http://www.mises.org/fullarticle.asp?control=1337&id=62The popular press has adopted a more optimistic tone regarding economic conditions. The reasons for this are clear. It appears that the current recovery is picking up pace. Recent reports indicate that second quarter GDP for this year increased by 3.3%, instead of the earlier 3.1% estimate. This is more than double the GDP growth rate from the preceding two quarters. Analysts expect 4% or higher growth for the following two quarters, with some predicting 6 to 7% growth. Falling inventories and strong spending, some say, indicate that this recovery will continue.
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However, this fact is crucial: a considerable portion of this increased GDP has come from increased military spending. Military spending rose 45.8% for the second quarter. This is the strongest quarterly increase in military spending since the Korean War.
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The Federal Reserve has pursued an aggressive policy in recent years. It has expanded the money supply rapidly, thus driving interest rates below levels that reflect consumer preferences. This has surely had a good affect on GDP statistics. Non-residential investment has risen by 7.3%. and consumer sending, which had been predicted to rise 3.3%, is up by 3.8%. Consumer will spend more and save less when interest rates fall because the financial return on deferred consumption has fallen. Investors will invest more when interest rates fall because the financial returns on investment rise as the cost of paying back credit fall. Ludwig von Mises and Friedrich Hayek recognized this long ago. They also realized that this would lead ultimately to inflation and future recessions.
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