A reply to Redmond on US v Europe/Japan GDP growth
M A Jones
mark at SPAMjones118.freeserve.co.uk
Mon Nov 1 07:22:16 MST 1999
I've been reading Jose Perez with deep interest, and only lack of time to do
the job properly right now prevents me taking up the arguments, because I
think it possible to interpret events differently, and I'm glad to see
Dennis at least trying to do so: but anyway, we are in Jose's debt for
expressing the 'optimist' view so forcefully. This just turned up on WSN and
it seems relevant.
>>From the Longwaves list:
>Special to The Sunday Examiner by Rick Ackerman
>The dismal science will never be the same if Dr. Kurt Richebacher's
>dire predictions for the global economy should come to pass.
>The former chief economist and managing partner at Germany's Dresdner
>Bank says a deflationary collapse lies ahead that will ravage the
>world's bourses and usher in a dark period of austerity and financial
>Probably not one economist in fifty shares his views, at least not
>publicly. Richebacher, now living in France, says many of his American
>colleagues have been seduced into ignorance and complicity by Wall
>Street's billions as well as by their love affair with mathematical
>models that shun fundamental laws of economics.
>Where they see a New Era of productivity growth and industrial
>efficiency, he sees duplicitous bookkeeping and manufacturing's steep
>decline. They talk of a booming U.S. economy, he sees a profitless
>mirage. They worship capitalism's bold risk-takers, he scorns them for
>recklessly piling leverage to the sky.
>Someone's going to be wrong, but judge for yourself who.
>Like the theories of Copernicus 500 years before him, Dr. Richebacher's
>logic strikes one as no less sound and compelling than the Polish
>scientist's once-heretical notion that the earth revolves around the
>Richebacher asserts, for one, that the U.S. investment boom in
>computers borders on statistical hoax. It began in 1995 with the
>government's implementation of a "hedonic" price index designed to
>capture both the falling prices and the rapid rise of computational
>power of each new computer.
>This is akin to measuring GM's auto sales by tallying the horsepower of
>all the engines in its cars, says Richebacher.
>Applied to the computer business, it has exaggerated investment levels
>exponentially. For example, during the 12-month period ended March 31
>the business sector increased its net investment in computers from
>$91.8 billion to $97.2 billion, accounting for a paltry 1.3% of nominal
>But when government statisticians multiply that $5.4 billion increase
>by their hedonic supercharger, the figure swells to $146 billion.
>This has worked wonders on America's bottom line, boosting the computer
>sector's nominal 1.3% contribution toward GDP growth for the period to
>49%, and the 4% contribution for the years 1996-1998 to 38%. For the
>first half of 1999, the effect has been even more pronounced, giving
>the computer industry a whopping 93% share of GDP growth.
>Remove the computer industry from the ledger, however, and the vastly
>larger rest of the economy had actual growth of just 2.5% during the
>three-year period versus a reported 4%. Meanwhile, last year's
>expansion would have been a middling 2%, and the uptick in productivity
>that has recently cheered economists would fade to insignificance.
>The obvious question is, how could the computer industry, with barely
>more than 1% of the total workforce and plunging product prices, be
>responsible for what most economists read as a dramatic improvement in
>America's standard of living?
>The answer is that it could not. And has not. Hedonic accounting makes
>the computer sector look like an economic hero, but any statistically
>significant improvement in our standard of living would necessarily
>have to come from the spreading use of computers across the entire
>Computers are indeed everywhere, but evidence that they have
>substantially boosted U.S. productivity remains elusive to say the
>least, says Richebacher.
>In this assertion he has corroborating testimony from no less an
>authority than Fed Chairman Alan Greenspan.
>In a 1997 speech in Frankfurt, Germany, Greenspan acknowledged that a
>straightforward interpretation of certain service-economy data suggests
>that productivity -- output per man hour -- has actually been falling
>for more than two decades.
>Greenspan called this implausible, offering the explanation that prices
>may have been mismeasured. But whatever the reason for the anomaly, the
>Fed chairman is obviously at pains to convince us that he and his staff
>of PhDs truly understand how to measure productivity accurately.
>If productivity growth in recent years has been largely illusory, the
>spectacular expansion of credit during that same time has been all too
>real, warns Richebacher (pronounced REESH-a-baisher).
