Keith said below,
"In truth, although governments are supposed to be the "true" originators of
money, interest rates and so on, they are really quite inept at controlling
the system. They've tried all ways in the course of the last century since
they nationalised the previous gold-based currencies -- with one major, and
several minor, recessions so far. They tinker about with taxation, crude
monetarism and exchange-rate changes, they chase after one theory after
another, and they still don't know what they're doing, whatever
"authoritative" announcements they make at the latest manifestation of
their wisdom. "
Cordell replies,
Inept compared to who. Or to what. I don't think anybody fully understands
"the system" and I am quite sure that control is probably as good as its
going to get. I refer to the mixed sort of system we have in N. America and
Europe, etc. There will always be second-guessers and I told you so, on
both sides. More of this, less of that. (And I am a grumbler here in
Canada at what is going on, but glad I am not accountable as would be the
head of the Bank of Canada). But considering the size and *complexity* of
the economies we are talking about, I am amazed that we are doing as well as
we are.
I know the answer will be "stay tuned" as we go over the cliff. And perhaps
we will. And perhaps there is no way of predicting and controlling complex,
chaotic systems.
arthur
-----Original Message-----
From: Keith Hudson [mailto:[EMAIL PROTECTED]]
Sent: Thursday, December 13, 2001 6:54 AM
To: [EMAIL PROTECTED]
Subject: Sally -- do you like bungee-jumping?
A week or two ago Sally asked FW whether we are likely to be going into a
recession. I replied that it is likely basing my argument on the
still-too-high price/earnings ratios on equity shares. I still stand by
that but here's another angle on it:
This morning I've been reading the views of Brian Reading (highly reputed
over here) of Lombard Street Research who reckons that the present downturn
will not be like a "U" or a "W" (the only variants that most economists
have talked about so far) but more like bungee-jumping.
In other words, the share values which have bounced off the "bottom"
recently will fall once again in the near future -- and go further
downwards -- then bounce up a bit, and then fall again -- a little further
still -- and so on with (thankfully!) decreasing bounces until the economy
rests for a long period at depression/recession levels while an awful lot
of businesses shake out their excesses and inefficiencies of the 90s.
And then Hamish McRae, economic editor of The Independent, writes of the
ineptitude of Greenspan's present policy of driving down the Fed's interest
rates all through this year totalling 6% so far and now at a 40-year low.
In "normal" times, this low level of interest rate would have prompted new
investment months ago -- but nothing has happened even though, taking
inflation into account, money borrowed by big business from banks is almost
costless. (Banks, howeever, are most unwilling to lend anything at all at
these interest rates to small and medium businesses.) Nor is anything
likely to happen until a "demand black hole" is filled.
The demand black hole cannot be filled quickly because American consumers
already have credit card debts on average amounting to about 120% of their
annual disposable incomes. It might be imagined that, interest rates being
so low, consumers could polish off their debts quickly at almost no cost.
But the cost of money, while almost free to big business, will not be free
to consumers. The lending agencies have to pay for administration and, of
course, profits.
It would not be so bad if it was just America that is suffering. But it is
not only the biggest economy in the world, but also the second (Japan) and
the third (Germany) which are suffering with static or declining economies.
The fourth (UK) is just about holding its own at present with about 1.5%
growth but even here the average consumer has credit card debts of 105% of
annual disposable income and unemployment is now growing for the first time
in more than a decade. Nemesis can't be far off.
In truth, although governments are supposed to be the "true" originators of
money, interest rates and so on, they are really quite inept at controlling
the system. They've tried all ways in the course of the last century since
they nationalised the previous gold-based currencies -- with one major, and
several minor, recessions so far. They tinker about with taxation, crude
monetarism and exchange-rate changes, they chase after one theory after
another, and they still don't know what they're doing, whatever
"authoritative" announcements they make at the latest manifestation of
their wisdom. Perhaps the coming recession will actually bring about the
dawn of real currencies -- that is, those that are, at all times,
guaranteed by being based on real value (whether gold, platinum, mineral
resources, basic foodstuffs doesn't really matter so long as it's tangible
stuff that people really value). Outside the constant interference of
governments with their latest fads, the value of currencies, interest
rates, and exchange rates would steady out with only the smallest wobbles
on which speculators could arbitrage (and usefully so, not destructively as
now).
(The last two paragraphs are my own comments, not McRae's.)
Keith Hudson
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Keith Hudson, Bath, England; e-mail: [EMAIL PROTECTED]
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