The YouTube video below is a capture of the CNNMoney interview of February 28, 2008, with economist John Williams of Shadow Government Statistics, a site that keeps track of key economic data, including figures no longer published by the federal government, as well as data for which government calculation methods have been altered over the years, often with the effect of casting economic conditions in a better light than would have been the case under previous methods. Among the crucial numbers Williams reports is the year-over-year growth rate of the broadest measure of money, M3, a key economic indicator on which the Federal Reserve stopped publishing information in early 2006 under various pretenses, none of which can be characterized as anything other than disingenuous and self-serving. In my two-part series, "The Federal Reserve under Fire," I set forth the importance of the growth rate of the money supply and, in particular, the growth rate of the broadest aggregate, M3, which is critical to an understanding of the direction of the economy insofar as inflation is concerned. Previously, in my series "The Economics of Wreckage," particularly in Part Two and in Part Three, I laid out the neo-Keynesian theory and policy of aggregate demand management and how it had gone awry on several occasions prior to the current era, illustrating why the policies that have been pursued by the Bush Administration and its rubber-stamp Federal Reserve, first under the addled Alan Greenspan and then under the obsequious Ben Bernanke, are predictably and inexorably leading the nation to the brink of hyperinflation coupled with deep recession.



The above-mentioned articles at The Dark Wraith Forums incorporate by reference links to a number of other published articles I have written over the past nearly three-and-a-half years forewarning of the coming economic catastrophe. In my January 2005 article, "Prologue to the Book of Consequences," I wrote the following:

The calculus of where the economy is headed is quite simple. Mainstream news media outlets bend over backward to avoid appearing biased, so they avoid describing the future consequences of current political actions, even though the consequences are governed by rock-solid principles of economics and finance that are not open to disagreement among the learnéd. Unfortunately, the neo-conservatives have made a craft of disputing the indisputable, giving observers an impression of debate where none exists.

At that time, I still had hope that the Federal Reserve, which had begun to clamp down on the growth rate of the money supply, would stick to its guns, even though that course would have thrown the economy into a recession. Financial markets were sending the classic signals that this is, indeed, what was coming, as I pointed out in several articles, including "Toward Full Yield Curve Inversion," which I wrote and published in March of 2006.

By that time, however, the reckless mendacity of this Administration was returning to fashion at the Fed: as it turned out, the Fed had rather swiftly and quietly untethered the broad monetary aggregates M2 and M3, once again causing them to grow out of control, leaving only M1—the kind of money ordinary people use—under an approximately zero growth rate regimen. The broader aggregates M2 and M3, feeding as they do the financial sectors and the wealthy, are now growing at rates that have absolutely no justification whatsoever other than to forestall economic catastrophe until the Bush Administration leaves office.

The growth rates of M2 and M3 are breath-taking. As mentioned above, the Fed no longer publishes M3. Including as it does M2, which in turn includes M1 (which, until recently, was not growing), this broadest measure of the money circulating in the economy is now in the growth rate range of 20 percent.

Two years ago, the yield curve inverted, which has historically signaled a good possibility of economic downturn that might become a recession. Shortly after full inversion, and notably in what was the Spring of a mid-term election year, the Fed panicked, backing down from tight monetary policy on the big-money aggregates, leaving only the people who use cash and checking account types of money to labor under a money supply being held at zero growth. As it turned out, the Fed was commencing the second phase of what would be a nearly unprecedented expansionary monetary policy that continues to this very day. Under this regime, not only is the Federal Reserve increasing the money supply at a rate in excess of the real growth rate of the economy, but the Fed is accelerating this growth rate! Although the chart below has been published here on several recent, prior occasions, it is worth publishing again, and it should be noted that John Williams of Shadow Government Statistics showed an almost identical chart in the video offered above.