>It didn't happen by accident. The economist says the Fed started the
>real orgy last fall with a series of rate cuts intended to shore up
>some hedge funds that had gotten in way over their heads by amassing
>huge positions in leveraged credit instruments.
>The Fed's massive gift to debtors quickly found its way into the
>mortgage markets, where homeowners ran up new borrowings in 1998 to
>more than $1.5 trillion, nearly two-thirds of it in refinancings.
>The hot money spread like lava into the financial system. Fannie Mae
>and Freddie Mac, quasi-governmental agencies which buy up mortgage
>loans, expanded their balance sheets four times as quickly as they had
>the previous year, with $220 billion of growth versus $61 billion in
>This put an estimated $15,000 into the pocket of each re-fi customer,
>kicking off a spending binge that pumped housing and stock prices to
>It also created a financial bubble whose collapse Richebacher says we
>will eventually have to reckon with.
>He says the four classic elements of a bubble are all present and most
>obvious: 1) money and credit have been expanding vastly in excess of
>both savings and GDP growth; 2) inflationary pressures are being
>channeled toward, and concentrated in, asset prices; 3) low inflation
>has kept monetary policy too loose, and 4) soaring asset prices have
>overstimulated domestic borrowing and spending.
>The Richebacher Letter circulates widely among top-level financial
>decision-makers, probably because it is so good at poking holes in the
>prevailing wisdom. What has he been saying lately? Just this:
>* Profit performance in the U.S. economy has been appalling during the
>stock market's steep rise of the last several years, but accounting
>gimmicks designed to please Wall Street have masked the weakness.
>Compared to a year ago, profits per share on the S&P 500 have
>declined from $39.72 to 37.71, and on the S&P Industrial Index from
>$42.13 to $38.37. Over that time, as all investors know, the S&P 500
>Index of stocks has risen spectacularly.
>* The trade deficit, which sent $233.4 billion abroad last year, is the
>biggest profit-killer in the economy. It has been offset, albeit
>precariously, by a household sector that has consumed manically with
>borrowed dollars and dissavings.
>* The bulls believe the Fed will keep the credit machine running full
>speed if the economy starts to falter. But "full speed" is not enough,
>since sustaining growth in the economy and the stock market will
>require ever-larger credit injections. With the personal savings rate
>already in negative territory, it is by now manifestly impossible to
>increase dissavings to the extent necessary to produce continued
>* The "profit miracle" of the 1990s is nonsense. What kicked the stock
>market into high gear earlier in the decade was mainly the one-time
>effect of lower borrowing costs induced by a recklessly generous Fed.
>Profits have weakened since in absolute terms and egregiously relative
>to soaring share prices.
>* The widespread use of stock options to compensate employees has
>caused corporate earnings to be grossly overstated, since the options
>reduce the amount of wages charged against profits. If properly
>accounted for, stock options would have lowered aggregate published
>profits by 56% in 1997 and 50% in 1998, according to figures
>Richebacher cites from Smithers & Co., a London-based research
>* Derivatives can insure individual market participants against risk,
>but not system as a whole. Ultimately they have spurred higher
>risk-taking through leverage, exposing the global financial system to
>the prospect of devastating failure.
>Richebacher, who counts former Fed chairman Paul Volcker among his
>close friends, says U.S. economists of the 1960s would more readily
>have recognized these problems and acted stridently to counteract them.
>Public discussion was still influenced back then by staid economists
>who represented the banks and who knew their theory. The current crop,
>however, is "really a part of Wall Street's sales force to sell
>In contrast with European economists, their theoretical thinking is
>"not too deep," and in recent years has been completely eclipsed by
>mathematical models that fail miserably in reckoning with the crucial
>variable of human behavior.
>The current level of thinking is "unbelievable," he says. "How can you
>simply overlook a negative savings rate and mountainous trade deficit"
>in saying the economy is healthy and robust?
>"There is almost no one left in America to pose critical questions
>about economic fundamentals," he laments. "The only miracle about the
>American economy is the consumer's amazing propensity to borrow" -- a
>fact which Richebacher says has delayed a day of reckoning.
>Even if there were someone raising such questions, one might ask, would
>anyone be listening?
>Inquiries concerning The Richebacher Letter should be directed to the
>following e-mail address: Richebacher at agora-inc, or to Agora
>Publishing, 1217 Paul Street, Baltimore MD 21201. Tel: 800 433-1528.
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