Re: Richebacher's black scenario

Hello all,

The Richebacher commentary was one of the dumbest pieces of economic 
thinking 
I've ever seen,--made the worse by the alarmist and sensationalistic tone 
of 
the correspondent.  Please! The guy isn't Copernicus by an astronomical 
unit 
of margin for error!  It also just really ruins the whole piece to have to 
swallow the extremely elitist and condescending pose of a man who doesn't 
have the credentials to claim the place on the throne of the global 
economy.  
The only Bubble worth talking about in the piece is the Ego Bubble of the 
economist himself.  The final part is really the killer, since he is 
warning 
about deflationary collapse while out of the other side of his mouth he 
criticizes the Fed for a too loose monetary policy.  One is left with the 
impression that if this turkey ran the Fed, the first thing he'd do is 
tighten credit and money supply growth-- the very ticket to inducing the 
deflationary spiral which he claims to warn against.  Point taken: don't 
let 
this fool anywhere near the money supply or he will engineer the 
catastrophe 
he claims to predict!

Let's take apart the horseshit...
1. First off, according to him, Americans are all idiots.  Compared to 
Europeans, our crew isn't "too deep" in the braniac dept...."No one is left 
to pose critical questions about fundamentals".  

Well, perhaps unlike Europeans, Americans don't have to be permitted by 
technocrats to use their money the way they want to, and they don't have to 
be told how to do it by some committee of stuffed shirts.  Each day, every 
American has a right to use his/her resources to buy or sell whatever 
he/she 
pleases.  When I buy a car, it's because I thought it was a good deal.  I 
wasn't fooled into buying a car by some evil Wall St. cabal.  Just in case 
our brain dead way of allocating resources might be improved upon by acting 
more like European economists, we can look at the track record of Europe's 
economics wizards and see that the Americans just beat the living shit out 
of 
them all decade long.  It was actually the Europeans who may be lacking in 
the brains department since they gambled on instituting a common currency 
without yet having a political union to back it up.  They set the EMU 
standards for joining up, and then they loosened/fudged those standards 
when 
several members couldn't meet their own criteria.  Just who is being too 
accommodating?

2. The Fed is too loose; and has been all decade by the way...
So where is the inflation which, by definition, MUST result from 
excessively 
loose monetary policy?  Wasn't that a 20 YEAR LOW I was looking at in the 
gold market a few months back?  Why is the dollar generally stable against 
the currencies of its major trading partners?  After all, if we're doing 
something wrong (too loose policy) compared to those oh-so-brilliant 
Europeans, then the $ would be dropping like a rock vs. the Euro.  
Unfortunately for that line of reasoning, it is the Euro which has fallen 
like a rock against the buck since its introduction.

3. Hedonic amplification of computers is distorting GDP
Taking the other side, I could also note that until last month the 
government 
didn't count software licensing as a contributor to GDP.  The whole of 
Microsoft, Oracle, and etc. never even happened as far as GDP metrics were 
concerned.  GDP is a famously arbitrary measure of activity and you can 
poke 
it for all you want.  At the end of the day, it's just a number for 
economists to talk about.  Whether the All Wise Richebacher believes it or 
not, his peers who pay attention to this statistic are well aware of its 
nature, composition, and foibles.  Richebacher is a conceited blowhard to 
cop 
the pose that he's the only one who knows about the amplification of 
computer 
sales.  Besides, no matter what number a government chooses to publish 
about 
anything, there are still private sector metrics.  Nobody needs to worry or 
wonder in the dark how many computers were really sold in America last 
year, 
or for what price. That data is available from innumerable sources.

Richebacher seems to imply that his economic brethren are too unschooled 
not 
to take the GDP statistics with a grain of salt and thus they are making 
research errors and policy mistakes.  Well, the policy errors that one 
would 
make from seeing GDP as stronger than it really is are as follows:

a) You would run a TIGHTER than optimal monetary policy.  Obviously not the 
problem according to Richebacher who says we're too loose

b) You would buy more stock than advisable, too.  Well, so far that hasn't 
been a problem either.  Professional asset allocaturs, typically taken from 
the ranks of economists have routinely been whipped by the market all 
decade 
long because they were too conservative.

So, if the GDP data is lying, nobody has been "seduced into ignorance" by 
it.

4. Since economists still haven't figured out what computers are good for, 
the managers and consumers who buy them must all be stupid.  

Actually, I think most regular people and managers know why they bought 
their 
computers and they are happy to have them.  If Richebacher can't figure out 
how computers affect service productivity metrics, that really is his 
problem.  Since the Laws of Economics require all agents to act with 
infinite 
rationality (a stupid idea, but let's hoist Richebacher on his own petard) 
then the capital investment by corporations in information technology is 
also 
an expression of rationality.  Their shareholders won't stand for the 
useless 
waste of capital.  Consumers don't buy products at too high prices which 
transactions then cause them to be dissatisfied.

Whereas, the economists haven't realized a consensus for how they will 
quantify and qualify that IT investment, its operations, and its outputs; 
and 
this causes them a huge amount of stress because every year IT spending as 
a 
percentage of total capital expenditures goes up (even though the prices 
per 
PC and etc. go down) and that means there is more and more economic 
activity 
which economists are at a loss to interpret.  In which case, the route to 
policy error is to place faith and power in an economist (or a gang of 
same) 
to let them allocate resources and credit in the economy because they 
really 
don't understand what's going on.

