The threat of extreme events
Kenneth Rogoff, formerly chief economist of the International Monetary Fund believes there is a high risk of a housing slump in the US
Samuel Brittan, Financial Times, June 18 2004

En komplikation är emellertid att snart sagt alla hinder inom OECD står inför uppgiften att rätta till sina underskott. Sedan oljeprishöjningen 1973 har OPEC-länderna haft ett mycket stort betalningsöverskott. Detta överskott motsvaras av lika stora sammanlagda underskott hos de övriga länderna. OECD-länderna och u-länderna utan olja.
Rolf Englund, Svensk Linje nr 7-8 1976

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To listen to the Bears over the past few years, you would have thought we would all be in breadlines and soup kitchens by now.
Why Hasn't "IT" Happened Yet?
Even though the markets, at their lows in March of 2003 had lost over $6 trillion of value, IT still hasn't happened yet.
Aubie Baltin 27/12 2005

So far, all of the ranting about doom and gloom sounds more like the boy who cried wolf than accurate forecasting. But I do believe that when IT happens, things are going to get much worse than anyone can imagine.

If there is any doubt that the world's investment community is suffering from irrational exuberance, just look at the German and French Stock Markets; in the face of 12% unemployment rates and less than 1% growth rates to look forward to unemployment rates can only get worse and yet their Markets are making new five year highs just as Paris is burning after two solid week of Muslim rioting.

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The Six Horsemen of the Apocalypse.
by Joe Average, November, 2005.

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Fed would like to see a little inflation come back, as well as significantly higher interest rates, before they have to deal with the next recession or slowdown.
It would not be politically correct to state they intend to stop the increase in housing prices.
John Mauldin, 21/10 2005

Back in the dark ages, or around five years ago, Fed rates were at 6.25%.

The Fed would like to get some more "bullets" in their gun, a bullet being a 25 basis point increase in rates. It is just a matter of time until they will need their bullets, and as we saw last time, you may need more than you think.

Third, they are concerned about inflation. But not that much. If they were really concerned, they would have been raising rates at a much faster clip. They would be throwing in a 50 basis point increase very now and then. But in fact, I think they are happy to see a "little" inflation. It gives them cover to keep raising rates for real reasons #1 and #2.
It would not be politically correct to state they intend to stop the increase in housing prices. There would be lynch mobs forming. So "fighting inflation" is a nice cover.

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WHY THE FED HAS NO OTHER ALTERNATIVE BUT TO PRINT MONEY!
Why is the US Fed so concerned about deflation that Mr. Bernanke even suggested dropping US dollar bills from a helicopter in order to combat it?
There is one condition under which deflation is a disaster and this is when total credit market debt is high as a percentage of the economy
Marc Faber, October 18, 2005

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Governor Ben S. Bernanke, November 21, 2002,
Deflation: Making Sure "It" Doesn't Happen Here

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How do we get out of this scenario alive?
By Rolf Englund, Financial Times 4/10 2005
Clyde Prestowitz, like many other commentators, warns us of what could happen: "a decline in the dollar, a rise in interest rates, a slowdown in growth, a rise in unemployment and declining home equity and household wealth - in a word, a recession, if not a depression"

I suspect the stock of outstanding synthetic credit derivatives - $ 1500 b in synthetic CDOs in 2004 v. $300 b or so in 2001, is the only thing than has increased more rapidly than China's reserves over the past few years.
China's reserves are probably above $800b now, up from $165b in 2000.
Brad Setser 18/9 2005

El-Erian has a nice graph of China's reserves here.

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The Nobel Prize in economics in 2002 went to a psychologist, Dr. Daniel Kahneman, who helped pioneer the field of behavioral finance. He basically shows that investors are irrational.
But what gets him a Nobel is he shows that we are predictably irrational.
We continue to make the same mistakes over and over.
John Mauldin, 26/8 2005

What makes for a bubble? Why do things get so out of hand? One of the reasons is simply human behavioral psychology. The longer a trend is in place the more confident we are in our belief that it will continue. Especially if we are participating in the trend to our benefit, we find all sorts of reasons that reinforce our belief that the trend will continue.

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Daniel Kahneman

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The runaway budget deficits are compounded by the persistent and growing imbalance in our trade accounts -- jeopardizing the inflow of foreign funds we have used to finance our debt.
At a private dinner the other evening where many of the men and women who have steered economic and fiscal policy during the past two decades were expressing their alarm about this situation, one speaker summarized the feelings of the group:
"I think it's 1925," he said, "and we're headed for 1929."
David S. Broder, Washington Post 11/9 2005

1925

1929

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Even the unflappable Bank for International Settlements (BIS) seems uneasy. In its quarterly report released on Monday September 5th, it gives warning that
“the complexity of some products and the associated risk-management systems, the growing presence of leveraged players in credit markets and the possibility that investment strategies may be less diverse than anticipated make it difficult to predict how credit markets will function under more stressful conditions.”
IMF’s economic counsellor, Raghuram Rajan: While recent changes in the financial system have made it more stable most of the time, they may also have increased the possibility that it will be excessively unstable in really bad times, as well as increasing the chances that really bad times will occur. We will not know how big the risks are, or what to do to mitigate them, until the system has been tested. “The danger,” he writes, “is that before the economy is stress-tested, it will be hit unexpectedly by a perfect storm.”
Buttonwood, The Economist 6/9 2005

Banks now securitise and flog to third parties their plain vanilla mortgages, keeping on their books the more complicated and less liquid assets that are harder to sell. When interest rates spike upwards, asset prices crash or for any other reason lots of investments have to be unwound in a hurry, banks may be looking for liquidity rather than supplying it to others to keep markets orderly.

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We recently marked the fifth anniversary of the peak of the great millennial stock market Bubble.
From the March 2000 top to the October 2002 trough, the U.S. stock market gave up more than half of its value, some $9.2 trillion.
Aubie Baltin, august 2005

Five years ago Cisco Systems was the world's biggest company by market capitalization. Its line of business, computer networking, was universally heralded as the industry of the future. Owners of Cisco still devoutly believe this still to be true. Never the less they have lost 75 percent of their investment.

Alan Greenspan, the chairman of the Fed, had worried about a stock market bubble as early as 1995 and had warned against "irrational exuberance" in 1996, and batted around the possibility that there might, indeed, be a stock-market bubble in discussions with his Federal Reserve colleagues as late as 1999. But he was not the man to stick a pin in the bubble.
Indeed, he himself became a vociferous booster of the "New Economy." In a speech he gave only four days before the Nasdaq touched its high, he sounded as if he were working for Merrill Lynch, cheering that "the capital spending boom is still going strong."

By 2006 we should be in recession and the Republican will lose at least one of if not both the houses of Congress and by 2008 the USA will be in depression and Hillary will win in a landslide and become the FDR of the 21st Century.

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IMF justerar i dag upp sin tillväxtprognos och talar nu om en global tillväxt detta år på cirka 4,2 procent. Det drivs av den rekordstarka USA-ekonomin på runt 4,3 procent, medan EU kommer ungefär en tredjedel efter på cirka 3,2 procent.
Det är imponerande siffror. Att den amerikanska ekonomin fortsätter att ånga på i rekordfart trots inte mindre än fem räntehöjningar - även om effekten av sådana alltid kommer med fördröjning - visar åter styrkan i den omvandling som skett där.
Ur Carl Bildts veckobrev v14/2000

Vecka 14 bör ha varit i april...

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Investors recently had expressed optimism - some disbelief - that the market had stood face to face with record crude-oil prices and barely blinked.
This week, however, the market didn't just blink; it fell to pieces as the Dow Jones Industrial Average shed 325.23 points, or 3.1%.
Blue chips fell each day this week, most of the losses coming Thursday and Friday.
Wall Street Journal 24/6 2005

Oil

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I am going to write here about a coming depression in general terms. I have some suggestions for how to prepare, (as if anyone can).
There are two types of depressions, hyperinflationary and deflationary.
The end results are the same.
Chris Laird Gold Eagle May 15 2005

First, the main thing the logistics equations suggest is that when the economic system becomes unstable, it is not possible to determine the outcome.

