US Loses 85,000 More Jobs in December 2009

I've been saying for maybe a year now that the economy likely would get worse before it got better. The trouble started back in the middle of the decade when the Federal Reserve System, under Alan Greenspan, caused the money supply to grow substantially faster than the real economy was growing. Much of the excess money, driven by Fannie Mae and Freddie Mac housing subsidies, wound up in real estate, artificially inflating real estate prices, creating a bubble that eventually had to burst. It did burst, as you probably know, starting in 2006 with the weakest borrowers in the so-called sub-prime mortgage market. The collapse of the sub-prime market led the bubble to burst in the rest of the housing market, dragging down the economy.

Starting in late 2007 the Federal Reserve System, then (and now) under Ben Bernanke, tried to stop what seemed like a likely recession caused by the first monetary bubble by--yes, that's right, by creating a second monetary bubble. It's a bit like trying to stop a cocaine addict from going through withdrawal by giving him more cocaine. I thought back in 2007 that we might have avoided a recession, but once Bernanke started inflating the money supply drastically faster than the real economy was growing, I predicted that we would have the very recession that he was trying to prevent.

Bernanke (and surprisingly, Greenspan) are Keynesian economists. Keynesian theory teaches that government can wave a magic wand and create new "aggregate demand" out of thin air. (We'll have more on Keynesian economics for those of you in my macroeconomics class.) By inflating the money supply, the government can create the short-term appearance that aggregate demand has risen, but when people figure out that it's just more money chasing the same level of goods and services, the monetary bubble bursts and rather than having more aggregate demand we actually end up with less of it. So by pursuing the fatally-flawed Keynesian polices to try to prevent the recession, Bernanke actually caused (or helped cause) the very recession he wanted to prevent.

Fiscal policy has the same effect as monetary policy: all the trillions of dollars of "TARP" and "stimulus" spending passed by the Democrats in Congress and supported by Republican President Bush and Democratic President Obama simply helps circulate all the new money that the Fed creates, making the bubble--and the bust--even bigger. You might recall those skyrocketing oil and gas (and food) prices in 2007, which hurt the auto and airline industries. The skyrocketing prices came directly from the Bernanke-Bush polices of inflate and spend. The stock market bubble of 2007, which alas for John McCain burst right after the Republican convention, also came directly as a result of the Bernanke monetary inflation. Obama and Bernanke have followed the same policies of inflation and government spending that led to the real estate and stock market bubbles, so it's not surprising that more than two years after Bernanke started them to try to stop the downward spiral caused by Greenspan's earlier inflation, we remained mired in recession.

Bernanke has testified before Congress because he's up for re-appointment and apparently he wants the job again very much. And has he learned his lesson, the lesson for which we paid so dearly in the 1970s and early 1980s, that government can't spend and inflate the economy into real growth? No. He sees his fatally-flawed policies, on the contrary, as having saved the economy from even worse. So more than two years after he started the current mess to try to clean up the mess caused by his predecessor, I'm still saying that I wouldn't be surprised if things get even worse before they get better.

You can read more about the bad employment news at
http://www.nytimes.com/2010/01/09/business/economy/09jobs.html?th&emc=th