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Kadosh, Kadosh, Kadosh, YHVH, TZEVAOT
FROM THE DESK OF: <[EMAIL PROTECTED]>
*Mike Spitzer* <[EMAIL PROTECTED]>
~~~~~~~~ <[EMAIL PROTECTED]>
The Best Way To Destroy Enemies Is To Change Them To Friends
Shalom, A Salaam Aleikum, and to all, A Good Day.
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---------- Forwarded message ----------
Economist Richebacher Says Basic Facts Point Inescapably
Toward Disaster
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 discipline.
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 sun.
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 GDP growth.
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 economy.
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 1997.
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 record heights.
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 economic growth.
* 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 institute.
* 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 shares."
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@agora-inc, or to Agora
Publishing, 1217 Paul Street, Baltimore MD 21201. Tel: 800
433-1528.
=================================================================
Kadosh, Kadosh, Kadosh, YHVH, TZEVAOT
FROM THE DESK OF: <[EMAIL PROTECTED]>
*Mike Spitzer* <[EMAIL PROTECTED]>
~~~~~~~~ <[EMAIL PROTECTED]>
The Best Way To Destroy Enemies Is To Change Them To Friends
Shalom, A Salaam Aleikum, and to all, A Good Day.
=================================================================
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