One of the hallmarks of a recession caused by a slowdown in monetary velocity is a simultaneous decline in inflation. On cue, producer prices plummeted in the last few months of 2008, falling at a 25% annual rate. In this light, we see the 0.8% increase in producer prices in January as a positive sign that monetary velocity has either stopped falling or has started to pick up. This signals that demand is reviving and the most intense period of the economic contraction is behind us. Although most of the rise in producer prices can be attributed to energy, "core" prices (excluding food and energy) rose 0.4% and are up 4.2% in the past twelve months. "Core" crude prices also increased for the first time in six months. Although only a 0.1% gain, core crude prices had been dropping at an 82% annual rate in the last three months of 2008. The underlying inflation problem that preceded the collapse in monetary velocity has not gone away and a resurgence of inflation will follow the eventual acceleration in economic growth.
The economy is already showing signs of recovery, though if you listen to Obama you'd think we're on the doorstep of the next depression. We've already discussed that recovery timeline fact (here, here), but it bears pointing out again because Obama is likely to try to take credit for any potential near-term recovery (before his own actions take effect and tank things again - remember, most of his 'stimulus' doesn't happen until at least 2010). I'm not planning to let him get away with that, and neither should you.
So, if one is inclined to apply basic economics and look at history, this recession is about half over, which means we should start to see some signs of life now. A glance at reality confirms that...golly gee-whiz-willickers, looky-there...signs of recovery!
Too bad Congress just gave Obama a tsunami of taxpayer dollars with which he can tank it again.
There's my two cents.
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