| Corrupted
Thinking In A Money Culture |
| U.S. Credit
Machine |
| By Kurt Richebächer |
| It is the
general view that the U.S. economy has outperformed the rest of the world
in the past several years. Judging by real GDP growth rates, this is true.
Yet the reason why is obvious, easily explained, and disastrous in its
consequences: the U.S. credit machine has no parallel in the world. It
is geared to accommodate absolutely unlimited credit for two purposes -
consumption and financial speculation.
There has developed
a tremendous and growing imbalance between the huge amount of
credit that
goes into these two uses and the minimal amount that goes into productive
investment.
Instead of moving to rein in these excesses and imbalances, the Greenspan
Fed has clearly opted to sustain and foster them. |
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Today it is
customary to measure economic strength by simply comparing recent real
GDP growth rates. It always becomes fashionable when U.S economic growth
is higher than in Europe.
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From a long-term
perspective, however, economic policy and economic growth are about physical
resource allocation, that is, available tangible capital stock and labor.
How much of the current production is devoted to consumption and how much
to capital investment? Looking for economic health and strength, generations
of economists have focused on two economic aggregates: savings and investment,
in particular net savings and net investment. |
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| It used to
be a truism among economists of all schools of thought that the growth
of an economy’s tangible capital stock was the key determinant of
increased productivity and subsequently of good, high-paying jobs. And
it also used to be a truism for economists that from a macroeconomic
perspective, tangible capital investment into factories, production equipment,
and commercial and residential building represents the one and only genuine
wealth creation. But in America’s new money culture, policymakers and economists
make no difference between wealth created through saving and investment
in the real economy and wealth created in the markets through asset
bubbles, engendered by extremely loose money and credit.
In 1996, an
article in Foreign Policy entitled “Securities: The New Wealth Machine,”
explained how securitization - the issuance of high-quality bonds
and stocks - has become the most powerful engine of wealth creation in
today’s world economy. |
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| Whereas societies
used to accumulate wealth only slowly, they can now do so quickly
and directly, and “the new approach requires that a state find ways
to increase the market value of its productive assets.” In such
a strategy, “an economic policy that aims to achieve growth by wealth
creation therefore does not attempt to increase the production of
goods and services, except as a secondary objective.”
This a perfect
description of the corrupted economic thinking that is today ruling in
America not only in corporations and the financial markets, but even
among policymakers, elevating wealth-creation, that is, bubble-creation,
to the ultimate of wisdom in the policy of economic growth.
There can be
no question that the rapid sequence of asset bubbles - stocks, bonds, housing
- that the United States has seen in the past few years were crucial
in stimulating economic growth. Considering, though, its tremendously lopsided
effect on consumer spending and the associated consumer-borrowing
orgy, we are unable to regard this as a reasonable and sustainable policy.
It works in the short run from the demand side, but it has come at heavy
structural costs. |
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| With these
remarks, we wanted to make one thing perfectly clear. It is not profits,
savings and investment that drive U.S. economic growth. It is America’s
unparalleled credit machine, and that alone, which makes all the difference
in economic growth and wealth creation between America and the rest of
the world.
In the consensus
view, the U.S. economy is breaking out of its anemic growth pattern. A
few signs of accelerating economic growth have led to this forecast, in
particular the 8.2% spurt of real GDP growth in the third quarter of 2003
and within it sharply higher investment technology spending, up 22%; surging
profits, and also surging early indicators, among them in particular the
November ISM survey for manufacturing. Various indicators are at their
strongest in 20 years.
We strongly
disagree with this assessment. The growth spurt in the third quarter was
exceptional, due to a one-off splurge in tax rebates and a burst in the
mortgage refinancing wave. |
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| As to investment
spending, what essentially matters is the change in total nonresidential
investment, and that continues to show virtual stagnation. The widely hailed
surge in IT investment came overwhelmingly from the hedonic pricing of
computers, which has been abolished. Recent profits reports have indeed
been impressive, but their success is vastly different between sectors
and not as straightforward as the official numbers imply.
Yet our disbelief
in the U.S. economy’s breakout from its protracted sluggishness has one
main reason: All the economic growth of the past two years, anemic as it
was, is traceable to a seemingly endless array of asset and borrowing bubbles.
Quoting analyst Stephen Roach, “the Fed, in effect, has become a serial
bubble blower” - first the stock market bubble; then the bond bubble;
then the housing bubble and the associated mortgage refinancing bubble.
As a result, consumer spending has been surging well in excess of disposable
income for years.
The idea was
that sustained and rising consumer spending would in due time stimulate
investment spending. It has grossly failed to do that. Our assumption rather
is that consumer spending will slow as the asset and consumer borrowing
bubble are sure to fade. Seeing no big investment recovery, we expect a
surprisingly weak U.S. economy in 2004.
Regards,
Kurt Richebächer
For the Daily
Reckoning
Former Fed
Chairman Paul Volcker once said: "Sometimes I think that the job of central
bankers is to prove Kurt Richebächer wrong." A regular contributor
to The Wall Street Journal, Strategic Investment and several other respected
financial publications, Dr. Richebächer's insightful analysis stems
from the Austrian School of economics. France's Le Figaro magazine has
done a feature story on him as "the man who predicted the Asian crisis."
In the December
issue of his newsletter, Dr. Richebächer aggressively dissected the
data economists are interpreting as a miracle 'recovery' - including a
critical look at the actual composition of the touted U.S. GDP growth.
His conclusion: the 'recovery' has already peaked. If you are not already
a subscriber, you can't afford to miss this special report:
Greenspan
Is Robbing You Blind!
http://www.agora-inc.com/reports/RCH/TrustTraders/
A version
of this essay was first published in The Daily Reckoning (www.dailyreckoning.com
). |
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