Why the stock market will continue to fall
Comments(0) The stock market is in a frenzy over the possibility of a US Recession and a slowdown in economic activity. To understand all of this data, we must first know the definition of a recession.
By definition, a recession is three consecutive quarters of negative GDP growth. GDP is the consumption + gross investment + government spending + net imports of the entire country. When GDP goes down, it is said to be a fall in economic activity but this is not entirely true.
GDP isn’t a real indication of growth
As you can see, the GDP can be easily manipulated by the government spending and gross investment inputs. When the Federal Reserve acts by issuing more credit, as they have done for a total of $180 Billion in the last few months, they can tamper with the data and improve economic indicators.
Because a recession is defined as a drop in GDP, inflating the money supply and increasing government spending is a surefire way to make the economy look better, at least on paper. GDP does not account for the change in the value of currency over time and can only be compared against dollars, not foreign currencies.
If the Federal Reserve were to issue credit worth half of the current GDP, all economic indicators would show that the economy is growing at a breakneck pace of 50% per year. Inflation is not accounted in the GDP statistics, so inflating the money supply has become the method of choice to prop up the economy. The Federal Reserve is in frenzy to issue more credit and cancel out the losses by mortgage companies and investment bankers alike.
The Great Depression
History tells us that the Great Depression was caused by a reduction in the amount of credit by the Federal Reserve. The Federal Reserve had let the money supply shrink by 33% over the course of the Great Depression, causing the markets to crash and billions to be lost.
Today we face the same crisis. Billions of dollars has been lost so far due to the real estate bubble. An overextension of credit coming from low interest rates and high amounts of credit have caused a bubble that’s ready to burst. Unless the Federal Reserve continues to inflate the money supply at a monstrous pace, the market is ready to correct in a big way.
There is approximately $1Trillion in US legal tender, paper currency that is. Unfortunately there is also $10 Trillion in credit, debt and bank accounts that has been created out of thin air; money that has been leveraged through the system so that everyone has a bigger and bigger piece of the pie. If the Federal Reserve were to stop printing money, and the credit system were left to collapse, the stock market would be worth just one tenth of what it is today.Recession is already upon us because of the slowdown in credit growth. The Federal Reserve will have to continue to issue credit in order to keep up the GDP statistics and hold the markets together. Once investors get wind that the GDP has been manipulated, we’ll see the sell off of the century.