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Remember the stock market bubble? With everything that's happened since 2000, it feels like ancient history. But a few pessimists, notably Stephen Roach of Morgan Stanley, argue that we have not yet paid the price for our past excesses.
I've never fully accepted that view. But looking at the housing market, I'm starting to reconsider.
In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another.
Paul Krugman New York Times 27/5 2005

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As Boomers Retire, a Debate: Will Stock Prices Get Crushed?
In speeches and a new book, he is warning that a flood of boomer retirees with trillions of dollars of assets to sell over the next 20 to 40 years threatens to crush stock and bond prices.
Jeremy Siegel, the Wharton School finance professor well-known until now for recommending stocks as a long-term investment.
Wall Street Journal 5/5 2005

Prof. Siegel, 59 years old, was born in November 1945, just before the baby boom started in 1946. As a child, he delighted in charting the number of morning glories in his backyard. Thus began a lifelong passion in explaining and predicting trends, including the stock market. He earned his economics Ph.D. at the Massachusetts Institute of Technology and has taught at Wharton since 1976.

His 1994 book, "Stocks for the Long Run," came just as the bull market was switching into high gear, turning him into a sought-after stock-market guru. Prof. Siegel used historical data going back to 1802 to argue that stocks have consistently been better investments than bonds. The book sold more than 350,000 copies and was translated into eight foreign languages. His reputation got another lift in 2000 when he warned that technology stocks were overpriced just as the tech bubble was about to burst.

In 1935, average 65-year-olds worked until they were 69 and were dead before they were 77. Today, the average worker retires at 62 and can expect to live another 20 years. And the number of retirees will start surging in a few years when the first big chunk of the 1946-64 baby-boom generation retires.

The cumulative gap between what retirees would need to keep 90% of their standard of living and what they'll actually get -- given all those assumptions -- is about $123 trillion between now and 2050, the model suggests. That's the U.S. figure; if the same calculation includes Japan, Europe and other industrialized regions, the gap rises to $347 trillion.

The Future for Investors: Why the Tried and the True Triumphs Over the Bold and the New
at Amazon

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Jeremy Siegel Home Page at Wharton

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I am not a believer in conspiracy theories. But
In all my years in this business, never before have I seen a central bank attempt to spin the debate as America's Federal Reserve has over the past six or seven years.
From the New Paradigm mantra of the late 1990s to today's new theories of the current-account adjustment, the US central bank has led the charge in attempting to rewrite conventional macroeconomics and in making an effort to convince market participants of the wisdom of its revisionist theories
It is a concentrated effort on the part of the Fed to exonerate itself from the Original Sin of failing to address asset bubbles. The result is an ever-deepening moral hazard dilemma that poses grave threats to financial markets.
Stephen Roach - Morgan Stanley Global Economic Team - April 25, 2005

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The Great Transition Part I: Giant Popping Sound
Did you hear it last week? I mean the Giant Popping Sound of the largest financial mania in history
another step along the way in the ongoing, seismic readjustment that it taking place in the global social, economic and political order.
M.A. Nystrom 18 April 2005

Did you hear it last week? I mean the Giant Popping Sound of the largest financial mania in history as it continues to deflate, ripping through stocks and markets across the globe.

The Giant Popping Sound last week was actually just another step along the way in the ongoing, seismic readjustment that it taking place in the global social, economic and political order.

Peter Drucker describes it quite bluntly in the introduction to his book, "Post-Capitalist Society:
"Every few hundred years in Western Civilization, there occurs a sharp transformation. . . Within a few short decades, society rearranges itself - its worldview; its basic values; its social and political structure; its arts; its key institutions. Fifty years later, there is a new world, and the people born can't even imagine the world in which their grandparents live and into which their own parents were born.

We are currently living through just such a transformation.

RE: "Vi lever i en brytningstid."

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Last bubble was brief, but still irrational
Short duration does not necessarily mean small magnitude.
The size of the late 1990s stock market bubble at its peak still supports a very pessimistic reading of stock market rationality.
By Brad de Long and Konstantin Magin Financial Times 18/4 2005

Brad DeLong is professor of economics at the University of California, Berkeley, and Konstanin Magin is a post-doctoral fellow at the Center of Integrated Nanomechanical Systems

Nasdaq Composite index exploded in late 1999, more than doubling in value in the year up to its late-winter 2000 peak, and the huge bath taken by investors in the Nasdaq from February 2000 to September 2002 as the index lost three-quarters of its value.

It is next to impossible to interpret these events within the context of a rational-expectations model, in which stock prices provide the best possible forecasts of future values. Only those who want their colleagues to doubt their own rationality even try.

By the end of 1996, Alan Greenspan, chairman of the US Federal Reserve, was worrying about the stock market. "How do we know," he asked an audience at the American Enterprise Institute, the Washington think-tank, "when irrational exuberance has unduly escalated asset values?" If you had invested in the Nasdaq while Mr Greenspan was writing his speech, you would have realised a real return from then until now of 8.1 per cent per year.
The answer to the question Mr Greenspan implied in December 1996 - "Are asset prices unduly escalated by irrational exuberance?" - is no.

Today many people - including us - are worried about high levels of bond prices and real estate in the US and elsewhere that seem incompatible with likely scenarios for the world economy. This look back at the bubble of the 1990s is somewhat reassuring: financial markets were not as dumb as we feared then, and so are probably not as dumb as we fear now. Like the late 1990s, any bond or real-estate bubble this decade will probably be of short duration.

However, short duration does not necessarily mean small magnitude. The size of the late 1990s stock market bubble at its peak still supports a very pessimistic reading of stock market rationality.

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Paul A. Volcker:
there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will.
Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.
What really concerns me is that there seems to be so little willingness or capacity to do much about it.
Washington Post April 10 2005

We sit here absorbed in a debate about how to maintain Social Security -- and, more important, Medicare -- when the baby boomers retire. But right now, those same boomers are spending like there's no tomorrow. If we can believe the numbers, personal savings in the United States have practically disappeared

We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.

The difficulty is that this seemingly comfortable pattern can't go on indefinitely.

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About Paul Volcker at Wikipedia

Books about Paul Volcker

Stein's Law: If something cannot go on for ever it will stop.
U.S. Trade Deficit: Causes, Magnitude and Consequenses
Rolf Englund May 2001

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Richard Clarida in Wall Street Journal
Alan Greenspan stirred up the bond market by opining that the then-low level of bond yields -- in tandem with strong growth, $50 oil
and a succession of Fed rate hikes since June -- represented a "conundrum."
From the TIPS market, we learn that the expected real return over the next 10 years on a riskless investment in government bonds is 1.81%.
11/4 2005

Mr. Clarida, professor of economics at Columbia and economic strategist at the Clinton Group, is a former assistant Treasury secretary in the Bush White House.

From the TIPS market, we learn that the expected real return over the next 10 years on a riskless investment in government bonds is 1.81%. This compares with an average of 3.1% over the past eight years, and a level of 2.86% in October 2001 when the economy was still in recession and prospects for economic growth were sure not as buoyant as they are today. Monetary economics and practical experience teach us that the Fed has limited ability to adjust the long-term average real rate. Instead, the expected long-term average real rate is determined in the global capital market.

The real puzzle is why required real rates of return are unusually low in the U.S. and abroad (as confirmed, for example, by the inflation-indexed yield of 1.8% offered in the U.K. government bond market).

The answer is that we are to some extent still in a post-bubble world, in which there is an excess of global saving compared with perceived profitable global investment opportunities.

I believe the U.S. will run a structural current-account deficit of 2% to 3% of GDP even after this adjustment is completed.

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The World Bank;
The severity of the coming slowdown will depend on the extent to which foreign investors lose their nerve about buying U.S.-dollar-denominated assets.
"A reduction in the pace at which central banks are accumulating dollars, a weakening in investors' appetite for risk, or a greater-than-anticipated pickup in inflationary pressures could cause interest rates to rise farther than projected, providing a deeper-than-expected slowdown or even a global recession
Wall Street Journal 6/4 2005

In an annual report on the risks confronting developing economies, the bank said the global recovery of the last three years has masked cracks that can't be left unattended for much longer.

The bank said, a new global recession is a possibility.
"A reduction in the pace at which central banks are accumulating dollars, a weakening in investors' appetite for risk, or a greater-than-anticipated pickup in inflationary pressures could cause interest rates to rise farther than projected, providing a deeper-than-expected slowdown or even a global recession," it said.

