So, the US recovery went into a slight reverse in the December quarter. The Keynesians at the heart of the media analysis put it down to a few chance effects
The New York Times chirped
The drop in gross domestic product was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses. Anxieties about the fiscal impasse in Washington also contributed to the slowdown, one reason stockpiles grew more slowly.
The Times suggested that growth might be slow in the current quarter because there has been a temporary staunching in the growth of social security benefits, which pay out 25 per cent more than is collected. This led to dark mutterings that presume the Administration and Congress will have to get busy renewing the “recovery” by restoring the cash infusion or see demand remain sluggish.
The Fed said the relapse was due to Hurricane Sandy (do they now believe that “broken windows” depress economic activity rather than stimulate it?). Even so they are to expand money supply and to continue keeping interest rates close to zero “at least until the unemployment rate fell below 6.5 percent”. Others pointed to Caterpillar trimming its inventories.
The truth is that the US remains miles away from recovery. Rather than facing up to this the commentariat will, at teh prompting of insiders in government, continue pointing to features in GDP that are undermining the rosy picture everyone would prefer to see.
US GDP as measured is now just 3 per cent above its 2006 level – meaning GDP per capita is down rather more than this on 2006 levels. Cumulatively, the annual level of private investment, the all-important driver of income growth, is now just 5 per cent higher than in 2006, again rather less than the growth of population. Some recovery!
The underlying capacity of the US economy to achieve real growth is seriously damaged by the easy money prior to the GFC and by the same cancerous rise of the regulatory state seen in almost all western economies.
The Fed and Administration’s twofold strategy is first, an on-going infusion of government spending based on deficit financing (government borrowing is 10 per cent of GDP); this expenditure is overwhelmingly directed towards consumption rather than investment. Secondly, it is hoped that the demand, though unbacked by the productive capacity to support it, will, with artificially low interest rates, prompt private investment growth allowing the productive base to be restored.
This, if pulled off, would vastly elevate the credentials of those in favour of government management of the economy by fiscal and monetary policy tools. It is however difficult to see any precedent for such a government engineered recovery, especially since there is no disposition to reverse the growth of the regulatory fetters on enterprise.
The one bright spot is the oil and gas boom created by centuries of US enterprise butopposed at every turn by the Obama Administration.
Meanwhile, catastrophic risks are present from the vast increase in the money supply and the unrestrained growth in government debt.
But the likely outcome is a US economy bubbling along with real growth barely exceeding population growth until some shock forces a reversal in the growth of spending and regulation.