Re: Richebacher's black scenario

EAST4WIND@aol.com wrote:

>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.

Golly, what a joy it is to be an American!

>  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.

Not true, pal. European population growth is almost 0%, while the 
U.S. is close to 1%. So a more accurate comparison of economic 
performance would use per capita figures, which follow. The U.S. 
economy was virtually flat from 1989 to 1992, recovered weakly in 
1993 and 1994, and didn't really take off until 1996. Stories of U.S. 
outperformance - which generally make grand systemic claims, not 
merely cyclical ones - are based on about 3 years of experience.

===========================================================================
REAL GDP PER CAPITA
(average annual growth rate)

                           1979-89   1989-99   1993-99
all advanced industrial     2.3%      1.8%      2.2%
G7                          2.1%      1.6%      2.0%
U.S.                        1.7%      1.6%      2.5%
Japan                       3.2%      1.7%      0.9%
Germany                     1.8%      1.9%      1.8%
France                      1.7%      1.5%      2.0%
Italy                       2.6%      1.5%      1.6%
UK                          2.3%      1.5%      2.8%
Canada                      2.1%      0.7%      1.9%
other                       2.9%      2.7%      3.1%
industrial                  2.1%      1.7%      2.1%
EU                          2.1%      1.8%      2.3%

source: computed from figures in IMF World Economic Outlook, various issues
===========================================================================

>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?

In stocks, of course. The U.S. bull market has no precedent in our 
history, and I've got numbers going back to 1820. By almost any 
measure you use, stocks are at or near records for valuation - 
records that go back more than a century. If you compare the real S&P 
500 to its trend growth line, prices are further above their trend 
than at any time since the index (actually its predecessor, the 
Cowles index) starts in 1871.

>   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?

About $300 billion in capital inflows this year.

>   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.

Is a fall of 8% rock-like? The euro is about where the ecu was in early 
1998.

>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.

Don't forget that software depreciates very rapidly, so including it 
in investment, and therefore in GDP, has almost no effect on the net 
numbers, though it does on the gross.

>Actually, I think most regular people and managers know why they bought 
>their
>computers and they are happy to have them.

If it weren't for computers, we couldn't be having this edifying 
conversation! Instead, we'd both be working.

>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.

You read any of Greenspan's speeches or testimony lately? He clearly 
thinks he can fine-tune. He's even said that he could handle a stock 
market decline, though the Japanese couldn't. He's so skilled, that 
Greenspan; must have been that early training with Ayn Rand.

>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?

Generally those things come after the bubble bursts, not before. 
Remember the U.S. from 1989-92? But even so, personal bankruptcies in 
1998 were at record levels, and junk bond default rates are 
surprisingly high.

>   Asset
>prices have risen a lot, and people are a lot wealthier than they were
>before.

Which people? The richest 0.5% who own 32% of all stocks, or the 
richest 10%, who own 84% 
<http://www.panix.com/~dhenwood/Wealth_distrib.html>?

>  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)

A factoid: the "average" household - the mean computed by dividing 
aggregate figures by the number of households - correponds to the 
95th percentile of the wealth distribution. Talk about skew!

>  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.

Uh, not exactly. The trend is exactly the same. The shift of federal 
government pension contributions from the public sector to the 
household had no effect on national savings rates, either.

>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.

Which are shaped by experiences of the last few years, no? Where do 
you think projections come from? Actual knowledge of the future? Or 
extrapolations from the present and recent past.

>   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.

Actually real S&P earnings are virtually flat since 1996.

>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.

You should broaden your checking universe beyond MSFT & DELL. The 
national income accounting measure corresponding to Wall Street's 
EBIT (earnings before interest and taxes) averaged 7.8% of GDP from 
1985 to 1989, and 8.1% from 1995-99.

>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.

Hey tell that to Orange County, Procter & Gamble, and Long-Term 
Capital Management! Derivatives can get very messy if prices don't 
behave according to models - if "normal" price relationships get out 
of whack, as they do in panics and credit crunches. The risk may not 
be exactly the same as leverage, but if Party A can't pay, Parties B, 
C, and D can be in serious trouble. But we don't really know how 
derivatives would behave in a serious financial panic. Not to worry 
though, those morons in government will bail everyone out!

>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.

Central banks are supposed to do the long-term work of the ruling 
class. As a friend of mine who used to work at the New York Fed told 
me, the attitude is that politicians and bankers may come and go, but 
central bankers are around for the long term. Preserving the rule of 
capital over the long term may require that some hotshots take a loss 
in the short term.

>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.

Has there ever been a time when Americans were so full of themselves? 
I'm 46, and my memory only goes back so far. Maybe some historians 
can help me out.

>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?

Not enough government subsidies 
<http://www.panix.com/~dhenwood/Payoff.html>.


Doug Henwood
Left Business Observer
250 W 85 St
New York NY 10024-3217 USA
+1-212-874-4020 voice  +1-212-874-3137 fax
email: <mailto:dhenwood@panix.com>
web: <http://www.panix.com/~dhenwood/LBO_home.html>