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China - With floating exchange rates you do not need such a big currency reserve
Rolf Englund Financial Times 8/12 2004

Dollarn

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– Welcome to the Bubble Economy, 2005.
There’s the housing bubble and the commercial office space bubble. There’s the bond-market bubble and its two progeny, the junk-market bubble and the emerging-market-debt bubble. That nearly $2.50-a-gallon price you see at the pump has all the markings of an oil bubble. And the premiums being paid for all those corporate mergers and acquisitions is a pretty good indication of a stock-market bubble.
Steven Pearlstein 5/4 2005

In fact, nearly every asset market you can think of is showing signs of bubblelike behavior. The reason is pretty clear: The global economy is awash in free cash.
“There is an excess of liquidity around, and it is proving very hard to get rid of it,” said John Makin of the American Enterprise Institute, using the term preferred by economists.

Fed maestro Alan Greenspan has argued that nobody can really identify a financial bubble until after it has popped, which was one reason the Fed did little to try to prick the stock market bubble in the late 1990s. That sophistry was exposed last month when transcripts of Fed meetings from 1999 were released showing that Fed officials, including Greenspan, were quite aware that they were dealing with a bubble of immense proportions.

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From January 1980 to January 2005, M3 US grew 420%.
Dow Jones Industrial Average returned 1,098%
Jim Jubak CNBC 1/4 2005

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A bubble or mania is a type of investing phenomenon that occurs when investors put too much demand on a stock or sector.
A crash is a sudden, dramatic drop in value of individual shares of stock and the total stock market as a whole. It generally occurs in a very short period of time. It is attributable to the bursting of a bubble.
Rich Scott & Ramsay Simmons March 2005

We will look at three examples of historic speculative bubbles: the Dutch Tulip Mania (1634-1638), the South Sea Bubble (1720), and the Bull Market of the Roaring Twenties (1924-1929).

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Five years to the day after the peak of the last global investment bubble, signs that another one may be about to burst could be seen, ironically enough, in the telecommunications industry.
Chuck Prince, chief executive of Citigroup, said: "The possibility of a liquidity bubble around the world concerns me. A very cautionary thing is that it feels like the world is changing and traditional indices may not give a complete picture."
Financial Times 14/3 2005

For much of the last two years, a credit boom has encouraged a flurry of highly-leveraged takeovers and allowed the refinancing of dozens of troubled companies. In Europe and the US, more than $100bn of so-called "high-yield" debt has been sold in the last eight months alone at barely half the premium over bank rates issuers were forced to pay in 2002.

Many of the biggest players in the debt market are reluctant to express their worries in public but privately admit to deep concern. The chief risk officer at a leading Wall Street firm says banks are being forced to lend on aggressive terms to "stay in the game", even though they know trouble is being stored up. "It's like a game of musical chairs. You just hope it is somebody else that gets hurt when the music stops."

The head of one of the biggest commercial lenders in the US describes the amount of leverage on some buy-out deals as "nutty". Much of the wildest lending is being done by hedge funds awash with cash, he says. "Some funds believe they have to invest the money even if it's not a smart investment. They think the people that gave them the money expect them to invest it. But it's madness." He concedes that it is difficult to predict when the market will turn - "it could stay frothy for some time" - but believes the catalyst is likely to be not an increase in interest rates but a large financing transaction that fails to get executed.

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One of my deepest concerns is that the current complacency with the trade deficit which stems from the relative stability of the US economy and markets will lead to an event as dramatic as the fall of the NASDAQ.
The US economy is growing handily, thank you very much, and unemployment is slowly beginning to drop. The trade deficit has caused no problems.
John Mauldin 11/3 2005

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When the Federal Reserve raises interest rates, trouble usually follows.
In 1987, the stock market crashed. In 1994, Orange County went bankrupt and Mexico devalued its peso, ravaging its economy. In 2000, the Nasdaq Stock Market bubble burst.
Others think it will be different this time.
Wall Street Journal 20/3 2005

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Bubbles were once very rare—one every hundred years or so was enough
Nowadays we barely pause between such bouts of insanity.
The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being.
Eric Janszen, Harpers Magazine February 2008

The new economy belonged to finance, insurance, and real estate—FIRE. FIRE is a credit-financed, asset-price-inflation machine organized around one tenet: that the value of one’s assets, which used to fluctuate in response to the business cycle and the financial markets, now goes in only one direction, up, with no more than occasional short-term reversals.

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"Eight hundred years of financial folly"
Carmen Reinhart has provided a synopsis of a paper she did with Kenneth Rogoff looking at financial crises over a longer time frame than most analyses, which have limited themselves to recent history
Naked Capitalism, April 20, 2008

Although the new paper is descriptive, the implications are not pretty for the US. Recurrent financial crises are the norm; it seems that countries get drunk regularly on too much capital inflows, go bust, sober up, and fall off the wagon again. In fairness, individual countries aren't necessarily recidivists, but the financiers and policymakers, who ought to know better, instead rationalize that each time that current circumstances differ from the not-too-distant past.

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Ed Hyman reminded us that every Fed tightening cycle has brought a financial crisis. Here is his list.
Chad Hudson March 2, 2005

Fed Tightening Cycle	Financial Crisis
1970	Penn Central
1974	Franklin National
1980	First Penn / Latin America
1984	Continental Illinois
1987	Black Monday
1990	S&L Crisis
1994	Mexico
1997	Pac Rim / Russia / LTCM
2000	NASDAQ

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Let me be clear about what I think Roach is saying but cannot say directly.
He is referring to the "R" word - Recession.
Rates that would be high enough to slow (compress) consumer demand must be high enough to raise borrowing costs. They must be high enough to significantly slow down home equity loans for new consumption.
John Mauldin March 4, 2005

That will mean lower new home construction, a slower real estate market and thus slower increases or even (gasp) a fall in home values, and slower or no increases in consumer spending growth. Reduced home construction and falling ("compression" sounds so much gentler than falling!) consumer spending. In short, a recession.The mirror of the recession of a few years ago, when housing and consumer spending did not stop their growth, and the brunt of the pain fell on business. During the last recession we had falling rates and massive stimulus.Far be it from me to quibble with Roach, who is far smarter than I am, but again, I am not certain that this is the complete picture. I think there is more to it than a falling dollar and interest rates.

The fact is that the US consumer is in pretty good shape on an individual basis, or at least thinks he is. Our national wealth and income are at all time highs. Our ability to service our debt is well within our income. While "savings" are not growing, we are in fact saving in our pensions and homes and stocks, which do not count in the national savings rate. If this were not true, we would not be at all-time highs in wealth and income.

The experience of most people is that their job and income is secure during a recession. There are other reasons for this, which Barry Ritholtz will deal with in next week's Outside the Box.Bottom line, the American consumer is comfortable with taking on more risk than in the past. Thus, he sees real little reason to change his consumer spending habits, or increase his savings.

Whether from rising US rates or simply the end of a cycle, the US will eventually fall into recession. The engine of global growth will sputter, and this time it will be the consumer that is the problem. Whether that is in 2006 or 2007 or even later, it will happen. The business cycle has not been repealed.You can count on a major stock market decline in the next recession. The average decline is 43% in a recession. Can we say Dow 6,000? That means many boomers, who are only a few years from retirement, are going to be very disappointed, to say the least.

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More by Stephen Roach

Kan man undvika recession i USA när man måste minska importen med 600 miljarder dollar?
Rolf Englund på Nationalekonomiska Föreningen 30/11 2004

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Between them, the 10 most valuable companies on the Nasdaq at its peak have lost $1,500bn, or 65 per cent of their value.
FT 6/3 2005

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Info about Foreclosures
has moved here

Because US mortgages are “no-recourse” loans (lenders have no recourse to the house’s owner beyond the value of the house), individuals with negative equity have an incentive to default.
Martin Feldstein, FT May 7 2008

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Pain of Foreclosures Spreads to the Affluent

This home on Hettiefred Road in Greenwich, Conn., came close to being auctioned off three times as a result of foreclosure actions. But each time, its owner managed to rescue his position.

New York Times, April 25, 2008

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Info about Foreclosures
has moved here

ACROSS the United States, there were 243,353 foreclosure filings in April alone.
The trend is unmistakable, many millions of American families will be losing their homes before long.
ROBERT J. SHILLER, NYT May 18, 2008

nearly three times the total in the same month just two years ago, according to RealtyTrac, a company that follows the numbers. The trend is unmistakable, and suggests that, without government intervention, many millions of American families will be losing their homes before long.

What would this mean in human terms? Picture a line of moving trucks extending for hundreds of miles: they are taking the furniture of countless families to storage lockers. Picture schoolchildren saying goodbye to their classmates. They aren’t going on vacation: they are being abruptly moved to the other side of town.

