> [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