>Doug Henwood wrote:
>
>> How could this all resolve itself? You could just have a long
>> grinding period of adjustment without a true collapse, like Japan has
>> been going through, or the U.s. went through from 1989-92/3. I also
>> think you have to entertain the possibility that this really is a
>> long upwave of prosperity, so there may be only a minor adjustment
>> ahead. I think the character of the next recession will provide the
>> definitive answer to the longer-term questions (and will show too
>> whether the productivity pickup is a blip or something more real than
>> a blip).
>
>As Dean Baker put it in this weeks's Economic Reporting Review:
>
>" most economists who have
>analyzed the stock market in relation to future projections of
>profit and economic growth, such as MIT Professor Peter
>Diamond and Yale Professor Robert Shiller, estimate that it was
>over-valued by between $8 trillion-$10 trillion. The size of the
>wealth effect associated with a correction of this magnitude is a
>decline in annual consumption spending of between $320-400
>billion. A reduction in consumption of this magnitude would
>lead to a drop in GDP of 4-5 percent. "
The "wealth effect" on consumption is unproved. What would a 50% decline in the stock market do to investment and consumption? To quote Keynes, "We simply do not know." Maybe Dean's numbers are right, maybe they're not.
>The present bubble is merely the frothy
>ending of this half-century cycle of American hegemony,
Maybe it is, maybe it isn't. "We simply do not know." The next U.S. recession will probably offer a clue. If it's as bad as you think it's going to be, then you're probably right on the long-term meaning. If it's mild, then you're probably wrong. Why make a lot of extravagant predictions now?
By the way, China, home to a very large chunk of humanity, has undergone one of the great economic booms of all time over the last 20 years - hideously polarizing and ecologically destructive, yes, but it's an important exception to your picture of deflationary implosion.
>Not only
>will the edifice crash down, it DESERVES to crash down
Reality may not comply with your moral judgment.
> and those of us
>who've been arguing so for a long time (I modestly include myself in the
>category) will be vindicated circumstantially as well as morally when it
>does.
Do you think such a collapse in the U.S. would make this country pull back from the world, or make it even meaner?
Doug