The Event Profit Formula
1958 recession was a result of a disaster in industrial production. Production in industries like automobile, for example, fell drastically, driving down the demand for raw material, and hence its prices, both in agriculture and minerals. Ironically, the prices kept going up in the other sectors of economy. Obviously, people could not afford industrially produced items, as much as they did before. Although unemployment went up to 7.5% in July 1958 and recession lasted for about eight months, the real wages did not fall. Federal Reserve was practicing a tight monetary policy for last two years. There was a budget surplus of 0.8% when recession started which turned into a deficit of 0.6% of GDP in 1958 and jumped to 2.6% in 1959.
Once again, we see that policy juggling at Federal Reserve throws economy into a crisis. Overall, the economy was strong. So, it bounced back, quickly, out of the disaster created by Federal Reserve. We know the effects of tightened monetary policies. It dries out the funds in banks and there is little or no money available for start-ups and small business expansion and growth. With new businesses not starting at an optimal pace, and current businesses have not enough money available for research and development, and for the expansion of their business operations, markets become boring. There is not enough of new and exciting products and services.
In addition to this, with fewer start-ups and limited expansion in business activity, the existing products and services do not have tighter competition. So, there prices either stay the same or even increase. Due to this, a very large segment of population which counts the prices decline and sales, over time, due to increased competition, never gets access to the still very expensive products and services. When this segment is thrown out of the equation, the products and services cannot expand their markets, over time. On the other hand, if economy is doing good, overall, the relatively well-off segment of population keeps buying the higher priced products and services.
So, the demand stays same, but, does not increase, for a while. When this well-off segment of population is saturated with currently stagnant level products and services, the demand faces a sharp drop. This sudden drop in demand can cause a drop in industrial products and hence the demand for raw material. Since, the cause, here, is not the drop in employment or real wage levels, the other sectors of economy like non-discretionary items continue to do well.
The sudden drop in the demand of stagnant sectors of economy, forces the existing companies to come up with more creative and innovative products and services, and opens the doors for star-ups with more creative and innovative products and services. As the creativity and innovation comes back to the given discretionary sectors, the demand bounces back and the recession is reversed back into the growth cycle. Now, if Federal Reserve did not interfere with the regular capital flow in free markets, the recession would have never happened. In other words, if the money supply and interest rates were determined by supply and demand, instead of Federal Reserve, the results would have been different.
Recessions and depressions can still happen in free markets without any government intervention. But without government intervention, they usually last for smaller periods and are followed by rapid and explosive growth rates, resulting into overall growth in incomes and wages, and better employment rates. The graphs showing the peaks and troughs in economy before and after 1913 when Federal Reserve came into being show that peaks and troughs in economy are now smaller in amplitude. But, the economy is not attaining the explosive growth rates, it used to achieve, before. Even in the best recent peaks the growth rates remain limited to 2-3%.
These growth rates are not enough to accommodate the growth in population. Therefore, the net well-being, standards of living, incomes and employment rates have been falling, consistently, in each cycle. Before, although the troughs were deeper, the net results at the end of each cycle were better-off, economy did end up doing better, overall, and people did end up being better-off. More recent government interventions do not allow the troughs to be deep enough for proper market adjustments in prices, and cost of living and doing business.
The absence and distortion of these adjustments, prolongs the recessions and the resultant peak is not as explosive, as it would have been otherwise. This is because the government interventions through aggressive monetary and fiscal policies do not allow the necessary deflation. These policies, artificially, keep prices high, and hence the cost of living and doing business. Due to an artificially maintained inflation, any given investment cannot go as far as it would have gone after the necessary deflation. Compared to gold, all the major currency yields have fallen from 100% to almost zero (1-6%) in last hundred years.
U.S. treasuries were down to 2.37% from a peak of 20% in 1981. Another disastrous effect of government interventions has been that it has enormously increased the cost of starting and running the small business. The net effect is that big corporations and richest people are getting unfair advantage and middle class is being literally wiped out. Devalued money and ever increasing burden of sovereign debt is killing middle class. Ever increasing direct and indirect taxes, in addition to the non-cash parts of wages are on rise. A larger and larger portion of every wage earners paycheck is going into payroll deduction for taxes and benefits like healthcare and people are taking less and less home.
Read my lips, this is the time to get serious about a leaner and healthier government. Time is running out. We, our economy and our finances cannot afford to feed the bigger and bigger government, anymore. This is like petting an elephant. Sooner and later you would realize that it would have far more feasible to have a cat or dog. Government is becoming an unbearable burden like too big of a mortgage or a vanity automobile. Government is there to serve us, and it must remain affordable. Killing our country and economy for the sake of and inefficient government is not wise at all. We all need to wake up from a dream full of fantasies.
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