so firms first reduce production to stop their inventories from explosion during reduction of demand, then respond to increasing demand by ratcheting up production to what they expect will meet the new demand. This amping up production is called ‘an inventory bounce’.
what else could it be aside from an ‘inventory bounce/re-expanding production to meet rising demand’?
oh i know. the change in GDP numbers might not be to do with changing production, but maybe just fiat money pumped in to dis-coordinate the economy. lets hope its that and not merely an inventory bounce!
Going back to your OP. Why is it important to analyze GDP? (I know what GDP is). Do we analyze GDP in order to advise government “policy makers” about what to do next? If GDP is “low”, then a certain policy prescription is recommended, and if GDP is “high”, then a different prescription is recommended? Is that why we analyze GDP? Is there any other reason to analyze it?
I understand that all parts of the market did not recover until the early 40’s,late 30’s but the economy began to recover in 32-33. Because some indicators do better than others it is perfectly reasonable to assume that during a “Recovery” the market will resume its daily activities while other indicators lag behind.
A recovering economy can tell us two things.
The worse is over
We are still recession prone( for example we had a recession in 1937).
“any economist” is either a Keynesian or a Monetarist, both of which, in my opinion, have absolutely no clue with respect to how the market economy works.
And the possibility that much of this inventory was liquidated doesn’t cross your mind?
There is no acknowledgement whatsoever of any malinvestments that may have occured during the boom. Your assertion basically has to ignore this and pretend that the economy just took a break for a little while, and now it can just resume the boom before the crisis.
So are you telling me that in 2006 and 2007 the economy was “growing”? Building houses all over the country that nobody really needed (some have even been demolished) is growing? Define growing, because for me that its not how you grow an economy. Are you really saying that building houses all over the place when they are no needed is growing just because that number is going up?
In my book, that is not growing, that is throwing resources away, no matter what your number says.
I am sure Austrian economists would agree with the concept of an inventory bounce, but they probably have a different name for it. one of the more important Ideas that I am trying to get across is that particular indicators do lag. Austrian Economists agree with this because they think that unemployment is frictional.
My point was more relevant to the definition of depression/recession (different names for the same thing) and knowing when an economy is recovering and when it is not recovering. Furthermore, I was hinting at the idea that a recession should include the recovery (speaking strictly in “mainstream” terms, an economy can be recovering and still be a recessionary gap).
The example of the Great Depression is actually a good one. Any economy is recession prone, knowing that recessions are catalyzed by increases in the money supply, and so the use of that terminology is misleading. I link this quite often, so people are probably getting tired of seeing it, but I offer you a long piece I wrote on the recession of 1937 and why it took place: The Dangerous Lessons of 1937. I have a more concise version, but it’s not up anywhere yet. I explain why I believe the recession of 1937 occurred only because of malinvestments which were made during the boom years of 1934, 1935 and 1936. The overarching argument I am making here is that what may look like a recovery is just a continuation of the distortion of the structure of production which originally caused the recession: telling the difference between an illusionist recovery and a real recovery is very important.
Or, one big recession (depression) was split into two smaller recessions by government statistics. (I know, the NBER is independent). It makes no sense that a “recession” can be over when the economy is not creating jobs. Mises home page, Markets & Data, you will see that the decrease in the unemployment rate was tied to the end of the recession until 1990 and 2002, when the unemployment rate kept rising after the recession was declared over. And, the number of months until peak unemployment is increasing. In 2010, it does not appear that peak unemployment is even in sight. This is a depression. And, if one were to say a depression was “avoided” by money printing and deficit spending…that would be a subject for another thread I guess.
Recessions and depressions are the same. The word depression is not limited to the “great depression”; the 1921 depression, which took one to two years to recover, was a depression, but by these arbitrary standards may be considered a recession today. The word recession and depression is terminology used by the government to give name to these cyclical fluctuations. Depressions were given to all fluctuations up until the Great Depression. Since 1937, the name recession has been used for all cyclical fluctuations. They are arbitrarily assigned words, are not based on any kind of actual empirical comparison.
if malinvestment is what caused the recession in 1937 than I am sure someone like you could provide a chart which shows the amount of companies liquidating assets.
We have already been in recovery mode for over 2 years now. Your indicators, if anything, can only indicate that we are now once more beginning to engage on a path to destruction.
Why would this be necessary? I’m sure that it would make the theory more empirically satisfying, but I am not sure that it would be completely necessary. There was a drop in productivity, and I admit that the chart I provide ends at 1935. A continuation of the chart, however, is provided by the St. Louis Fed.
When I first began to research the topic, I set out to show that the monetarist theory that a doubling in the reserve ratio is in line with Austrian theory, but it turned out that the doubling of the reserve ratio really did not play a part in sparking the recession. I write:
There was a substantial decrease in the money supply between late 1937 and the end of 1938.[43] This has been attributed to an increase in reserve requirements by the Federal Reserve.[44] Although Kenneth Roose’s thesis that the increase in the reserve requirements led to a decrease in the price of government bonds,[45] the theory that the increase in reserve requirements led to a contraction of the money supply is much less empirically satisfying. This was not the first time the Federal Reserve had increased reserve ratio requirements; indeed, they had done so in 1922, and that recession was over with fairly quickly.[46] Joseph Salerno suggests that the monetary contraction was a result of the recession, not a factor of, explained by the idea that banks began to retract on their loans due to increased uncertainty after the initial decline in the stock market and because of falling business profits, due to high artificial wages.[47] In light of evidence provided by Benjamin Anderson, it seems as if Salerno’s explanation is more appealing. As aforementioned, the volume of commercial loans increased despite an increase in the reserve ratio requirement, as did the volume of brokers’ loans and the total amount of securities being sold.[48] It was only after the initial crash that total amounts of loan began to contract from the peak established in the middle of 1937.[49]
I haven’t looked at this in great detail. Were the banks not fully loaned up at the time? Or was the money supply already contracting anyway at the time of the doubling of the reserve requirement?
IT would be necessary to prove that companies actually invested poorly.
also if we add up all the numbers we could find out how many companies may have engaged in malivestment. This could give us a rough estimate of how much of an impact played in creating the 1937 recession.
Evidence of malivestments? Well, they aren’t profitable, require perpetual inflation, and many of them will go out of business once interest rates rise towards their natural rate. Usually investments have to profitable in order to be considered “good investments.” Also, “inventory bounces” don’t mean much; they’re just jumps in investment because actors believe that they have cut inventories too dramatically. The fact of the matter is that most of them shouldn’t even exist, and are dragging scarce resources away from other more warranted economic activities. A 4 trillion dollar increase in the monetary base is good for security/commodity markets, but it may force the credit superstructure to run away (in fact, it should). All of the indices and economic indicators are practically worthless, but if I had to focus on one, it would be the PPI.
This is kind of off topic a bit but wouldn’t the emergence of Credit Default Swaps kind of disprove the idea that a company needs to make a profitable investment?
Here is how I use particular economic figures.
1.GDP I use in conjunction with Okun’s law.
I track the number of Jobless claims in order to tell me when the unemployment rate has bottomed out.
I agree that an inventory bounce does not mean much at all,but GDP and Job growth are closely correlated. If we use okun’s law we would have to assume that we would need 7% GDP growth for more than one qaurter to bring down the unemployment rate to acceptable levels.