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I'm not an economist or a Wall Street strategist. Moreover, I'm not a senior financial industry executive or a central banker. So, based on the criteria the mainstream media uses to qualify its "experts," I guess my opinion doesn't matter very much.

However, there is one fellow who is widely viewed as an expert and who has proven that he actually understands economic reality. His name is Professor Robert Shiller
Financial Armageddon 11/4 2010

Check out the chart below, from Professor Shiller's web site. The blue line is the cyclically adjusted PE ratio for the last 130 years.

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Infectious Exuberance
Financial bubbles are like epidemics
Robert J. Shiller, July/August 2008 Atlantic Monthly

America, from its inception, was a speculation,” begins the historian Aaron M. Sakolski’s 1932 classic, The Great American Land Bubble. George Washington himself was a land speculator, Sakolski notes, and by Washington’s time it was widely perceived that America would eventually be populated much more densely by vast numbers of immigrants, leading many investors to dream of rapidly rising land prices. Waves of speculative mania swept towns, cities, and regions from the 18th century onward, even along the vast and empty frontier. Up, up went the prices. And then, inevitably, down.

Sakolski was seeking to make sense of the biggest national housing bust in American history—at least so far. It began in 1926 and spread to the stock market in 1929, triggering a severe banking crisis that in turn affected almost all types of businesses. Home prices fell a total of 30 percent from 1925 to 1933, and the unemployment rate reached 25 percent at the depth of the Great Depression.

Bubbles are a lot like epidemics. Every disease has a transmission rate (the rate at which it spreads from person to person) and a removal rate (the rate at which those individuals recover from or succumb to the illness and so are no longer contagious). If the transmission rate exceeds the removal rate by a certain amount, an epidemic begins.

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Irrational Exuberance
Irrational Exuberance is a March 2000 book written by Yale University professor Robert Shiller, named after Alan Greenspan's "irrational exuberance" quote. Published at the height of the dot-com boom, it put forth several arguments demonstrating how the stock markets were overvalued at the time.
Wikipedia

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Congress appears eager to help more than a million homeowners facing foreclosure
Robert Shiller, a Yale economist who has long argued there was a bubble in home prices, thinks the plan will do little to stop the slide in housing prices.
CNN 22/4 2008

The runup earlier this decade, fed by low interest rates from the Federal Reserve and lax underwriting standards by lenders, created a bubble that hasn't yet completely deflated. Shiller notes that prices shot up 85% when adjusted for inflation from 1997 through mid-2006 and have fallen only about 15% since then.

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More than 10m would have negative equity in their homes and
more than 2m foreclosures would take place over the next two years.
Lawrence Summers, Financial Times February 24 2008

House prices

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Info about Foreclosures
has moved here

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Not even Alan Greenspan
One great puzzle about the recent housing bubble is why even most experts didn’t recognize the bubble as it was forming.
Robert J. Shiller, New York Times March 2, 2008

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Two recent interviews, one with Yale University economist Robert Shiller and the other with National Association of Realtors Chief Economist David Lereah, paint a wildly divergent picture regarding the state of the nation's housing market.
Tim Iacono 5/3 2007

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Equities look overvalued,
but where is the turning point?
The cyclically adjusted measure follows the method of Professor Robert Shiller of Yale university: it is the ratio of stock prices to the moving average of the previous 10 years’ earnings, deflated by the consumer price index.
Martin Wolf, Financial Times, March 7, 2007

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If a prophet is only as good as his last prophecy, then you'd be wise to listen to Robert Shiller.
The stock market crash that followed was no surprise to Shiller and proved that he had called it right.
Now he's warning that a similar collapse may soon apply to the real estate market.
ABC News 24/3 2006

Shiller said that the same psychology that applies to stock market investors now drives the real estate boom. He called it irrational exuberance, coincidentally the title of his 2000 book about the stock market. Shiller argued that human emotion, not strategic economic factors, drives prices and property buying.

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House prices

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Just because prices are more reasonable than they were doesn't mean they're reasonable.
The preeminent teacher of that lesson is Robert Shiller, a Yale professor with a strong record of thinking independently and being right. His book Irrational Exuberance updated
Fortune 26/12 2005

"The trailing P/E ratio for the S&P composite is still around 25, vs. a long-term average of 15."

The commonly cited figures—a current market multiple of 17, vs. a historical average of 15.2—are based on the previous 12 months' earnings. But, as Shiller points out, that's foolish: "Twelve months is kind of short, only a fraction of one business cycle."

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Irrational Exuberance

This site offers updated information relating to the book Irrational Exuberance by Robert J. Shiller

More about Shiller

Mr Greenspan was not certain that the equity market was indeed a bubble. But by September, he was explicitly referring to it in such terms: "I recognise that there is a stock market bubble problem at this point," he said at the September 24, 1996 meeting - the day the Dow closed at 5874.03.

Three years ago, at the height of the stock bubble, Paul Volcker, Mr Greenspan's predecessor as Fed chairman, issued a famous warning: that the world economy was dependent on the US economy, which was dependent on the stock market, which was dependent on fifty stocks, half of which had never reported any earnings. (FT.com site; Jul 19, 2002)

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A stock market bubble exists when the value of stocks has more impact on the economy than the economy has on the value of stocks
John Makin November, 2000

The root cause of this recession was the bursting of one of the biggest financial bubbles in history.
It is wishful thinking to believe that such a binge can be followed by one of the mildest recessions in history—and a resumption of rapid growth.
The Economist January 2002

Book: Bubbles and How To Survive Them
A non-technical guide to the economics of boom and bust
01 October 2004, John Calverley, IEA (Timbros storasyster)

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Most people think of the Great Depression as originating in the stock market crash of 1929.
But Nobel Prize-winning economist Vernon Smith's research indicates that the 1929 crash was itself
the result of an earlier collapse in the boom housing market during the Roaring '20s.
The Bellingham Herald, 5/6 2009

Smith, professor of economics and law at Chapman University, won his Nobel in 2002.
He spoke Friday, June 5, before a standing-room-only crowd in Fraser Hall at Western Washington University.

"We still have shoes to drop out there."

Examples: Large numbers of adjustable-rate mortgages will reset at higher rates in the next couple of years, putting more households at risk of foreclosure and piling more losses on mortgage lenders. And sharp drops in consumer spending have yet to play themselves out in the commercial real estate markets. Increasing numbers of commercial loans to retailers are likely to go sour in the months ahead.
"That has yet to hit the banking sector," Smith said.

The housing boom and bust that touched off the economic chain reaction was at least partly due to federal policies that made it easier for people to borrow money to buy homes. Politicians from both parties pushed those policies because they were popular, Smith said.

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Vernon L. Smith, Nobel Prize winner in Economics, 2002

Houseprices

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Finanskrisen gjorde 1930 års nedgång till depression
En allvarlig lågkonjunktur i USA utvecklades till Den stora depressionen genom att banksystemet inte fungerade.
Förluster och bankrusningar medförde att 9 000 banker gick omkull.
Detta var en medveten politik från finansminister Mellon.
Danne Nordling 27/3 2009

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We should not try to avoid 1929. We have already failed.
The best we can do now is to avoid 1930, 1931 and 1932
What about the €200bn European Union stimulus package that was agreed in a watered-down form by EU leaders on Friday?
Unfortunately, it is a public relations exercise first and foremost, designed to dupe people into believing that the EU is finally doing something.
Wolfgang Münchau, Financial Times, December 14 2008

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"This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled.
The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era.
Stagflation in the 1970s and early '80s undermined New Deal ideas and called forth a rebirth of radical free-market notions.
What's becoming the Panic of 2008 will mean an end to the latest Capital Rules era."

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The Road To Revulsion
"There is nothing in the situation to be disturbed about."
-Secretary of the Treasury Andrew Mellon, Feb 1930
cit. by James Montier June 16 2008

We have long been proponents of the Kindleberger/Minsky framework for analysing bubbles (see Chapters 38 and 39 of Behavioural Investing for all the details). Essentially this model breaks a bubble's rise and fall into five phases as shown below.