The Federal Reserve is pouring hundreds of billions of excess dollars into the economy to hold off an economic crash. The longer it does this, the worse the resulting inflation will be; more importantly, however, the longer it pursues this radically irresponsible policy, the worse the recession will be when a new Federal Reserve Board must crush the money supply long enough to drain out the staggering greenback overhang. Interest rates, which will already be rising because of inflation expectations embedded in them, will skyrocket because interest rates are the price of money, and when the supply of anything contracts, its price goes up. Business investment, already laboring under tight credit conditions, will grind to a standstill, as will consumer spending on anything other than basics, which will absorb a greater and greater share of income in the spiral of accelerating inflation caused by the almost incomprehensible oversupply of money progressively eroding the purchasing power of each dollar circulating in the economy.

On the international front, as the dollar continues its inexorable plunge into Second World currency weakness, U.S. exports to other countries will rise as our goods become cheaper overseas, and foreign imports to the United States will become more expensive. That has two sour notes. First, as imports become more expensive on American shelves, the domestic substitutes right beside them on the shelves will rise in price by the so-called "substitution effect," fed as it will be by the excess money that will fuel the demand-pull inflation at the retail level. Second, as Americans buy fewer imports, foreign reserves of dollars, which are the means by which our government, our businesses, and our households have been able to borrow so much money for the past several decades, will begin to dry up; and with the U.S. government spending in stupendous excess of the tax revenues it draws, the U.S. Treasury in the years ahead will suck up what little there will be of foreign capital available for lending, leaving both households and private businesses with virtual bread crumbs of lendable funds, especially once the Fed begins the long, gruesome process of letting the economy slowly absorb in real output gains what will ultimately be the trillions of dollars in excess liquidity poured in by the Bush Administration's Federal Reserve.

All of the righteous, legitimate, and perhaps even understated condemnation of the Bush Administration and its Federal Reserve aside for a while, the pertinent questions on most people's minds revolve around what is to come; and by no means are the answers pleasant. Even under the most responsible, intelligent, and take-charge President—of which none appear to be on hand for the up-coming election—the economy and its constituents will suffer, and the suffering will be severe.

No, the United States economy is not in a "recession," yet, despite the premature squealing of quite a few people. Although some parts of the country might already be experiencing negative economic growth, according to the latest figures released by the Bureau of Economic Analysis of the Commerce Department, the overall economy actually grew in the first quarter of 2008, albeit at an anemic rate of just 0.6 percent, matching the growth rate for the final quarter of 2007; and, although the Commerce Department is notorious for revising such GDP growth rate numbers several times, the signs simply are not there of a widespread recession underway for the U.S. as a whole. Americans have not seen a severe recession in more than a generation. The last bad one was caused by the contractionary monetary policy of the Federal Reserve under the leadership of Chairman Paul Volker, President Jimmy Carter's appointee; Volker's Fed aggressively clamped down on the money supply to drain out the excess money that had been building at a greater or lesser pace for more than a decade. Volker did not let go until not only the inflation had abated, but so too had the far more important expectation of future inflation. Recessions since then have been relatively short and mild by comparison, and the "recession" that heralded the beginning of the current Administration was not a recession by the technical measure of two consecutive quarters of negative real GDP growth, but it was certainly more than enough of a pretext for George W. Bush and his Republican allies in Congress to get their way with drastic tax cuts to "stimulate" the economy, a siren call the GOP has used in the past, most notably at the outset of the Reagan years and, before that, near the end of the Eisenhower Administration. Unlike Ronald Reagan and George W. Bush, who led their party's parade to the trough of wildly generous tax cuts for the rich, Eisenhower resisted the tax cut bleatings of his fellow Republicans and, in so doing, was able to deliver several years of balanced federal budgets, unlike either Ronald Reagan or George W. Bush. Of course, in all fairness at least to the current President of the United States, few are those even among the professional apologists for Mr. Bush who would accuse him of being the latter-day incarnation of President Eisenhower in fiscally responsible leadership, much less in statesmanship and general intelligence.

As a touchstone for reference, the table below presents the record of recessions in the United States from the third decade of the 20th Century to the present.



With that data providing helpful historical guidance, and with some well-established macroeconomic principles being applied, what follows is a summary, if highly preliminary, assessment of what interested readers should expect of the economy in the coming months and years.

