In private correspondence, one FWer has pointed me to Karl Polanyi recently. I haven't read his big work yet --- "The Great Transformation" -- but I gather from other commentators that one of Polanyi's main ideas is that "Humans are motivated primarily by a quest for social standing, and not material gain." Unlikely though that seems at first sight, I think that Polanyi is quite right. The consumer goods which are significant enough (relative to regular spending) to produce powerful surges of economic growth are mainly status symbols. They show that someone has "arrived". Some of the young thrusting businessmen along our road are now buying SUVs as their main family car. They're quite unnecessary, but they are a superb method of showing off their 'superior' status.
Although SUVs saved the American automobile industry last year, they certainly won't be the saviour of the American economy as a whole because foreign-owned competitors already able to make vehicles in large quantities are coming on the scene very rapidly, profit margins will decline to vanishing point very quickly (they're almost zero now in the American firms!) and there'll be little surplus for re-investment. As an item, the SUV simply isn't large or novel enough to get spending started again in a sufficiently powerful way that will lead to genuinely new products and a resumption of growth.
We are probably doing a repeat now of something similar to the Great Depression of the 30s. In that period there was a succession of new consumer products (albeit small items -- mainly electrical goods), but spending and unemployment didn't lift properly until the economy was artificially stimulated by WWII -- the price ultimately being paid in the 60s and 70s by rampant inflation. By then, the automobile industry was producing cars which were cheap enough for widescale ownership by the non-middle-class and there were enough new products to start a powerful wave of spending and economic growth which lasted until about two years ago.
A desperate attempt was made by the IT sector in the last ten years but ended in disaster, the only significant result being that millions of people in America and England no longer have adequate pensions because their pension fund trustees and co-conspirators, the stock-brokers, were churning their stock market investments so much that they're now worth only a fraction of what they should be.
So what is the new mass product likely to be? It isn't going to be the SUV, 'cos it's not really new and is only a fashion embellishment on an existing product. The mobile phone still certainly has a growing future, but that's too small an item financially to have any sort of significant effect on the economy. PC sales haved now stabilised and, although, a useful innovation in some sectors (including my own recent business I'm pleased to say), it's not going to transform the scene.
The only consumer item I can think of that would be an orthodox extrapolation of the sort of goods that people in the developed countries have been buying during the last century is the small private family aeroplane. This could be made for, perhaps, only two or three times the cost of a car. It would be affordable by enough people to stimulate a mass market and it would be a sufficiently major item to lift the economy again. But the family aeroplane has problems. You can't park it in front of your house, so you can't show it off as a status symbol. There is not enough convenient airport space, nor airspace, for it to be used for daily commuting. So although tens of millions of Americans and English people could already afford to buy a private aeroplane its prospects are permanently dashed both for practical reasons and lack of opportunity for impressing your peers.
There's nothing else I can think of. Can you? I think Japan, Europe and America (and the white ex-British Empire Dominions) are in for a long, long haul of Japanese-type no-growth or, worse, deflation of Great Depression proportions. (Most of the rest of the world will be far, far worse, of course, 'cos the Americans will have snaffled most of the oil supplies even while in economic stasis.) Meanwhile, China will catch up to our levels of consumer spending ('cos they haven't yet sampled all the consumer goodies we are now saturated with) and then what? Maybe by then, the next genuinely new, practical consumer product that will re-engage economic growth will have been perfected (one of which, I've little doubt, will be unrejectable organ transplants) but, by then, we'll be into a entirely different ballgame -- and long after FWers are pushing up the daisies.
Keith Hudson
-------- STILL BLOWING BUBBLES Paul Krugman
The big rise in the stock market is definitely telling us something. Bulls think it says the economy is about to take off. But I think it's a sign that America is still blowing bubbles -- that a three-year bear market and the biggest corporate scandals in history haven't cured investors of irrational exuberance yet.
Or, to put it another way: it's hard to find any real news to justify the market's leap. Instead, investors seem to be buying stocks because they are rising -- which is pretty much the definition of a bubble.
Before the Iraq war, optimists attributed the economy's weakness to prewar jitters. They predicted a great postwar economic surge: oil prices would plunge, reassured consumers would open their wallets and businesses would start investing again.
We're still waiting. Oil prices are off their prewar highs, but they're still higher than they were last fall. Consumers seem to be spending a bit more, but we're talking about fractions of a percent. And businesses are still more interested in cutting costs and laying off workers than buying new capital goods.
There have been some pieces of good news -- a not-too-bad manufacturing survey here, a pretty good housing-starts number there. But there has also been bad news, especially regarding employment. Payrolls are still contracting; since the U.S. economy has to create 80,000 jobs a month just to keep up with a growing working-age population, the already miserable job market continues to get worse.
Don't tax cuts and low interest rates create the conditions for an economic rebound? Well, interest rates have been low for a while. And everything that has happened since 2001 suggests that Bush-style tax cuts -- which, because they are targeted on the very affluent, basically give people with plenty of cash to spare even more cash to spare -- provide very little employment bang per deficit buck. Meanwhile, desperate state and local governments are continuing to slash services and, in a growing number of cases, raising taxes, undoing much or all of the stimulus from the federal government.
Does the collective wisdom of the investor class perceive an imminent, vigorous recovery that is invisible in the data? The market isn't always right. It wasn't right when it sent the Nasdaq to 5000; it wasn't right in the fall of 2001, the summer of 2002 or the late fall of 2002 -- three would-be bull markets that fizzled. And selling by corporate insiders hit a two-year high in May.
Meanwhile, the average stock is selling at 31 times earnings, twice the historical norm. And if you take into account pension liabilities and the cost of stock options, that number goes above 40.
A few months ago, some analysts began to argue that because interest rates were so low, even today's very expensive stocks were a good buy. I don't agree, but that's a long discussion. What's clear, however, is that investors' big move back into the market has been driven not by careful comparison of returns, but by the fact that stocks are rising -- and the fear that if you don't buy stocks, you'll miss out on a good thing. The new bull market isn't forecasting anything; it's just feeding on itself.
Could the story I'm telling be wrong? Of course. Maybe a vigorous, though still invisible, economic recovery will deliver the sustained, double-digit earnings growth that analysts -- apparently not chastened at all by recent history -- are once again predicting.
But even if that happy scenario comes to pass, it's hard to justify current stock prices -- because if the economy booms, the low interest rates that might conceivably make stocks worth buying at 30 times earnings will soon go away. If and when businesses start borrowing again, they'll have to compete for funds with the federal government, which will be running $400-billion-plus deficits as far as the eye can see. Meanwhile, foreigners won't keep lending us $500 billion each year; in fact, private investment inflows into the United States have already dried up.
Oh, and the banana-republic policies now being followed in Washington won't just drive up interest rates; they'll probably generate a full-blown fiscal crisis one of these years. That can't be good for equity prices.
In short, the current surge in stocks looks like another bubble, one that will eventually burst.
New York Times 20 June 2003
Keith Hudson, 6 Upper Camden Place, Bath, England
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