Displacement - The birth of a boom
Credit creation - The nurturing of a bubble
Euphoria - Everyone starts to buy into the new era.
etc etc

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Minsky, Hyman

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I see nothing in the present situation that is either menacing or warrants pessimism. . . . I have every confidence that there will be a revival of activity in the spring and that during the coming year this country could make steady progress. Andrew W. Mellon, U.S. Secretary of the Treasury, December 31, 1929
John Makin, False Dawn, May 30, 2008

The bursting of every bubble is followed by statements suggesting that the worst is over and that the real economy will be unharmed. The weeks since mid-March have been such a period in the United States. The underlying problem--a bust in the residential real-estate market--has, however, grown worse, with peak-to-trough estimates of the drop in home prices having gone from 20 to 30 percent in the span of just two months. Meanwhile, the attendant damage to the housing sector and to the balance sheets tied to it has grown worse and spread beyond the subprime subsector.
Of the 130 million U.S. housing units, 18.5 million--almost 15 percent--are empty. This bodes ill for the outlook for homebuilding; house prices; and the balance sheets of commercial banks, investment banks, and American households. In June, Congress will pass the Foreclosure Prevention Act of 2008. This is a symbolic measure that will not become effective until October 1 and, given its cumbersome structure, will provide virtually no relief to the households facing foreclosure that it is designed to help.

Houseprices

Subprime

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As travellers, we all love the euro. It made my life marginally easier. But let's be serious.
A minor convenience is nothing set against the fate of nations.
It was the perverse workings of the fixed exchange Gold Standard that turned the US slump into a global depression in 1931.
(See 'Fetters of Gold' by Berkeley’s Barry Eichengreen. A brilliant book.)

Ambrose Evans-Pritchard 8 May 2008

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Det var inte inflationen - det var Depressionen
Germany "the new democracy survived serious threats to its existence in the early postwar years and
found a semblance of stability from 1924 to 1928,
only to be submerged by the collapse of the economy after the Wall Street crash of 1929."
Ian Kershaw, New York Times, February 3, 2008

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This huge monetary expansion perpetrated by the Federal Reserve has contributed to the biggest speculation in every conceivable asset category and has been accompanied by unprecedented hubris, greed and outright fraud.
This will be punished. The punishment is likely to fit the crime.
Ian Gordon, Economic Forecaster and Interpreter of Kondratieff Cycle

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Crisis may make 1929 look a 'walk in the park', Ambrose Evans-Pritchard

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In the end, the Fed can always stop a deflationary spiral.
As Bernanke said to Milton Freidman on his 90th birthday, the Fed will not repeat the monetary crunch it allowed to happen 1930-32.
"Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
Ambrose Evans-Pritchard on 14 Dec 2007

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The Forgotten Man: A New History of the Great Depression, by Amity Shlaes.
This new book is the finest history of the Great Depression ever written.
Steven F. Hayward, National Review, July 30, 2007

Farewell to the Mark
Amity Shlaes, member of The Wall Street Journal's editorial board.
Wall Street Journal, December 31, 1998

Amity Shlaes

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We are reminded of the 1929 crash.
Countless studies have blamed the monetary authorities for having stood by as the world economy slid into the Great Depression.
Charles Wyplosz, Eurointelligence 23.09.2007

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Amazing similarity between the last month or so of the rise in Japan that ended on Dec. 29, 1989, and the current advance in the Dow Jones
Bill Fleckenstein, CNBC 7/5 2007

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TOO MUCH LIKE 1929
The final sequence of events that will lead to the implosion of the global economy
Bernard Ber, April 27, 2007

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The Crash of 1929
http://www.pbs.org/wgbh/amex/crash/index.html

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You are Chairman Bernanke. What do you do?
A conscientious fellow, you try first to do no harm. You have made a lifelong study of deflation and the Great Depression. Of all the mistakes you could make at the helm of the Federal Open Market Committee, there is one you really want to avoid:
You do not want to go down in history as the scholar of the Great Depression who inadvertently steered the highly leveraged U.S. economy into Great Depression Part II.
You will be slow to tighten monetary policy when home prices are deflating, let the cpi be what it may.
James Grant, 9/6 2006

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Ben S. Bernanke
Essays on the Great Depression
Princeton University Press
May 10, 2000

Ben Bernanke has gathered together his essays on why the Great Depression was so devastating. This broad view shows us that while the Great Depression was an unparalleled disaster, some economies pulled up faster than others, and some made an opportunity out of it. By comparing and contrasting the economic strategies and statistics of the world's nations as they struggled to survive economically, the fundamental lessons of macroeconomics stand out in bold relief against a background of immense human suffering. The essays in this volume present a uniquely coherent view of the economic causes and worldwide propagation of the depression.

Full text at Amazon

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He had presided over the greatest prosperity in U.S. history when Calvin Coolidge announced from the Black Hills of South Dakota, “I do not choose to run for president in 1928.” In March 1929, Coolidge turned the presidency over to Herbert Hoover, the commerce secretary he derided as “The Wonder Boy.” Six months later came the Wall Street crash and Great Depression with which Hoover’s name is forever associated. Coolidge was enjoying retirement.
Is Alan Greenspan the Calvin Coolidge of our time?
Patrick J. Buchanan, february 2006

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Greenspan's most vehement critics are convinced he has made a fundamental error as a monetary economist.
The hairshirt economists vs. the cheerleaders for growth-is-good
Business Week 28/6 2005

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The Bursting Asset Bubbles - Wall Street, October 1929
Sam Vaknin, Ph.D. - 4/24/2005

One of the fascinating things about the extended media commentary on the 75th anniversary of the Wall Street Crash is that no one has a definitive answer as to the cause.
The interpretation that I find most interesting is the notion that bubbles and crashes tend to accompany the rise and fall of financial hegemonies. John Plender, FT 31/10 2004

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Wall Street Crash: 75 years on
Markets may rise and markets may fall, but there was only ever one Wall Street Crash.
BBC 27/10 2004

In October 1929, Professor Irving Fisher of Yale University, a great guru of the markets, earned immortality with the pronouncement:
"stock prices have reached what looks like a permanently high plateau."
BBC 27/10 2004

Stock market downturn of 2002

Time Line 1998-2004

Over a six day period, the high-tech NASDAQ stock index in the U.S. lost 17% of its value, dropping by November 13 2000 to below 2,900, its lowest value since November 3 1999.
In paper terms, it represented an evaporation of more than $1.7 trillion in share values since the all-time high of 5,123 in March 2000, or a drop of 44.3% in 8 months.
Market Plunges and Fed steps in again

1929: Wall Street Collapses
Near-panic seized stockE HTML PUBLIC "-//SoftQuad//DTD HTML 3.2 + extensions for HoTMetaL PRO 3.0(U) 19961211//EN" "hmpro3.dtd"> traders today in the wildest session Wall Street has ever seen.
International Herald Tribune Oct. 24, 1929

Market crashes through the ages
BBC 16 July, 2002

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Gerhard Stenberg, chef för Handelsbankens kapitalförvaltning i Göteborg, hoppar av i protest mot börshysterin efter nästan 30 års arbete i aktiemarknaden. 98-05-20
Han tror att en börskrasch är oundviklig och vill inte ta ansvar för att rekommendera placeringar i aktier för närvarande. "Kurserna är på tok för höga och måste ned med minst 30 procent.
Vi står inför ett kraftigt fall i börskurserna i hela världen. Det kommer att bli en rejäl smäll".

Vad kan man lära av historien?
Rolf Englund i Smedjan nr 4/1992

Stock Market	World Economy
Hong Kong Hang Seng 1993-1998	WE 1974-2002
Dow Jones 1970-1997
Dow Jones 1994-1999
Dow Jones 1991-2001
S&P p/e 1930-2000
FTSE dividend yields och P/E-ratios 1987-1999
Nikkei 1984-01
Tokyo Nikkei 1986-1995
Stockholmsbörsen 1979-1997
Stockholmsbörsen 1999-2000
Frankfurt-börsen DAX 1989-1997
Dow Jones fyra största krascher

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Spela roulett med skuldbördan
Leif Widén
(Världsekonomin och aktiebörserna)
Arbetspapper 2002-02-04

Tröstande ord från Gunnar Eliasson - sju procent realt per år - på sikt

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Aktieindex Hongkong och London 1993-1997

S-E-Banken

Tröstande ord

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Doomsday-warnings
See also New Era?

Panic!

