Illusory profits

Louis Proyect lnp3 at panix.com
Fri Sep 7 13:57:23 MDT 2001


Businessweek, SEPTEMBER 7, 2001 

COMMENTARY 
By Pete Engardio 

Is That Asia in America's Mirror?  

For clues as to why the U.S. economy went bust in 2001, look at why Asia
melted down in the '90s. Hint: Denial plays a big role 

Return with me for a moment to January, 1994. The stock markets of East
Asia's Tiger economies had suffered a sharp correction after two years of
spectacular gains. Everyone thought the worst was over and the Tigers would
come roaring back. But they didn't. 

A few years later, manufacturing exports -- the engine of the region's
growth -- suddenly stalled out. Economists weren't worried. They attributed
the slowdown to currency swings, a slump in U.S. computer sales, and other
temporary cyclical factors. Thanks to East Asia's strong economic
"fundamentals," they assured, the region would soon resume its three-decade
record of torrid growth. 

You know what happened next. On July 2, 1997, the crash of the Thai baht
triggered a regional meltdown. At first, most businesspeople and economists
figured the Asian miracle's setback would be short-lived and that the
region's high savings rates, low labor costs, and flexible entrepreneurs
would restore strong growth. Now, the world realizes East Asia's boom had
covered up deep structural problems, including lax banking regulation,
dangerous dependence on short-term foreign debt, and enormous
overinvestment in manufacturing plants. 

PUFFY PROFITS.  Why rehash old history? Because elements of what happened
in Asia are playing out in the U.S. today. Like Asia in 1997, I fear,
America is in serious denial. Or perhaps it was until the past few weeks.
The Bureau of Labor Statistics is now saying the stunning productivity
growth of the late 1990s was overstated. Other analysts contend that U.S.
companies' robust profits over the past few years were puffed up by
accounting gimmickry. 

Meanwhile, the news from companies like Nortel, Cisco, Lucent, and JDS
Uniphase remains bleak. Federal Reserve Chairman Alan Greenspan on Aug. 21
lowered interest rates for the seventh time this year, but the stock market
is still tumbling. 

The markets seem to be saying they have lost faith that the America of the
1990s devised a magic formula for gliding through booms and busts with
minimal damage, just as they lost faith in Asia's master technocrats in
1997. They also realize the aftershocks of the 2000 Nasdaq crash, followed
by the 2001 electronics and telecom bust, could seriously damage the other
pillars of America's New Economy. 

STRUCTURAL PROBLEMS.  This isn't to suggest the U.S. is destined for an
Asia-style crash. Nor am I postulating that the actual problems themselves
are that similar. When I talk about denial, I'm referring to the lingering
belief that the current slowdown is all about short-term cyclical blips,
rather than structural problems. 

That's why analysts had hoped the economy would rebound in a few quarters
after the Fed cut interest rates and excess inventory had been efficiently
flushed out of the system. Many also assume that whenever the recovery is
complete -- and Corporate America does some fine tuning -- the U.S. will
quickly charge back to its old exuberance. 

Just as the Asian miracle was reassessed after 1997, I suspect future
economic historians will take a dimmer view of the American miracle of the
1990s after what we've just been through. Let's compare America's New
Economy to the ill-regulated, debt-glutted, crony-infested economies of
East Asia. The economic models are as different as night and day. But
prebust East Asia and prebust America share several features -- most
notably a severe misallocation of capital into overbuilt industries as
successful strategies were carried to wild excess. 

What were the flaws of preboom America? Here are some things I would put on
the list: 

Growth über alles: In prebust Asia, the only yardstick of success that
really mattered to companies, government ministries, and even many stock
analysts was sales growth. They didn't care that many manufacturers didn't
even cover their cost of capital, and that many of their goods never made
it out of warehouses. In prebust America (the dot-com fad excluded), profit
growth was everything. 

The same thing happened with many of the hot-growth companies in the U.S.
high-tech explosion. Now, as more analysts put a sharp pencil to the
balance sheets of publicly traded U.S. companies -- especially in the tech
sector -- they're finding that many of those profits were illusory. Rather
than use generally accepted accounting practices, companies were allowed to
hide losses or book phantom profits under loosely defined "pro-forma"
accounting. Analysts are posing harder questions about the methods some
U.S. companies have used to produce high profits. 

full: http://www.businessweek.com/bwdaily/dnflash/sep2001/nf2001097_822.htm

Louis Proyect
Marxism mailing list: http://www.marxmail.org

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