The US economy and Alan Greenspan: what is going wrong?
Gerard Jackson
Those who argue that private consumer and investment spending is being depressed by worries fuelled by tension with North Korea and the impending war with Saddam's murderous regime have got the wrong end of the stick, as usual.
America's economic problems have everything to do with the 1990s unsustainable boom that the Fed's (meaning Alan Green) criminally loose monetary policy fuelled and for which the US economy is now paying. McKelvey, an economist with Goldman Sachs and Co. New York, said: "The best way to think about the US economy right now is it is still working out the imbalances that came alongside the stock market bubble of the late 1990s."
Not quite right, if I read Mr McKelvey correctly. When most economists speak of imbalances they are usually referring to balance sheets. Here they see huge borrowing, sitting along side deflated assets, with very little or nothing to repay them at the moment. In their books this means that firms will take considerable time to repair the situation. While they do so the economy must remain sluggish.
While this is true in itself, it tends to focus on what is being called debt overhang. Meanwhile, the great majority of commentators are still focusing on the military build-up. It does not matter. No one expects a protracted conflict, and very few expect a significant and permanent increase in oil prices. These commentators should cast their minds back to the Korean, Vietnam and Gulf Wars, none of which caused business and consumer spending to fall.
The basic problem is that the Alan Green policy of flooding the US economy with massive credit expansion misdirected production. Enormous amounts were spent on enterprises that would not be able to cover their operating costs once the credit expansion worked its way through the system. During the 1995-2000 period IT spending exploded, rocketing from $228 billion to $713 billion. The inevitable result was huge losses and a plunging stock market as market process began to make the necessary corrections by eliminating the malinvestments.
Unfortunately, this gigantic spending spree and the speculative frenzy that it spawned resurrected the old "excitement" fallacy. According to this thesis, people become so exited by a boom they lose their senses and become rabid speculators, which then drives stock prices to "giddy heights".
In fact, some commentators used the Victorian railway boom of the 1840s to justify this thesis. An inspection of the facts, however, shows how very wrong the "excitement theory" is. The one question these commentators never think of asking is where does the money come from.
The central bank is the answer. From the end of 1844 to about February 1846 the Bank of England's discounts rose from about £2 million to over £13 million pounds while bank credit jumped from $22 million to nearly £36 million. What we have here is a massive credit expansion in which discounts rocked by about 464 per cent and bank credits by 64 per cent.
Where did a most of this money go? Into hi-tech speculation, i.e., railway investment. More than £180 million were poured into railway schemes in 1845 and 1846, about twice the investment of the previous 10 years. By September 1847 it was all over.
Almost as if it were describing the 1990s The Economist painted a grim picture of the boom, contemptuously referring to "the folly, the avarice, the insufferable arrogance, the headlong, desperate, and unprincipled gambling and jobbing, which disgraced nobility and aristocracy, polluted senators and senate houses, contaminated merchants, manufacturers, and traders of all kinds, and threw a chilling blight for a time over honest plod and fair industry."
The same thing happened in the 1990s. The Fed's present policy is delaying recovery by frustrating the necessary process of liquidation. In doing so, Alan Greenspan is once again laying the foundations for another recession.
Melbourne: Australia
BrookesNews.Com
Thursday 6 March 2003