The Internet Stock Mania Website

Real Estate Bubbles

The Economist 99-09-23

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Over two days this week, Gerrit Zalm, the Netherlands finance minister, and Nicolas Sarkozy, his French colleague, have set up a live experiment that will assure full employment for future graduate students of comparative economics.
Financial Times editorial 23/9 2004

The intriguing question facing eurozone policy makers is whether the two ministers, with their very different budgetary prescriptions for 2005, can boost employment more broadly in their economies while bringing their deficits below the limit of 3 per cent of gross domestic product set by the EU's stability and growth pact.

The policies could not be more different. Mr Zalm, with determined rigour, has brushed aside street protests to present a hair-shirt, supply-side budget which combines belt-tightening for consumers and corporate tax breaks for business. He hopes the deficit will fall to 2.6 per cent next year from 3 per cent in 2004 and structural reforms will attract investment, creating growth and jobs in the medium term.

Mr Sarkozy's budget, by contrast, appears largely pain-free. Buoyed by a recovery in government revenues, the French finance minister forecast that the public finances next year would show a deficit of 2.9 per cent - meeting EU rules for the first time since 2001.

An International Monetary Fund study, released last night, suggested that fiscal policy in the eurozone has weakened since the introduction of the single currency in 1999.

Against this background, it is difficult not to sympathise with Jean-Claude Trichet, the European Central Bank president, who warned again yesterday of the need for further budget consolidation and the dangers of loosening the stability pact's sanctions against excessive deficits.

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What is the relationship between Weimar Germany and Wall St. of the late 90s?
On the surface, what could be more different?
Stock market booms are the best of times while hyperinflation is a nightmare.
Robert Blumen, Ludwig von Mises Institute

Ludwig von Mises Institute

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During the year ending in July, real disposable income grew at a 1.8 percent rate while real consumer spending grew at a 3.5 percent rate.
John Makin, AEI

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Hans Tson Söderström: Tur att vi har vår flytande krona
Det är inte särskilt höga odds på tipset att efter det amerikanska presidentvalet följer en kraftig finanspolitisk åtstramning. I värsta fall blir den förknippad med stigande räntor och en fallande dollar. I så fall uppstår en svårbermästrad situation för ECB och EU:s finansministrar
Kolumn i DI 10/9 2004

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Stand by for a pensions bail-out
A re-run of the S & L disaster
John Plender Financial Times 13/9 2004

In the light of United Airlines' proposal to stop contributing to its pension funds, comparisons are increasingly being made between today's overstretched US pension fund system and the savings and loans crisis of the 1980s. Not without justice, although the problem in pensions will be more of a slow-burn affair since pension funds, unlike S & Ls, are unleveraged.

The nub of it is that private defined benefit schemes in the US have a $400bn funding gap. Meantime, the Pensions Benefit Guarantee Corporation (PBGC), the agency that insures private pensions for 44m workers and retirees, had an $11.2bn deficit at the end of 2003. It also has $85bn in exposure to companies with junk bond ratings, which implies a high risk of default.

The position can only worsen given the degree of moral hazard built into the system, whereby the premiums paid to the PBGC do not adequately reflect the risks. One measure of this, highlighted by Bradley Belt, executive director of the PBGC, is the fantastic bargain United Airlines has enjoyed at the insurer's expense. It has paid little more than $50m in premiums since the agency's inception in 1974. Yet if its pension plans terminate, the PBGC would be hit by a claim of $6.4bn.

The agency is thus in a position not unlike that of the International Monetary Fund. Its mere existence encourages morally hazardous behaviour and everyone expects it to act as a financier of last resort for the whole system. Yet it lacks the resources to do more than a marginal firefighting job in the event of a systemic crisis. And the potential for systemic crisis increases all the time because the weaker players in the system are encouraged, as in the S & L fiasco, to speculate their way out of trouble.

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More by John Plender at FT site

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"Risk för global kris"
Morgan Stanleys chefsekonom varnar för sammanbrott i världsekonomin
DN 9/9 2004 Reporter Johan Schück

När andra talar om ljusare tider, så menar han /Stephen Roach/ att skenet bedrar och att problemen bara skjuts på framtiden.

- De amerikanska konsumenterna håller igång ekonomin genom att skuldsätta sig allt djupare, uppmuntrde av skattesänkningar och rekordlåga räntor.

Räntorna är konstlat låga och måste upp till mera normala nivåer.

Numera är det inte privat kapital, utan pengar från centralbankerna i Ostasien /läs: Kina och Japan/ som täcker det amerikanska /bytesbalans/underskottet.

Roach tar tillbaka sitt råd från tidigare i år om en kraftig amerikansk räntehöjning: ekonomin är inte längre tillräckligt stark, det rätta tillfället har gått förlorat, menar han.

More from Stephen Rocah

"USA har ryckt åt sig ett stort försprång och har världens mest framgångsrika ekonomi"
Klas Eklund på SvD:s ledarsida 2000-08-11

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The risks ahead for the world economy
Fred Bergsten The Economist print edition Sep 9th 2004
Fred Bergsten is director of the Institute for International Economics in Washington. His book, “The United States and the World Economy: Foreign Economic Policy for the Next Administration” is forthcoming.
Very Important Article

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Bubbles are getting blown out of all proportion
The financial press is full of grim prognostications of economic damnation postponed but not avoided.
The monetary moralists preaching inevitable doom for the US economy because the Fed dared to stabilise the economy after the bubble's collapse are simply wrong
Adam Posen Financial Times 8/9 2004
The writer is a senior fellow at the Institute for International Economics
Chart sources: Author’s calculations from Adam Posen ‘It Takes More Than A Bubble to Become Japan’ (Reserve Bank of Australia 2003)

Like the hellfire preachers of yesterday, today's economic pundits are taking a stern line on excess. Economies that enjoyed asset price booms, notably the US, are damned to pay for their wanton ways. Central banks that attempted to offset the negative effects of a bubble's burst, notably the US Federal Reserve, are merely postponing the day of judgment and, if anything, compounding their sin by blowing up other bubbles - in housing, or in government bonds, or both. The financial press is full of grim prognostications of economic damnation postponed but not avoided.

This is all pernicious (pernicious \pur-NISH-us\, adjective: Highly injurious; deadly; destructive; exceedingly harmful/nonsense). Pernicious because it discourages central banks from responsibly doing their job of stabilising the real economy, as the Fed correctly did in 2001-03.
Nonsense because there is no evidence to support these claims. Bubbles have only rarely caused the lasting damage that these commentators assert as unavoidable destiny; when they have, it has been because central banks have failed to respond to the bubbles' aftermath.

The outdated but apparently still widely attractive monetarist image of liquidity as toothpaste - if you squeeze the tube in one place, it bulges somewhere else - does not stand up empirically.

This cross-national evidence is consistent with economic historians' assessments of the US experience. Among the many booms, panics and busts in the 19th and 20th centuries, only those accompanied by banking problems had negative consequences lasting beyond a few quarters. Bubbles can pop with limited macroeconomic impact, and usually do.

As for the second contention, the moral hazard story of “the Greenspan put” - in which investors believe the Fed will step in to protect them if the market crashes, and so act recklessly - is a cute story, but that is all it is. Investors do not decide whether or not to risk their money based on whether the central bank cut rates in the aftermath of the last bubble.

In fact the evidence is that, if anything, investors have less risk tolerance for extended periods after bubbles, whether or not the central bank cuts rates. Only two of the 15 big industrial economies (Finland and Italy) have had recurring bubbles since 1970 - all the rest had to wait through a long period of fading memories and turnover in financial services personnel before a second asset price boom emerged (if one ever did).

Deflation did not emerge in Japan until the end of 1997, many years after the bubble had burst. It was a consequence of years of failure by the Bank of Japan to respond adequately to slowing growth, the Ministry of Finance's decision to raise taxes in a recession and the corporate sector's inability to face up to bad loans, a problem that was allowed to grow to vast proportions. After the bubble burst, the BoJ's unwillingness to stimulate the economy unless government and business “got the rot out” served only to encourage more wasteful government spending, greater declines in corporate and bank capital and constant renewal of bad loans.

Thankfully, the Fed, as its aggressive rate cuts in 2001-03 show, has learnt these lessons. The monetary moralists preaching inevitable doom for the US economy because the Fed dared to stabilise the economy after the bubble's collapse are simply wrong.

All reasonable people agree that today, with rising inflation, burgeoning Federal deficits and the possibility of a stagflationary oil shock, interest rates should be on an upward path in the US. But the Fed is right to wait for the data to come in to determine the pace of that increase.

