Bundesbank mocks US IT book-cooking

[/ dave /]

Michael Pollak wrote:

> [Here's the guess a letter writer to the FT came up with: a US real GDP
> growth rate 1/3 less than that posted for the last two years]
> 
> Financial Times, 05-Sep-2000
> 
> LETTERS TO THE EDITOR: Statistics explain divide between US and Europe
> 
> By KURT RICHEBACHER

Richebacher is an Austrian economist tied in with the contrarian investing crowd who
incessantly decry the oft-trumpeted advances of the "new economy," bemoan the decline in the
savings rate, hint at the imminent plunge of the dollar, point out the perils in the bond
market, and harp on the Fundamentals viv-a-vis investing strategy. Not that he seems that
far off in many respects, and he does have a no-nonsense presentation that kind of lays it
all on the line, but ultimately the ways in which he might envision this information being
applied and put into action might differ considerably from the more egalitarian and
beneficent agenda of many on this list. He's been quoted in the WSJ now and then, and also
has some kind of financial tie-in with the Fleet Street organization, of which Bill Bonner,
the commentator I posted about a few months back, is also a part. I managed to track down
one of Bonner's June e-columns in which he discusses Kurt Richelbacher (attached). I believe
Richelbacher (or someone on his behalf) has a website, with more of his ideas on Keynes, the
economy, etc. and probably an incitement to send money in exchange for investing tips...

--

/  dave  /



VIRTUAL PROFITS

"At long last," to repeat yesterday's quotation from Dr. 
Kurt Richebacher's recent letter, "the great global bear 
market in stocks has arrived"

But what happens next?

I ended yesterday's letter with an interrogative that must 
have left you on the edge of your seat. Why did corporate 
profits decline after 1997? Surely, with the spread of 
Information Technology...and the beneficent light of the 
New Era sun ...profits should have risen.

But they did not. Why?

You may be worried that this subject will be too narrow and 
dull to be worth your time. Let me assure you - you are 
probably right. Yes, I do explain why life as we know it on 
planet earth will soon end...and how. But if you have other 
things to do...I will understand.
 
America has, since WWII, enthusiastically taken up its role 
as the consumer of last resort. Like the teenager with an 
infinite appetite at the family table, America has been 
willing to consume just about anything and everything that 
the world wanted to send its way.

In economists' terms, we provided the Keynesian demand 
required for global growth. "But the long-term effect of 
Keynesian economics," writes Dr. Richebacher, "was 
dwindling capital formation and 'stagflation,'...an unusual 
coexistence of economic stagnation and inflation."

The answer to this problem of the late 70s was supposed to 
be a shift to the supply side - Reaganomics. Lowering taxes 
and reducing regulations produced new growth. But the 
growth was not the investment-led growth that was expected. 
"The reality," as Dr. Richebacher puts it, "was the precise 
opposite: an unprecedented consumer borrowing and spending 
binge, with exploding budget and trade deficits." 

Instead of increasing the amount of investment, Reaganomics 
actually reduced capital formation and increased 
consumption. Once again, America played its role well - 
absorbing products from all over the world (especially from 
Japan, which was the economic miracle of the time)...and 
going deeply into debt.

"Over the decade," again, quoting Dr. Richebacher, "total 
outstanding debts skyrocketed from $4.1 trillion to $12.8 
trillion. During the three decades since World War II, each 
dollar in incremental GDP growth required approximately 
$1.40 of additional debt. At the end of the 1980s, the 
debt-to-GDP ratio had soared to $2 with a rising trend."

The 1990s merely continued the trend. We were getting good 
at it. Debt-to-equity, total debt, and debt-to-just-about-
every-other-measure-under-the-sun has gone up. "The 
American reality of the last four years is the wildest and 
most reckless credit and debt binge that the world has 
every seen," as Dr. Richebacher puts it. (See: 
http://www.dailyreckoning.com/corprofits2/)

That is the trouble with Keynsian demand-side growth. It 
gives the illusion of growth - the effect and essence of 
growth, as it were, but much of the growth is virtual, not 
real.

Nothing comes from nothing. Real growth still and always 
requires real investment of real money. It requires 
sacrifice - giving up current consumption in favor of 
capital formation. In the most primitive economy, progress 
requires that a man give up his leisure in order to do some 
work. In a more advanced economy, a person must forego 
additional consumption in order to devote the money to 
investment purposes.

But instead of saving their money and investing 
it...Americans spent it. And instead of making capital 
investments that would have boosted earnings and profits, 
US companies preferred to give the consumer/investors what 
they wanted - a fast return on their money. They preferred 
to substitute virtual profits (in the form of stock market 
increases) for actual increases in productivity and 
earnings.

A real return requires time. And sacrifice. But a fast 
return could be had by embracing the latest jingoes of 
American corporate management. In the 1960s, American go-go 
management was the envy of the world. But after in the bear 
market of '73-'74, the American model was discarded. For a 
few years, it was the German model that the world wanted. 
Then, in the 80s, books on Japanese corporate management 
were the rage. By the 1990s, a new American model was back 
in style - one that was consistent with the underlying 
trends in the U.S. economy.

The single imperative of U.S. executives has been to 
"maximize shareholder value." And do so quickly. You do 
this by cost cutting, restructuring, merging, acquiring and 
buying back your own shares - not by investing in new plant 
and equipment. Each announcement of a merger, for example, 
produces a pop in the share price. So does a large purchase 
of your own shares. But these gains are virtual - they 
produce no additional profit.

In his 1997 book, The Synergy Trap, Mark Sirower showed 
that two thirds of all the 168 mergers and acquisitions he 
studied failed to produce additional shareholder 
value...instead, they destroyed shareholder value.

And even the gains from cost-cutting are largely an 
illusion. That is, companies are always trying to remove 
unnecessary costs. And while one company can, 
theoretically, boost its net earnings by eliminating costs, 
what really happens is that the culture of cost-cutting 
produces cuts across the entire economy. One company's 
cost, it turns out, is another's revenue. The aggregate 
effect is merely a reduction in economic activity, not an 
increase in profits.

In short, corporate profits leveled off after 1997 because 
there was so little real investment in the preceding years. 
There was not enough money going into new plant and 
equipment to produce new profits.

While American corporations were trying to squeeze out 
additional earnings by cutting costs, and goose up their 
share prices by buying back their own shares...their 
workers were on a spending spree. This too contributed to 
the lack of profits. The money paid to employees did not 
come back in sales revenue. Instead, much of it ended up in 
the hands of foreign businesses. Then, when it did come 
back to America, it came back as capital investments in 
stocks and bonds. The dollar was boosted up...so were U.S. 
equities. Interest rates, on the other hand were held down. 
And U.S. corporate profits suffered.

Dr. Richebacher: "The U.S. current-account deficit 
increased to $338.9 billion in 1999, from $220.6 billion in 
1998, and $143.5 billion in 1997. That is, the deficit has 
doubled within the two years. It is already well above 
$400." In fact, the first quarter of 2000 the deficit - 
which measures the difference between goods and services 
sold abroad and those imported from overseas - hit $100 
billion for the first time ever.

"Follow the trail of debt excesses," urges Dr. Richebacher, 
"The decisive causes of every single, serious economic and 
currency crisis are credit and debt excesses. Apparently, 
one cannot repeat it often enough: the U.S. credit and debt 
excesses of the past few years are beyond past 
experience...essentially leaving behind a horribly 
vulnerable economy and financial system. This tells us to 
expect a very hard landing of the economy with a steep, 
steep fall of the dollar."


Bill Bonner