Good post, Keith. A similar article, appears in today's NY Times: Slow Recovery May Still Feel Like a Slump http://www.nytimes.com/2002/08/12/business/12ECON.html Excerpt: "But many economists expect the country to escape a double-dip recession largely because consumers show little sign of severely cutting spending, even though their assets are far less valuable than two years ago. Americans' net worth has fallen to about $35.3 trillion, from $45.1 trillion in late 2000, according to Economy.com, a research firm in West Chester, Pa. Rising home values have not been enough to offset stock market losses by the group's calculations, and consumer debt has risen. Still, Americans' net worth has more than doubled over the last decade. Those long-term gains seem to have kept many people sanguine about the stock's market fall and willing to continue spending. " Which is why, I suspect, most consumers are not paying too much attention to their savings at the moment. State budget woes will only be worse next year, I assume, due to lower income and spending revenues, so that letting inflation become the economic solution is more likely. - Karen
Keith wrote: Stephen King, the head of economics at the HSBC bank (now one of the largest in the world) usually writes an article on Mondays in The Independent. This week, after looking at renewed doubts for the recovery of US manufacturing and at the way that private savings are now at their lowest point for 20 years, he ends his article with what I think is the most succinct description of the US economy that I have read for a long time. After writing that there have been six recessions of varying intensities in the past 40 years, he is suggesting that the present recession looks rather more serious than usual. But, let's face it, Stephen King's main income comes not from writing articles like this for the public but from the private professional advice he gives to his bank. So I wonder what that could be? I have a thought or two about this which I'll add at the end of King's final four paragraphs: <<<< STAGNATION RATHER THAN RECESSION IS STALKING THE US ECONOMY Stephen King . . . . . Most recessions are also associated with a significant retrenchment from both households and corporations with either less borrowing or more saving out of current income. This is often the result of aggressive monetary tightening designed to deal with other problems, notably the need to bring down inflationary pressures. But there are plenty of other reasons for retrenchment. Japan's retrenchment in the 90s had little or nothing to do with inflationary pressures. Instead the need to save more, to spend less and to pay off debts reflected a combination of earlier massive asset price over-valuations and, latterly, an inability of the Japanese economy to stage a sustained recovery in growth. Low interest rates were, in themselves, no cure for the earlier wild party. And here lies the problem for the US today. The US has been through recession. It has cut interest rates to generate recovery. Yet neither the corporate sector nor the household sector are in a position to lead recovery. Fiscal policy [lower taxes] may help for a while but, ultimately, consumers need to save more than before because of the losses they have so far experienced and companies will need to save more if they are going to be able to fund their ailing pension schemes. These changes in savings behaviour may lead to other negative effects. So far, house purchase has been well-supported, a direct result of persistently falling short- and long-term interest rates. But if consumers and companies ultimately choose to rebuild their savings or pay off their debts, it is difficult to see why the housing market will continue to remain a source of strength: put another way, house prices may rise as part of an asset allocation shift out of equities but a failure of economic growth threatens the value of all real assets, whether it be equities or property. Ultimately the sectoral balances [in savings] suggest that the key problem facing the US economy -- and, for that matter, the global economy -- is not so much the possibility of a "double-dip" recession. That would be more likely to happen if, for example, there were to be an aggressive tightening of policy -- a very remote likelihood at this stage. Instead, the main problem facing the US is an inability to stage a decent recovery. With none of the key areas of private sector activity in a position to take advantage of interest rate cuts, the danger is not so much one of renewed recession but, rather, one of economic stagnation. Under these circumstances, the light at the end of the post-bubble tunnel becomes very dim indeed. >>>> I suggest that what Stephen King is privately advising his bank is that the US administrations will see $ inflation as the only way out of the trap -- despite the danger of eliciting competitive inflation of other currencies, principally the yen, euro and pound with the possibility of all sorts of problems (including the collapse of many smaller economies) a decade or so down the line. (An additional reason why the US might well consider this is that higher inflation automatically produces higher taxation [proportionately as well as absolutely] and it will be a way of shifting the US more easily into war-mode if Gulf War II proves to be much more expensive and protracted than presently envisaged.) Keith Hudson ---------------------------------------------------------------------------- ------------ Keith Hudson, General Editor, Handlo Music, http://www.handlo.com 6 Upper Camden Place, Bath BA1 5HX, England Tel: +44 1225 312622; Fax: +44 1225 447727; mailto:[EMAIL PROTECTED] ________________________________________________________________________