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America on the comfortable path to ruin
These two facts - the rest of the world's surplus output and the US goal of full employment - explain the global macro-economic picture
Martin Wolf, Financial Times, August 18 2004

From 1996 to 2003 US real demand has grown faster than real gross domestic product in every year (see chart). When demand has grown slowly, as in 2001, output has grown even more slowly. Thus, the US authorities had to generate faster growth of demand than of potential output, with the difference spilling over on to the rest of the world via growing current account deficits.

Was the fiscal slide inevitable? No, but it could have been avoided only if the US had been prepared to accept a slump. Yet no US administration would have tolerated this outcome.

For the same reason, the desire of both presidential candidates to reduce the fiscal deficit in coming years is meaningless without change in the external position. The point is powerfully made in the latest in a series of papers authored by Wynne Godley and associates for the Levy Economics Institute and the Cambridge Endowment for Research in Finance. click here

Let us be blunt about it. The US is now on the comfortable path to ruin. It is being driven along a road of ever rising deficits and debt, both external and fiscal, that risk destroying the country's credit and the global role of its currency. It is also, not coincidentally, likely to generate an unmanageable increase in US protectionism.

Worse, the longer the process continues, the bigger the ultimate shock to the dollar and levels of domestic real spending will have to be. Unless trends change, 10 years from now the US will have fiscal debt and external liabilities that are both over 100 per cent of GDP. It will have lost control over its economic fate.

What cannot last will not do so, as the late Herb Stein famously remarked.

The essence of the needed changes is quite clear: a further substantial devaluation of the dollar, together with a sizeable rise in domestic demand, relative to potential output, in almost all other important economies of the world.

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See also FT leader: Dollar stands on a precipice
Financial Times; Jan 02, 2003
As the late Herbert Stein, former chairman of the US council of economic advisers, once said:
"If something cannot go on forever, it will stop."

The combination of an ever-rising US current account deficit with a strong dollar must cease. Indeed, it already is doing so. The currency weakened in 2002. It is rather likely to weaken further in 2003. The present course of the US economy is unsustainable.

Net US liabilities to the rest of the world are some 25 per cent of gross domestic product - in the neighbourhood of $2,500bn (£1,562bn). In the first three quarters of 2002, the current account deficit ran at close to five per cent of GDP. As recently as 1997, however, the deficit was only 1.5 per cent of GDP. It is bigger this year than two years ago, despite last year's economic slowdown. Since the beginning of 1997, trend growth of exports of goods and services, at constant prices, has been 2.2 per cent a year, of GDP 3 per cent and of imports 7.4 per cent. Even under quite conservative assumptions, the current account deficit could, on current trends, be over 7 per cent of GDP by 2007. By that year, US net external liabilities would, at current exchange rates, be close to 65 per cent of GDP. If the dollar is to remain strong, despite these deficits, the rest of the world must accumulate net claims on the US economy at $500bn a year, and rising, for the indefinite future. This is hard to imagine.

Already, there has been a steep decline in net private foreign purchases of US assets, from $978bn in 2000 to an annual rate of just $560bn in the first three quarters of 2002. Net foreign direct investment has collapsed, from $308bn in 2000 to an annualised $14bn in 2002. This decline in private foreign purchases of US assets has been offset by a big increase in foreign government net purchases of US assets, from $38bn in 2000 to an annualised rate of $136bn in 2002. There has also been a steep fall in US private purchases of foreign assets, from $605bn in 2000 to an annual rate of just $380bn in 2002. If foreign governments stopped propping up the dollar and US investors invested abroad, as before, the dollar would tumble. Other currencies must rise if the dollar is to fall. But the two biggest economies after the US - the eurozone and Japan - are highly dependent on export demand, at least for the moment, while no big economy offers obviously superior returns to those available in the US. Moreover, other governments, particularly in Asia, are desperately unwilling to see their currencies rise against the dollar. The most potent of all large-scale purchaser of dollars is Japan. Its vast foreign reserves, already $395bn at the end of 2001, rose to $461bn by October 2002. With the finance minister talking of a yen exchange rate below Y150 to the dollar and pressure on the Bank of Japan to expand the money supply, further purchases are probable. If the dollar is to fall, the important currency against which this is likely to happen is the euro, since it belongs to the one large entity whose authorities will refuse to buy dollar assets in large quantities. The dollar has already fallen 16 per cent against the euro since the end of January 2002. This slide could easily continue in 2003. This is a tale of irresistible force meeting immovable objects. The force is the growing pile of US liabilities. The objects are the low real returns in other big economies and the unwillingness of many governments to tolerate currency appreciation. In the short term, the objects may win. In the long run, the force will be stronger. The dollar must fall. The longer it remains high, the bigger its fall will be.

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Greenspan is running out of buttons to push
Peter Hartcher, Financial Times, August 10 2004
The writer is international editor at The Sydney Morning Herald and a visiting fellow at the Lowy Institute for International Policy. He is author of a forthcoming book on Alan Greenspan and Wall Street, entitled Bubble Man

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The US economy has grown reasonably fast since the second half of 2003 and the general expectation seems to be that satisfactory growth will continue more or less indefinitely.
The expansion may, indeed, continue through 2004 and for some time beyond. But... it will certainly not happen without a cut in domestic absorption of goods and services by the US which would impart a deflationary impulse to the rest of the world
Wynne Godley et al, The Levy Economics Institute, July 2004

The US economy has grown reasonably fast since the second half of 2003 and the general expectation seems to be that satisfactory growth will continue more or less indefinitely.

But with the government and external deficits both so large and the private sector so heavily indebted, satisfactory growth in the medium term cannot be achieved without a large, sustained and discontinuous increase in net export demand. It is doubtful whether this will happen spontaneously and it certainly will not happen without a cut in domestic absorption of goods and services by the US which would impart a deflationary impulse to the rest of the world.

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There are big medium-term risks ahead
Global macroeconomic imbalances, the impact of a rising Asia, protectionism and vulnerability to terrorist outrages
Martin Wolf 20/7 2004

Start with some of the elements in the global macroeconomic picture.

The US current account deficit has risen from about 1.5 per cent of gross domestic product to over 5 per cent today. During the recent US slowdown, the current account deficit has, remarkably, continued to rise. This is the opposite of what one would normally expect and of experience in the early 1990s.

A net creditor for most of the 20th century, the US has seen its net liability position move from a rough balance in 1988 to minus 24 per cent last year.
Yet, despite a current account deficit of 4.9 per cent of GDP in 2003, net liabilities to the rest of the world fell as a share of GDP. The tumbling dollar reduced net liabilities by more than the current account deficit increased them.

On average, according to the International Monetary Fund's latest World Economic Outlook, real domestic demand will have grown at 3.8 per cent a year in the US between 1996 and 2005, while real output will have grown at 3.5 per cent.

The UK has an even bigger discrepancy, at half a percentage point a year. Meanwhile, the eurozone's demand will have grown at a pitiable rate of 1.8 per cent, with output growth of only 2 per cent, and Japan's demand will have grown at a still lower 1.2 per cent, with output growth at 1.5 per cent.

In 2004, according to the Organisation for Economic Co-operation and Development, the Anglosphere (the US, UK and Australia, but not Canada in this case) will run a combined current account deficit of $636bn, with the US deficit alone accounting for $555bn.

Asia's current account surplus was recorded at $322bn.

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The Asset Economy
The income-driven impetus of yesteryear has increasingly given way to asset-driven wealth effects. For consumers, businesses, policymakers, and investors, the asset economy turns many of the old macro rules inside out
Stephen Roach Morgan Stanley 21/6 2004

The equity bubble of the late 1990s was a transforming event in many ways for the US economy. But there is one lasting implication that stands out above all - an important transition in the character of the American growth dynamic.

The income-driven impetus of yesteryear has increasingly given way to asset-driven wealth effects. For consumers, businesses, policymakers, and investors, the asset eco nomy turns many of the old macro rules inside out. In the end, it could well pose the most profound challenge of all to sustainable recovery in the United States.

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More from Stehpen Roach

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The threat of extreme events
Kenneth Rogoff, formerly chief economist of the International Monetary Fund believes there is a high risk of a housing slump in the US
Samuel Brittan Financial Times June 18 2004

Kenneth Rogoff, formerly chief economist of the International Monetary Fund, in the May issue of the Central Banker puts his finger on a weakness of official assurances by saying "people tend to resist thinking about low probability extreme events".

