An announced recovery

The economy continues to decay, but people in various media and government outlets were cheering the fact that the economy only shrank by one percent in the prior quarter, unlike the over six percent shrinkage in previous quarters. That the economy continued to get worse is considered good news because it got less worse instead of more worse.

Some, such as Bernanke, conclude that the economy will recover by the end of the year. Bernanke was saying the same thing back at the beginning of the year though, so the only real strong point he has is consistency. While unable to foresee the recession he sees that it will soon be over.

Naturally anyone familiar with Austrian Economics can poke holes in the pronouncements of recovery.

The GDP only shrank by one percent, in a quarter which saw phenominal increases in government spending. Unfortunately government spending is considered a contributing factor to the GDP instead of either an outside factor or a subtractive factor. The basic equation for the GDP is: GDP = private consumption + gross investment + government spending + (exports − imports). A corrected equation for the GDP would be GDP = private consumption + gross investment - government spending + (exports − imports).

The second formula accurately represents the drain on the economy that is the government. But that may be too controversial for most economists, and just leaving out government spending as a whole would still give a clearer picture of the GDP. GDP = private consumption + gross investment + (exports − imports).

In either case, the GDP smaller than actually reported. And that smaller GDP would indicate a larger decay of the economy considering how rapidly the federal budget is growing.

But supposing that Bernanke is right, that the economy is starting to recover. According to Austrian economics, that will mean that the USA will have to deal with the negative effects of the efforts of the government to stave off the inevitable liquidation of malinvestments. Since this was done by doubling the money supply, the negative effect will be a havling of the value of the currency. That means if the recession does indeed end in 2009, the next one begins in 2010.