First, the economy will not go into recession for a while. The current scenario appears too much like the U.S. economy in 1979, except that the incumbent Federal Reserve is far more out of control than the pre-Volker Fed was. We will experience what in Carter's time was called "stagflation": paltry real growth of GDP coupled with accelerating inflation. Eventually, as that inflation becomes more and more embedded in interest rates, the Fed's efforts to hold interest rates down by pouring money at greater and greater rates into the economy will begin to fail, and the economy will teeter closer and closer to the brink of negative real growth in GDP.

As far as inflation is concerned, a quick, dirty way to generate a forecast is to take the year-over-year growth rate of the money supply and subtract from it the real growth rate of GDP: that's the "overhang" of dollars the economy's real (that is, production-based) spending growth cannot use, so that overhang must, sooner or later, become inflation. If the broadest money aggregate, M3, is growing at close to 20 percent, and the real GDP is growing at around half-a-percent, that means inflation will eventually hit 19.5 percent or so on an annualized basis. As a nice, round number, call it a forecast of 20 percent inflation. As mind-numbing as that number is, the worse part is that, the longer the Federal Reserve under the new President fails to crush the money supply, the closer expected inflation will get to that 20 percent figure, which means interest rates will climb to the point where economic activity in the United States will grind to a virtual halt; but that's not the worst part.

The expected inflation premium does not affect only interest rates; it becomes embedded in the forward expectations of compensation for all factors of production, perhaps most notable among them being labor, which has been on its back for years in terms of its ability to successfully project bargaining power into management-labor wage negotiations. That will change: under mounting pressure from rank-and-file workers who will begin to experience real deprivations as their nominal purchasing power withers in the accelerating inflation, people will forcefully demand far greater performance from their unions and, in the absence of union representation, from the employers themselves. Long dormant (in some cases, even intergenerational) frustrations with the inability to get ahead economically will translate, at best, into far more active, vociferous workers and, at worst, widespread agitation and activities that will bring down what has become a swift, efficient, often merciless fist of retributive law enforcement surveillance, actions, and violence, which will be wholly and prejudicially supported by courts packed by the Bush Administration with extemist conservative and Right-wing judges.

The next President, regardless of which nominee it is, will be faced with the choice of either forestalling the application of draconian remedies for the hyperinflation or forcing the Fed to quickly and resolutely clamp down on the money supply, this latter choice sending the economy into a hard recession near the depth and length of the Great Depression. Either way the new President decides to play it, by 2010 or 2011, unprecedented, severe, unavoidable demands on the federal budget will emerge, and they will get worse with each successive budget cycle. At the same time, the utter debilitation of the U.S. armed forces will have become apparent not merely to the U.S. brass, but to the heads of state of adventurous countries in the Shanghai Cooperation Organization, a nascent South American alliance, the European Union, and loner countries like Japan, all of whom will shed at least some pretense of disinterest in taking command of land, the seas, the sky, and space in the growing chasm between continued American military posturing and viable, multi-theater engagement capability.

And if all of that is not enough, the growing independence of the world economy and its sovereign participants from the U.S. dollar will mean that U.S. goods and services, although cheap and well received in other countries, will become not just more expensive here at home, but also subject to much more price volatility as the greenback no longer serves as the anchor in international contracts for everything from foodstuffs to hydrocarbon products.

Other catastrophes will attend and succeed those listed above, but that's a good start, although, as cautioned earlier, this is just a preliminary and quite summary impression of what is to come. Indeed, it could get much worse.

One way or the other, despite the greatest efforts of the stupefyingly irresponsible Bush Administration and its swirling cacophony of apologists in the Right-wing think tanks, the mainstream media, academia, the courts, the religious community, and the general population, reality will soon arrive on the unstoppable freight train of dire consequences to which each of the aforementioned groups will no doubt find its own means by which to dismiss personal responsibility for national calamity. That, no doubt, was why the gallows were so popular in a by-gone era: a good noose not only kills the mendacious, it shuts them up, too.


The Dark Wraith will offer further economic forecasts as events merit.