24 Sep 2008

A Major Recession Seems Due–Just Look at the Pretty Picture

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Folks, I am not a “chartist,” because I wouldn’t want to go the John Nash route of spotting spurious causal connections. But, if you accept Austrian Business Cycle Theory, then the following graph of the levels of M1 is very interesting. (Click for larger image.)

Specifically, you can tell a little story that the Fed let the money supply grow quickly, then put on the brakes (no growth in M1) for a few years, and this led to a recession. Then the process repeats. (I admit it only jumps out during the last two recessions.) But with each repetition, the delay before the onset of the recession is longer. That could be because the central bankers learn more tricks, and/or the market gets better at adapting to said tricks.

If you trust the pattern in the chart, then we seem due for a recession. The worst is yet to come. We have yet to see the impacts on what the analysts call the “real economy,” but we will.

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