This article was posted at GoldMoney
Morning in America?
2012-JAN-10
US
unemployment figures came in better than expected last
week at 8.5%. While noting that the figures
underrepresent actual unemployment, does this
improvement mark the beginning of an American economic
recovery? If so, it is the last thing the consensus
expects.
Let us assume for a moment that Europe’s banks are
rescued from the crisis. This being the case, there is
every possibility a US recovery will take place for two
basic reasons: businesses are always keen to invest as
soon as market conditions stop deteriorating, and
secondly GDP should begin to reflect increased
quantities of money flowing into the economy. I shall
comment on each in turn.
Businesses in the US have been accumulating cash in
these uncertain times, and it is generally assumed,
incorrectly, that managers are happy to just sit on this
accumulating cash. It is not in the nature of business
to sit idly waiting for the tide to turn: businessmen
are entrepreneurs who continually seek profitable
opportunities, recognising that wasting time is itself
an expense.
This is why the capitalist system survives despite and
not because of the attempts of central bankers and
governments to assist the entrepreneurial function. And
once capital investment begins to recover, competition
ensures it spreads. The conditions now exist for this
recovery to take place, if only because the bad news is
elsewhere and interest rates are extremely low. We can
therefore assume (Europe and other systemic disasters
permitting) that a business recovery should take place.
How far this goes before rising commodity and energy
prices derail it is another matter.
Meanwhile the expansion of raw money since 2008 has been
remarkable, but so far the bulk of this money has either
gone back on deposit at the Fed, is being deployed for
speculation in capital markets, or is funding the
government. Very little of this money has actually added
to the GDP statistic by being deployed in the economy,
which will change when businesses go further than just
reinvesting cash balances, and actually borrow to build
capacity.
Putting this together, in the earliest stages of
economic recovery companies reinvest their own money.
The benefit to the GDP statistic is marginal to begin
with, but as economic recovery gains momentum and
businesses begin to borrow, money will flow into the
economy from capital markets, inflating the GDP
money-value. So by the time it is confirmed at the GDP
level, the recovery will actually be well under way.
The political consequences in an election year of such a
development are beyond the scope of this article. Rising
interest rates will begin to be discounted, giving
support to the dollar; but before that happens a bear
squeeze should develop in energy and commodity futures,
partly because markets are wrong-footed for economic
recovery, partly because market liquidity has been
reduced as a result of the MF Global scandal, and partly
because the outlook for price inflation will change
radically.
Precious metals should fare well. Industry will want to
build silver stocks to lock in low prices, conflicting
with physical demand from investors, and gold should get
a significant boost from the change in the inflationary
outlook.
