Greenspan: economy soft, not falling down

[/ dave /]

Doug Henwood fwd'd:

> 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)

-- 

/  dave  /