G'day Andrew,
You wrote:
> Although the bublble has been pricked, the economy underneath has
> still
> grown in real terms. What we need now are more labor saving
> inventions.
> We'll soon have them in the form of further technological innovation,
> I
> feel. A prediction: Bluetooth wireless systems are going to be
> absolutely huge within 2 years.
>
> Is the US credit system heading for disaster? It's not clear how that
> will happen. As for the oncoming real estate crisis, I haven't heard
> about that before.
>
> Finally, you criticize the Fed. I disagree with your assessment. The
> Fed was far too tough on inflation in 1999 and 2000. It should have
> kept interest rates steady or lowered them, not raised them. There
> were no signs of inflation. The economic slowdown exists because the > Fed kept
>rates too high, not because they kept them too low.
Well, my main point about the Fed was that it hasn't quite the room for
manoeuvre with which people seem to credit it. It either reacts, in which
case it can be too late (given the time rate manipulation can take to hit
home, never mind the mediations that can undo the hit) or it predicts (in
which case it can get it hopelessly wrong). If it makes its job a bit easier
by choosing one priority (to keep the finance sector as stable as possible
while it creates credit at unprecedented rates without recourse to trends in
the real economy), then its efforts there can create stress elsewhere (eg
encouraging residential debt whilst residential incomes are flattening out),
and the more it does that, the harder it becomes to anything else.
In its call for more rate cuts, Morgan Stanley
<http://www.morganstanley.com/GEFdata/digests/20010402-mon.html> cites profit
squeezes, flattening productivity numbers and concomitant downturns in
employment and household income. They might also have mentioned the
unprecedented debt levels associated with all these massive takeovers we're
seeing (our largest miner, BHP, was effectively taken over yesterday by a much
smaller Brit-based company, for instance), many by way of LBOs, and the
proliferation of dodgy junk bonds held by funds, investment banks, and
insurance companies (our second largest insurer, HIH, went under last week to
the tune of at least $4 billion and gawd-knows-what knock-on effects). Big
debt means chasing the short-term dollar at the expense of stuff like
retooling, R&D, keeping corporate knowledge in the family, paying wages in
line with productivity, etc etc, too.
AFL-CIO President Lane Kirkland is on to this: "By any measure, the country as
a whole, and working people in particular, are paying a wholly unacceptable
price to the financial manipulators.who arrange highly speculative, highly
leveraged takeover deals." Which is morally outrageous of course, but also
systemically dangerous while those workers are encouraged to borrow to buy
foreign consumer goodies at a rate which leaves their earning projections for
dead. Finance capital sacks 'em whilst finance capital entices 'em to greater
debt! None of which could happen if the Fed wasn't helping finance
capitalists do that.
Greenspan himself has the occasional moan about this (got this from Doug's
site): "It is very difficult to judge at what point debt service costs become
unduly burdensome and can no longer be
sustained. There is no evidence at this point that markets are disinclined to
readily finance our foreign net imbalance. But the arithmetic of foreign debt
accumulation and compounding interest costs does indicate somewhere in the
future that, unless reversed, our growing international imbalances are apt to
create significant problems for our economy." But what can the bloke do?
Crash the markets, expel all those Yen and Euros, and bankrupt half the
country? Maybe he's gone so far down this road he can't kill his own
Frankenstein ...
And they are talking up Bluetooth-type technologies for all they're worth, but
just what the capital costs (and debt is retarding capital investment at the
moment) versus productivity benefits of those is, nobody knows. And if the
bulls are right, and we're passing the fire-sale inventory clearance stage,
well, then won't they're be upward pressure on US prices? And if Japanese
money returns home to plug exposed bad debts, won't the dollar drop, and won't
that invite inflation re all those foreign goodies?
I know that's a lot of 'ifs', but the US finance system in general, and the
Fed in particular, are not equipped to handle any of this, are they?
Yours,
a bear of very little brain who finds all these data confusing.