5. On the same note, if the models from the 60s were so good, then why did 
the world abandon them for new models?  Well, it's called model failure.  
60s 
models were notoriously pretentious, and were especially famous for the 
misguided notion that central banks could successfully fine tune the 
economy 
and thereby stamp out the business cycle.  Once again, infinitely rational 
actors wouldn't abandon a model which could competitively predict and 
interpret the data.  If we want to look at a real waste of time, it seems 
to 
be the economists' penchant for making flawed models and bad predictions.  
Perhaps this is why almost every major corporation has been killing off 
their 
econometric forecasting divisions: they don't work, and their predictions 
aren't any good.  Why waste $250,000 on an inaccurate and egocentric 
economist when one could buy 1,000 of the latest accurate and servile PCs 
instead?

6. As for the hallmarks of the bubble...
If money and credit growth are excessive, then where are the rising credit 
defaults, the destroyed banks, and the inflation that goes with it?  Asset 
prices have risen a lot, and people are a lot wealthier than they were 
before.  Good for them.  It's a lot better than the alternative.  How can 
the 
households be so much richer (about 50% on average over the last decade) if 
they are dissaving?  Uh-oh: one more too narrowly defined metric (the 
household savings rate) just bit the dust because it doesn't 
comprehensively 
described all the relevant behaviors.  And much as he would like to suggest 
that a wealth effect has kicked off all kinds of spending, he would be very 
hard pressed to prove that argument based upon past data.  However, in the 
future, it is likely to kick in more, since wealth effect consumption tends 
to lag the movements of markets by a few years.  If it does, then that 
would 
stimulate demand, put upward pressure on prices, and expand GDP.  One can't 
argue that a big wealth effect is fueling consumption, and at the same time 
argue that deflation is the likely result. 

7. It is mighty convenient for him to compare '97 to '98 earnings.  
Unfortunately for him, today's stock prices are based not upon the '97 or 
'98 
data but rather on the expectations for 2000.  On that score, the consensus 
estimate is near $55 earnings for the S&P 500.   The fundamental growth in 
earnings has been unmistakably robust over the 1990s.  It has, for a fact, 
been one of the best decades for earnings expansion since they started to 
track such things.  To assert otherwise based on the one bad year on year 
comparison within the time series is a very stupid way to look at the data. 

8. To claim that the earnings growth in the '90s can all be explained away 
by 
lower interest expenses is utter horsehit.  Last time I checked, some 
companies such as Microsoft and Dell have minuscule borrowings; you could 
cut 
interest rates to zip and it wouldn't do much to cut their nigh nonexistent 
interest expenses.  Rather, it would more strongly REDUCE earnings (in the 
case of these cos.) by cutting into the interest earned on their huge cash 
balances.  And yet these companies are the ones with the most phenomenal 
rates of earnings growth.  

Profits are up because of the good decisions made by American management 
teams.  This isn't a new thing.  American managers have increased earnings 
over the very long term by an astonishing amount and that has occurred 
despite some epochs of lousy economic policy at the gov't. and Fed (read: 
no 
thanks to the  economists of Europe, either).

9. As an economist, he ought to resign (oops, I forgot he's already a 
former 
working economist) for trying to put one over on his readers about how 
derivatives spur higher risk taking through leverage.  Uh-uh.  Wrong.  
Can't 
happen.  All derivatives, are, by definition, part of a zero-sum game.  For 
every risk taken by one party, an exactly equal risk was sloughed off by 
the 
counterparty.  So, while derivatives markets do give birth to speculators 
(those who seek out the risk because they want exposure to the opportunity 
for rapid appreciation) the speculators are compelled to deal with 
counterparties who must be taking an exactly opposite position.  Taking the 
pair together, no money will be made at all.  It cannot be any other way. I 
note that's a law of economics.

10. If Alan Greenspan and the rest of the Fed economists are part of Wall 
St.'s sales force, then why oh why are the Wall Streeters complaining so 
bitterly that the Chairman ought to lay off the "irrational exuberance" 
lingo, ignore the Street, and focus upon the stabilization of CPI? Sorry, 
that dog of an argument just doesn't hunt.

The only true item in the whole piece was the comment that the U.S. trade 
deficit is a drag on U.S. growth. However, I don't have to be a European 
economist to know that.  Perhaps the U.S. wouldn't have to function as the 
"importer of last resort" in times of economic crisis elsewhere if the 
Europeans would liberalize their own trade relations to the standard of 
freedom set by the Americans.  Over time, a continuation of the trade 
deficit 
must eventually (although we won't know exactly when) contribute to a 
lowering of the $ exchange rate, which in turn puts upward pressure on 
interest rates, makes our exports more competitive, makes imports less so, 
etc.,etc.,etc., and thereby restores equilibrium not found in the present 
trading regime.

The other thought I have on the topic of IT economies is why have the 
Europeans done such a lousy job of competing in the computer and software 
markets?  Admittedly, for cellular phones, they are tops, but for 
everything 
else there are Asians and Americans who just blow them away.  Why should 
the 
Europeans be so lacking in deep thinkers, capable engineers, and competent 
IT 
management teams?  Could it be that the main advantages of using, owning, 
making, and selling IT are defeated in Europe by flaws in THAT continent's 
policies?  Rather than see Americans as unusually manic reactors to a too 
loose Fed, perhaps the Europeans are the unusual ones-- too depressed as a 
result of their own illusions and flawed, straitjacketing policies to see 
and 
seize upon the full benefits of information technology...

Regards,
Brian Lewis