> Greenspan: Economy Soft, Not Falling Down
(Dr. Richebächer had something to say about this today. Any thoughts about the "crucial novelty" vis-a-vis global synchronization he mentions?)
BUBBLE AFTERMATH by Kurt Richebächer
"Encouragement of consumption is no benefit to commerce, for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption."
Jean-Baptiste Say,
"A Treatise on Political Economy", 1803
Since World War II, all recessions in the United States, as well as in the rest of the world, had their main cause in monetary tightening by the central bank, implemented in response to rising inflation rates. As soon as the central banks loosened their shackles, economies promptly took off again.
Also important, the business cycles in America and Europe never used to coincide and cumulate, but instead used to follow each other. The fortunate effect of this regular sequence was that it stabilized the world economy.
Now, for the first time in the whole postwar period, the U.S. economy has slumped against a backdrop of the most aggressive rate cuts by the Federal Reserve and the most rampant money and credit growth ever. Implicitly, the forces depressing the U.S. economy this time are radically different from those that fueled past recessions. It is the goal of this essay to explore and identify the unusual causes of this economic downturn.
Among these causes, the profit implosion is the most obvious and also the most important. Essentially, it must have its own specific causes. Searching for them, we identified three major profit killers: first, a surging share of depreciation charges in gross investment; second, inflexible, record-high interest charges; and third, the gaping trade deficit.
Widespread hopes of an early rebound in U.S. corporate earnings are doomed.
But there is another crucial novelty to this economic downturn: its global synchronization. The problem is that the global economic upturn of the past few years was equally synchronized, as economies around the world adjusted to the roaring U.S. asset and spending bubble. During 1997-2001, American spending on imported goods and services exceeded earnings from exports by altogether $1,428.8 billion. To put this into perspective, U.S. GDP growth during these four years was $1,055 billion in real terms and $1,763.8 billion in nominal terms.
It is a familiar postulate of Austrian theory that the extent of the bust following a boom tends to be rather proportional to the scope of the excesses and the adherent economic and financial imbalances that accumulated during the boom. Gottfried Haberler's 'Prosperity and Depression' (1937) says: "The length and severity of depressions depend partly on the magnitude of the 'real' maladjustments which developed during the preceding boom and partly on aggravating monetary and credit factors."
This postulate of the proportionality between boom and bust has convinced us from earliest times. Manifestly, it is diametrically opposite to conventional thinking in America that, under the influence of Milton Friedman, discards past boom excesses as things of the past. Past is past, and the only thing that counts for the present and the future is current monetary policy.
In this view, the Depression of the 1930s owed nothing to any credit excesses and related maladjustments in the economy and the financial system during the boom years, but resulted exclusively from the Fed's flawed policies after the stock market crash. Common to this opinion is furthermore the conviction that proper monetary policy is capable under all circumstances of preventing recession and depression.
It goes without saying that this kind of thinking is prone to foster illusions about what monetary policy can do. What we generally hear and read from American sources reveals that there is, in fact, a widespread, inordinate complacency about the U.S. economy's woes, even though troubling economic data abound lately.
A strong, preconceived view appears to hold sway that everything is bound to come up roses in the end. We stick to our view that the world economic prospects are significantly more bleak than most people realize.
Regards,
Kurt Richebächer, for The Daily Reckoning
P.S. The existing imbalances and structural distortions are too big and the room to cut interests far too small to fight the spreading weakness. But as to prevailing illusions, America is apparently on top. The rest of the world clearly lacks the dynamics for self-made economic growth. But Europe, above all, has no prior excesses to cope with. Our particular concern about the U.S. economy arises from the recognition that the world's greatest bubble in history has in many ways grossly imbalanced it, hampering growth for a long time to come.
The decline of profits is already the worst since the 1930s. What's more, it started long before the economy began to slow down.
(end fwd)
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/ dave /