Rising prices do not mean recovery

April 8, 2009

Everyone is looking for convincing evidence that prices have bottomed before concluding the recession is on the way out. I strongly disagree with that approach. Rising prices in the stock market reflect the speculative mood of investors and the lack of alternatives, it’s not a measure of new productive jobs. Rising prices for housing should actually be considered a negative given the millions of homes still waiting to be sold, if anything we should hope for lower prices so the market can clear and construction can resume. Rising prices for consumer goods or commodities can just as easily reflect a reduction in supply as an increase in demand. Prices are not irrelevant, but almost.

Furthermore, just as the recovery from 2003 to 2007 with hindsight now appears to be an illusion, it’s not impossible the multi-trillion dollar stimulus packages will yield something that feels like an economic recovery, also to be dismissed as an illusion a few years from now. GDP is supposed to be inflation adjusted, but nobody really believes the GDP deflator these days. Rising prices will give the government more cover for their fictitious measures and with rising numbers later this year or next I would not be at all surprised to see politicians and economists line up to claim credit. Once that happens everyone becomes vested in the recovery’s continued success. If the stimulus dollars stop flowing and the economy tanks once again, they will all look like fools, therefore the stimulus will likely continue until inflation tips and the government loses control.

Very few people in public office have the humility to admit their mistakes and reverse course, especially not on such a major defining issue. And once large businesses get a taste for government largess, I find it unlikely government officials will ever be able to withdraw the punch bowl without suffering a tremendous backlash. The least surprising result of all this inflation would be rising prices, but don’t confuse that for genuine economic growth.

No related posts.