> His synchronization argument has a problem - there was no synchronized
> upturn in the EU, Japan, or much of the "South."
I thought that seemed odd, as he doesn't generally seem to be that far off the mark, at least as far as highlighting more-or-less empirical data (to the extent that it's possible). What could he be thinking?
I hesitate to forward another column, but I found this one from a couple of weeks ago to be amusing, with Richebacher's dressing-down of blinkered American economists, and his dire pronouncement that, "There is nothing in sight that might be regarded as healthy readjustment." One wonders just what he might surmise as a likely outcome on the "other side" of all this, given that he also used the word "doomed" in that other commentary I forwarded. Maybe he's a closet end-timer (or maybe he's hedging his positions)...
THEY HAD IT IN THEIR GUTS by Kurt Richebächer
Worldwide, the economic news is going from bad to worse. Never before has the world experienced such massive destruction of stock market wealth; never before have business profits and business capital spending suffered such steep declines. Yet there remains, particularly in the United States, a general flat refusal to see anything foreboding in these developments.
Blind faith is overwhelming bad and worsening facts. This faith has two main objects: first, Fed Chairman Alan Greenspan creating money and credit with reckless abandon; and second, the consumer borrowing and spending with equally reckless abandon.
This faith is utterly amazing. But it confirms our long- held suspicion that the American consensus remains at a complete loss to appreciate and understand that the extraordinary excesses of these two, Mr. Greenspan and the consumer, have been crucially responsible for the present economic and financial mess. Even more of the same excesses are hardly the solution. While postponing the day of reckoning, the consumer is ever-worsening his position by loading himself with more debt that he is unable to repay.
We continue to track the chief causes of this developing American economic and financial crisis. Our finding is that they keep worsening. There is nothing in sight that might be regarded as healthy readjustment.
In his book Crises and Cycles, published in 1936, Wilhelm Röpke, Germany's leading economist at the time, lamented about the general posture of American economists to indulge in the collection of detailed statistics about the economy, simply looking for regular sequences in the business cycle while grossly neglecting analytical research about underlying causes and conditions.
For the great European economists, economics was in essence a branch of logic with minimal statistics; for American economists, it is traditionally a branch of statistics with minimal research and logic.
The main concerns of the European economists were the need for sufficient rates of saving and capital investment as the key sources of wealth creation and productivity growth. For them, capital formation was the future. Under the dominating influence of Professor Wesley Mitchell (1874-1948), economic thinking in America took a diametrically different route. He had no interest in the conditions of long-term economic growth. His whole attention centered on the recurrent oscillations in economic activity.
His primary thesis was that each phase of the cyclical oscillations grows out of the preceding phase. Under his influence, the business cycle became a fad with American economists and the business community, and forecasting became a national sport.
With the change in the target of research came a radical change in the kind of research. While the European economists emphasized the need for a theoretical concept to properly assess economic policies and prospects, Mr. Mitchell discarded such abstract theorizing as a useless exercise.
Pointing out that business cycles generally follow the same pattern, Mr. Mitchell advocated that economists should therefore contend themselves in their studies with purely empirical, descriptive analysis. Instead of trying to search with theoretical concepts for causes and conditions, they should look for regular sequences and leads and lags of the significant economic and financial variables, trying to trace unfolding fluctuations.
Putting it briefly and bluntly: while the European economists searched for causes and conditions that determine long-term economic growth and its repeated upheavals, Mr. Mitchell practically turned American economics into a science of statistical symptomatology, refuting the necessity to identify underlying causes and conditions.
Still, although very skeptical of any theory, he emphasized in his writings that the quest for profits is the central factor controlling economic activity. Accordingly, he said the whole discussion must center on the prospects for profits, which is really the theoretical assumption of crucial importance about the workings of the capitalistic economy.
Looking back over the five decades since World War II, it is true that the industrial economies developed very smoothly and that cyclical fluctuations showed, indeed, the very same pattern as presumed by Mr. Mitchell. There appeared to be no need for a theoretical concept.
But we think that this interpretation is grossly misguided. With the Great Depression in their memory, policymakers, economists, entrepreneurs and the public worldwide entered the postwar period with strict views about what is sound and what is unsound in economics.
They didn't need a theory; they had it in their guts that saving and investment were needed to increase living standards and wealth. Americans were proud of repaying the mortgages on their houses. They would have thought it irresponsible to increase an existing mortgage. In the same vein, deficits in government budgets as well as deficits in the balance of payments were generally abhorred. Minor deteriorations tended to cause prompt and heavy adverse market reactions in the markets, forcing governments to undertake quick, corrective action.
What prevented prolonged spending excesses was, clearly, not only prompt monetary tightening, but rapid, adverse market reactions and a general sense of responsibility and unwanted consequences among the public. This kind of thinking went completely out the window in the United States in the 1980s with unprecedented private and public borrowing binges.
Whether plunging personal saving, a soaring budget deficit or a soaring trade deficit, none of it mattered anymore for the economy's health in the eyes of American consensus economists. For the first time in history, national and international lenders and investors readily financed extreme American borrowing and spending excesses.
There was still a lively, critical public debate inside America about the negative effects of the soaring budget deficit and lower personal saving on national saving and the pace of domestic capital investment. Net national saving as a percent of GDP declined from around 7% to almost 2% during the 1980s, while net private investment (gross investment minus depreciations) shrank over the same period as a share of GDP from a little over 7% to 5% of GDP. Clearly, this reflected a consumption boom, not a supply-side boom.
We have recalled this episode and the notorious American disregard of economic theory because these negative trends in saving and capital formation that started in the 1980s have dramatically deteriorated in recent years.
Measured by the new slide of net saving and net capital investment, consumers and businesses have ravaged the economy's capital structure in the past few years as never before. Yet this time there is zero discussion, zero research and zero worry.
Net national saving has slumped again to around 2% of GDP, and continues to shrink as minimal personal and business saving is being joined by a soaring budget deficit. Net capital investment still accounts for about 5% of GDP, about half-and-half nonresidential and residential investment.
Manifestly, this is not a garden-variety type of economic downturn; that is, one triggered by rising inflation and monetary tightening. Rather, collapsing profits induced businesses to slash employment, fixed capital investment and inventories. The profit slump is the one very unusual feature. The fact that it occurred against the backdrop of the most rampant money and credit growth in history is the other one.
During 2001, broad money growth (M3) accelerated to $912.5 billion, from $573.7 billion in the year before, while GDP growth, measured from fourth quarter to fourth quarter, decelerated to $5 billion. To put this into perspective: Broad money (M3) grew by $468 billion overall, from 1990 to 1995 or $94 billion per year.
Worst of all are the credit figures. In 1991, borrowings of the non-financial sector soared by $1,108 billion and those of the financial sector by $916 billion. During the second quarter of 2002, the debt explosion went astronomic. Total non-financial debts exploded by $1,531.4 billion (government $451.3 billion, consumers $705.5 billion and businesses $201.1 billion) and financial debt by $916.3 billion, all at annual rate. Altogether, this produced an abysmal increase in GDP of $58 billion, also at annual rate.
One would think that such a horror picture of grossly ineffective record money and credit growth would provoke some critical questions about underlying causes. But we see nothing of that kind. Few, if any, people seem to have noticed.
The past U.S. boom was anything but normal, and so is the downturn. The question to examine in the face of the obvious, massively abnormal features of boom and bust is how, and to what extent, they condition the future, either for better or for worse.
Regards,
Kurt Richebächer
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/ dave /