The Depression is Not Over

from Mises Daily: Wednesday, February 10, 2010 by Frank Shostak

Real GDP increased at an annual rate of 5.7% in Q4 after rising by 2.2% in Q3 — the quickest pace in more than six years. This was above Wall Street economists’ forecast for a 4.6% increase in Q4. The yearly rate of growth of real GDP climbed to 0.1% in Q4 from −2.6% in Q3. The yearly rate of growth of GDP at current prices, i.e., nominal GDP increased by 0.8% in Q4 from −2.1% in the prior quarter.

The bounce in the growth momentum of both real and nominal GDP is due to the Fed’s massive money expansion. However, a sharp fall in the growth momentum of real AMS[1] poses a threat to the growth momentum of GDP in quarters ahead.

Most economists, including the White House chief economist Christina Romer, hailed the Q4 GDP data as “the most positive news to date on the economy.”

But economic growth presented in terms of GDP just describes monetary expenditure. GDP is designed along the line of Keynesian thinking, which holds that spending equates with income — hence more spending leads to a higher national income and in turn to higher economic growth. On this logic, a tighter monetary stance by the Fed leads to slower economic growth while increases in monetary pumping produce higher economic growth. (In the GDP framework, money expansion leads to an increase in overall income in the economy, and hence to a higher rate of growth of GDP).

In reality the exact opposite actually takes place — printing more money weakens wealth generators’ ability to grow the economy whilst a decline in the money supply’s rate of growth strengthens their ability to grow the economy.

Once the central bank raises the pace of money expansion in order to lift the economy out of a recession, it prevents the demise of various false activities. It also gives rise to new false activities. The outcome of such so-called economic growth is nothing more than the strengthening of wealth consumers and renewed pressure on wealth generators. All this undermines the process of wealth generation and weakens true economic growth.

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An Inflationary Depression? Perhaps…

And if you don’t think the government has been interfering much, take a look at this.