Worried about the federal deficit? The dollar? The global monetary system? You can relax now. Bloomberg columnist Caroline Baum writes Every Problem Is an Opportunity for U.S. Economy. Baum writes:
If you consider the litany of negatives buffeting the economy since the bursting of the stock market bubble in 2000 and the 2001 recession, it’s something of a miracle that it managed to grow 2.3 percent in 2002, 4.4 percent in 2003 and 3.9 percent in 2004 (all on a fourth-quarter over fourth-quarter basis).
The economy expanded in 2001 as well, albeit at a miniscule 0.2 percent rate. [...]
Herewith is a short list of hurdles the economy confronted, in no particular order of importance or chronology and freely adapted from various prognostications over the years:
[...] What are we to make of the solid and increasingly broad-based growth in the face of all this adversity?
The first lesson is that an economy’s natural tendency is to grow. Really it is. Unless you throw some nasty stuff at it -- higher taxes, excessive regulation, unnecessarily high real rates, a curtailment of individual freedoms -- people want to produce. They produce to profit, to have the means to buy whatever it is they want.
[...] A second lesson to be learned is to avoid spending too much time hanging out on the Prudent Bear Web site.
Bearishness is a way of life for some folks, an end in itself. Many economists and analysts, not to mention an odd mix of physicians and college professors who write to me (when they’re not buying up gold), maintain an Armageddon forecast, month after month, year after year. All that changes is the reason for the looming disaster, once the previous excuse fails to pan out.
- a 40 percent drop in the broad U.S. stock market;
- a 78 percent plunge in the technology-heavy Nasdaq Composite Index;
- the biggest decline in capital spending since 1974-75;
- a terrorist attack;
- corporate accounting scandals;
- two wars;
- too much debt;
- too little saving;
- more than enough uncertainty;
- a contested presidential election (2000);
- a divisive presidential election (2004), the outcome of which held drastically different implications for business;
- a record budget deficit;
- a record current-account deficit;
- no jobs;
- no good jobs;
- good jobs going overseas;
- good companies going overseas;
- $50 oil, which is a tax on the consumer;
- an over-leveraged consumer;
- a tapped-out consumer;
- no pent-up demand;
- no help from the world’s No. 2 economy, Japan;
- an end of the stimulus from tax cuts;
- an end of the stimulus from mortgage refinancings;
- a housing bubble;
- a bubble in high-yield and emerging bond markets;
- a Federal Reserve pushing on a string;
- a liquidity trap (see string theory above).
On a quick check at the Prudent Bear site (being careful to avoid spending too much time lingering there lest we should become perpetually bearish), the following letter from the fund manager can be found. The manager in question happens to be David Tice, an Austrian economics practitioner who has spoken at Mises Institute conferences. The letter, written about a year ago, contains the following sub-heads:
- RECKLESS CREDIT GROWTH CREATING INFLATION
- CREDIT EXCESSES GO GLOBAL
- ASSET INFLATION IS IGNORED & ONLY THE CPI MATTERS
- THE FED MISUNDERSTANDS ASSET INFLATION & FOSTERS EVEN GREATER EXCESS
- RECENT REFLATION CREATES NEW UNSTABLE BOOM
- THE FED HAS LOST CONTROL
- ARE GSEs & FOREIGN CENTRAL BANKS “OUT OF BULLETS”?
As one who has been bearish too early a nmber of times, I have a few thoughts for Ms. Baum.
Is the Economy Really Growing?
The growth rate of the economy is measured by taking the nominal GDP and correct for inflation, to get real GDP. Many of us think that inflation has been dishonestly mis-measured for years (see this, and this), producing a much lower CPI, which means that the correction to nominal GDP is less, and the alleged real GDP is greater. If financial asset inflation were taken into account, the erosion of purchasing power would be much more evident. If the GDP is measured in gold ounces, Euros or a trade-weighted currency inde, it has taken a serious hit in the last few years as the dollar has declined. The loss is about 40% against an index of other currencies. In other words, Americans whose wealth is held in dollars have lost 40% of their global purchasing power in the last four years. Ms. Baum writes as if nothing bad has ever happened in the world. A series of currency crises: Mexico, Asia, Russia, Argentina, Turkey...has so far avoided the United States. Are we somehow special? Bill Bonner frequently uses the term “American Exceptionalism”, the idea that we are the exception to any kind of principles of econoic law. We live the way we do, at the standard of living that we have, because of who we are and it will always be thus. Other nations that spend beyond their means will go broke, other countries that print money will have inflation, other countries that tax too highly will drive productive activity away, but not us: we are the exception to the principles of cause and effect. Donald Coxe writes: As stated often, I think investors should use as their mantra, “This year and every year, I shall increase my share of the total wealth of the world.” Professor Reisman has argued that GDP itself seriously mis-measures economic production by over-emphasizing consumption at the expense of investment. An economy has no such “natural tendecy to grow” as Baum writes. Growth occurs because people save more than the amount required to offset the continued consumption of capital that occurs during production. Savings in excess of capital consumption can be used to fund additional capital investment, and more production.
Perma-bullishness?
True, permanent bearishness is a disposition for some. But this must be compared to the damage done by the permanent bullish outlook that Baum seems to endorse. The majority of panelists in Barron’s quarterly investment round table were bullish -- forecasting a rising stock market every singleyear -- for the entire period from 1999-2003, during one of the worst bear markets in US financial history.
Are Austrians Perma-Bears?
A more respectable source, The New York Times, contains Five Years Later and Still Floating by the brilliant James Grant, one of Ms. Baum’s adherents of the alternative lifestyle of perpetual bearishness. Grant notes:
- To hear Mr. Greenspan tell it in 1999, post-bubble damage control was as simple as cutting interest rates. He passed lightly over the possible consequences of the rates he cut. The list so far includes a bubble-like housing market (geographically localized but ferocious), an overheated debt market (this one spans the globe) and a steady depreciation in the foreign exchange value of the dollar. Consuming much more than it produces, the United States emits hundreds of billions of greenbacks into the world’s payment stream every year - about $600 billion in 2004. The recipients of these dollars willingly invest them in American assets if the price is right. On the evidence of the dollar’s decline, the price - the available rate of return - is too low. Ultra-low interest rates not only serve to inflate the value of bonds, stocks and real estate. They also entice investors in those assets to employ the elixir called “leverage.” Leverage means debt. Borrowing at 2.5 percent, a speculator can invest at 3 percent and still make a handsome living - if he or she can be sure when 2.5 percent might be raised to 2.75 percent or 3 percent. The Fed is happy to oblige. Forswearing the element of surprise in its policy actions, it has told the market exactly what it proposes to do. Paying close attention, professional investors, including thousands of hedge funds, have borrowed fearlessly. A little fear would help to improve the quality of financial stewardship. [...] Five years later, the bubble is still unpopped.
