have wound down on their own. Again, we are seeing signs of a slowing in the downside trajectory, but the plans yet to be enacted have in our own past prolonged economic downturns.

A Long Recession Already by any Standard.

This recession from peak (November 2007) to present is roughly 16 months, putting it in the category of the longest lasting recessions in US history. Of course we need to make clear that the current Administration inherited this recession in the event there was any confusion on that subject. I have heard that for three months now and frankly, it doesn't make it any better or worse for any businesses or individuals we talk with. The implication is that the prior Administration caused it, but every person willing to own up to the truth knows it was a combination of lack of oversight by the prior Administration, policies promulgated by the Administration before that, Congressional policies and bald-faced denial of the problems when presented, Fed monetary policy, and as always, a handful of unscrupulous individuals in industry determined to squeeze out every nickel of personal gain they could get. When you are talking the amounts of easy money that was out there for the unscrupulous people (in industry, Congress, and the several Administrations overseeing the creation of this mess), you get these kind of excesses and this kind of crushing recession.

The problem we are having now is not the deep recession. It is bad no doubt, but as history shows, even bad recession will turn around. No the problem is how we are handling it. The Bush Administration was too hands off, so much so that it did not require the oversight agencies to actually perform oversight. The rules were in place, they were just not enforced and the Executive branch was not requiring enforcement. Ironic, isn't it as enforcement is the Executive's primary role. The Bush administration parroted the free market mantra, but it didn't really know what it was saying. It was not the Reagan free markets that worked so well. Bush initiated steel tariffs, pursued a weaker dollar, initiated massive new spending entitlements (e.g. Medicare prescription coverage). His 'compassionate conservatism' mixed and matched policies that created massive spending without the massive power of the supply side initiatives under Reagan. He did get some of it right but he hamstrung the benefits with his social policies. Thus a mess.

The new Administration looks only at the supply side aspects of the Bush administration and labels that as the reason for failure. That is wrong as history shows. Kennedy, Reagan, Clinton (capital gains tax cuts, welfare reform/entitlement reduction), and even Bush II with his second tax incentive package again showed that supply side incentives really do rev up economic activity AND bring in increased tax revenues despite lower tax rates. It is the SPENDING that kills the budget because Congress and the Administration see all those dollars and go on spending sprees that create huge burdens we then struggle under when the economy, as now, goes belly up.

Anyway, Obama carefully points out the 'failed ways of the past' with each speech as he pushes his massive spending and social engineering budget and 'stimulus' package. The irony is, HIS package is the worst part of the Bush package, i.e. the massive, massive government spending. Indeed his is far worse as his debt creation is greater than the total of all prior presidents combined.

This is precisely the kind of spending and programs used before in our past. It was done in the 1960's and that threw us into the horrible malaise of the 1970's, the other really, really bad economic period in the US outside of the current one and . . . the Great Depression. That spending in the 1960's on the Great Society and the 1970's on the regulation (and not all of it was bad, as we had to clean up the water and air) put us in a long period of economic malaise where the free market could not work due to price and wage controls (Nixon), mandated mileage standards that produced an auto industry that could not compete globally (Carter), and a multitude of big government, centralized planning attitude that our country was not founded upon. We struggled until the yoke was thrown off in the 1980's.

Government Spending did not End the Great Depression.

That brings us to the other period of massive spending and central government growth, the Great Depression. The stock market crashed in the late 1920's as the Fed tried to quash growth and the specter of inflation that it thought had to arise given the roaring US economy. It hiked and hiked rates, the final hike an unreal 1% jump until it succeeded in slowing the US economy. It slowed it alright. The stock market crashed and with the trade and tariff wars the US helped spur, the US economy along with the world collapsed. Over a third of all US banks closed, unemployment at similar levels, soup lines, you name it.

Roosevelt thought the answer was government spending, the old 'pump priming' plan. The government spends some money and that gets others to do the same. Keynes said you could pay a fellow to dig and fill holes in the ground and that would provide the stimulus because he would go out and spend the money. The government basically did that and the fellow did spend the money, but it never went past that. Government spends to pay the guy to paint the Golden Gate bridge, dig a ditch, fill a ditch, build a bridge, etc. Once the painting was done, the hold dug, the bridge built, the feds stopped spending, the worker spent his wages, nothing happened. More stagnation. So, more government borrowing to spend on more holes, painting, bridges, etc. and the cycle repeats.

Current scholars of the Great Depression say that this very act of diverting economic capital into these 'garbage in, garbage out' make work programs bleeds the economy of money it needs and thus actually PROLONGED the Great Depression many years. The economy did not get the money as the federal government cornered the market on industry and sucked up all the funds to do so. Indeed we did not breakout from the Depression until WWII.