The two large economic regions that really matter right now are the European Union (EU) and the U.S.A.. There is a HUGE difference between them, and the difference is monetary. Inside the U.S., the Fed is expanding the M-2 stock of money at an annualized rate of 13.6%. Inside the EU, the European Central Bank (ECB) is looking at an M-3 (a broader money measure) which, according to the March 2001 figures, is expanding at an annualized rate of 5.0%.
Inside the U.S., the annualized rate of climbing consumer prices is now 3.3%. In the EU it is rolling at 2.6%. The ECB lowered its rates by 0.25% on May 10, after keeping them unchanged since October 2000. The Fed has cut interest rates 250 basis points this year.
The money rates of expansion are the ECB at 5.0% and the Fed at 13.6%. The rates of climbing consumer prices are EU at 2.6% and the U.S. at 3.3%. A simple Quantity Theory of Money calculation shows beyond doubt that the place where prices will start climbing the fastest is in the U.S.
Currently, consumer prices are climbing at 3.3% inside the U.S.A.. Those are the official facts. Worse, much worse, is the most recent report that shows U.S. unit labor costs climbing at an annual rate of 5.2%. Here, we are back to margins. If U.S. corporations swallow this increase in their costs, earnings go down. If earnings go down, there goes the second third and fourth quarter higher earnings which Wall Street is so looking forward to. Knowing this, U.S. corporations will probably have to raise their prices. This will lead to either a loss of sales, and the earnings get hit again - or - it will lead to an even higher measure of consumer price increases, popularly known as inflation.
The only other route U.S. corporations can choose is to cut costs. The fastest and easiest way to cut costs is to either cut wages and salaries or to lay off workers. What corporations have been doing, with increasing fervour, is to lay off workers. These layoffs are slowly but surely scaring all of those who still have work. The people who have already been laid off have drastically slowed or stopped their spending. Those who are scared of being laid off are scared of borrowing more to consume.
With falling sales, corporations have little or no chance of enhancing their earnings. Put all of this together and it is very easy to ignite an interlocking sequence of economic events, a sad mixture of falling earnings, increased layoffs, falling sales, business defaults and repossessions.
What is this a perfect economic description of?
A RECESSION.
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