There are also dangers that are highly likely, but the timing of which is uncertain.

Mr Rogoff cites the US current account deficit of 5 per cent of gross domestic product, which he, like many others, regards as unsustainable. Suppose, however, this suddenly reverts to balance. For instance, a steep collapse in US house prices could lead to a sharp rise in private savings. Indeed, he believes there is a high risk of a housing slump in the US even though the boom there has not gone as far there as it has in the UK or Australia.

A future correction would need to be accompanied, according to the former IMF economic director, by a drop in the the dollar of over 40 per cent in the short run and in the long run of about 12-14 per cent.

Short-term real interest rates in the Group of Seven countries are still negative. In the US, they are minus 1 per cent. In core euro countries, they are around zero. This compares with a normal historical level of, say, 2 or 3 per cent.

There is also a gap of over 2½ percentage points between prevailing international nominal short-term rates and the rates on 10-year government bonds (an upwardly sloping yield curve). Monetary policy is, in the awful US financial jargon, "behind the curve".

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I continue to believe that our stock market is the financial equivalent of an 8.0-plus earthquake waiting to happen.
Financial insanity is rampant. Folks are speculating in houses, with many having more than one real estate investment due to the financing that’s available and the belief that real estate is now bulletproof.
Bill Fleckenstein, CNBC 10/1 2005

The fact that Google could have a $50 billion valuation is one sign of the times.

I don’t believe that there has been a moment in time in the last 50 years where the stock market has been more lopsidedly tilted toward all risk and no reward.

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The next bubble - House prices

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Thinking About ‘Low Probability Events’
Marshall Auerback June 22, 2004
http://www.prudentbear.com/internationalperspective.asp

America’s vaunted economic “flexibility” is a mirage: it is fundamentally a product of financial engineering and endless debt creation, which has persistently created the image of a dynamic economy, successfully withstanding one shock after another, from the fall out of the Asian financial crisis of the late 1990s or the devastating terrorist attacks of September 11, 2001.

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http://www.prudentbear.com/homepage.asp

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Beware bursting of the money bubble
David Hale Financial Times May 30 2004 19:30

The financial markets have been hit by shocks from the Middle East over the past few weeks. But the real risk to world markets is that the speculative bubbles and "carry trades" that have developed as a consequence of American monetary policy over the past year will unravel as the US Federal Reserve moves to increase interest rates.

During the Nasdaq bubble of 1998-2000, US interest rates ranged between 4 per cent and 6 per cent. Since June 2003, they have stood at 1 per cent. The advent of such low money market yields has unleashed speculative capital flows to asset classes that played no role in the technology bubble of four years ago.

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Warren Buffett
"Vi tror att dollarn kommer att tappa i värde i förhållande till andra större valutor"
Inför närmare 20.000 aktieägare på Berkshire Hathaways årsmöte i Omaha, Nebraska meddelade han därför sin intention att göra slut på investmentbolagets ansenliga kassa på 36 miljarder dollar, motsvarande 274 miljarder kronor, så snabbt som möjligt.
DI 3/5 2004

Warren Buffett, känd som en av de mest inflytelserika investerarna i världen, har alltsedan 2002 varit öppet skeptisk till dollarinvesteringar. Han gillar inte alls den räntepolitik som den amerikanska centralbanken för utan förspråkar i stället räntehöjningar.

73-åringen befarar nu att det redan gigantiska handelsunderskottet i landet kommer att öka ytterligare. Inför närmare 20.000 aktieägare på Berkshire Hathaways årsmöte i Omaha, Nebraska meddelade han därför sin intention att göra slut på investmentbolagets ansenliga kassa på 36 miljarder dollar, motsvarande 274 miljarder kronor, så snabbt som möjligt. "Vi tror att dollarn kommer att tappa i värde i förhållande till andra större valutor", sade Buffett, enligt norska Dagens Naeringsliv.

US Trade deficit

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Return from the dead
Just when you thought deflation was the worry

ry.cfm?Story_ID=2594332">The Economist Apr 15th 2004

Remember inflation? Remember fretting about accelerating consumer prices and higher interest rates? Those days may soon be back.

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John Makin, resident scholar at the American Enterprise Institute in Washington:
The blissful combination of higher growth and lower inflation that has characterized the U.S. economy since last spring is the inverse of stagflation, the nightmare scenario that followed the oil shock of 1973-74 Still lower inflation is a distinct possibility.
John Makin AEI 29/1 2004
- We are nearing the end of a benign, unusual period of faster growth and lower inflation and moving into a period of slower growth and higher inflation
IHT 15/4 2004

On Wednesday, the government reported that U.S. consumer prices shot up more sharply than expected in March, rising 0.5 percent from a month earlier. Excluding food and energy prices, the rise was still 0.4 percent, the biggest monthly increase in two years. These early signs of a return to creeping price increases — just a few months after the U.S. Federal Reserve pronounced the risks of inflation and of deflation ‘‘almost equal’’ — may put the central bank in a tight spot as pressure grows to raise interest rates sooner than it might like.

‘‘We are nearing the end of a benign, unusual period of faster growth and lower inflation and moving into a period of slower growth and higher inflation,’’ said John Makin, resident scholar at the American Enterprise Institute in Washington. ‘‘The resulting whiff of stagflation may force the Fed to raise U.S. interest rates while growth is slowing.’’

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Those with a memory of what happens when a bubble bursts know that, if history is any guide, the bear market that began in 2000 is not over - not by a long shot.
By Maggie Mahar Financial Times April 11 2004 19:36
The writer is the author of Bull! A History of the Boom, 1982-1999 (HarperBusiness) What drove the Breakneck Market - and What Every Investor Needs to Know About Financial Cycles
amazon.com

How can one conclude that they are wrong? Because the US market has not yet "reverted to a mean". Past experience suggests that when a bubble collapses, a market cannot lay down a firm foundation for the next boom until the pendulum has swung back to its mean, or average price.

Historically, at its mean, the S&P 500 has traded at 17 to 18 times the previous year's earnings, and roughly 14 times estimates for the current year, while yielding dividends of about 4 per cent. When a bear market scrapes bottom, the pendulum inevitably swings too far in the other direction: price-earnings ratios usually sink below 10, while the yield rises to at least 5 per cent.

Today, the S&P 500 fetches approximately 29 times last year's earnings and roughly 18 times estimated earnings for 2004, assuming you believe analysts' estimates. As for dividends, the average stock on the S&P yields less than 2 per cent.

Meanwhile, the underlying economy deteriorates in what could be the prelude to a second fall in equity prices. Debt builds, the dollar declines, capital investment remains sluggish and, despite increased productivity, real wages barely budge. Sceptics argue that a recovery built on debt and consumer spending is no recovery at all.

So the crash of 1929 was followed by a 50 per cent rally. But then came the crash of 1930-1932. When it was all over, the market had fallen some 86 per cent from its pre-crash peak.

Similarly, the go-go market of the 1960s first sold off in 1970 when the Dow plummeted from a high of nearly 1,000 to a low of 631. Investors assumed that this was a nadir and, sure enough, late in 1970, the benchmark index began to climb. The bear market rally of the early 1970s ran for a little more than two years, reaching a climax early in 1973, with the Dow making a new high of 1,071. Many thought that a new bull market had begun. Within weeks, the the crash of 1973-1974 began. When it bottomed, the Dow had sunk to 577 - seven points below where it had traded in 1958.

An entire generation was driven out of the stock market. It would be another eight years before a new bull market began.

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The jobs picture is even worse than it seems
And despite what the experts say, inflation is out there, and we’re feeling it already.
Bill Fleckenstein, CNBC 15/3 2004

Using the seasonally adjusted total unemployment rate of 5.6% and adding to it "discouraged" workers, the rate grows to 5.9%. Factor in other groups of people who are underutilized in the work force, you can ratchet the number all the way up to 9.6%. And, for the sake of comprehensiveness, if you use the non-seasonally adjusted numbers, that rate would swell to 10.9%. So, those are the numbers, and I'll leave readers to draw their own conclusions.

What's particularly scary is how pathetic job growth has been, despite all the interest-rate cuts (nominal rates are near zero, and real rates are essentially below zero), the two Bush tax cuts and now the refunds from the last cut. Despite it all, we still can't get enough jobs created.

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Realräntor/Real Interest rates

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The failure of the US economic recovery, now more than two years old, to produce meaningful job growth has generated much talk about its political consequences.
It could undermine President George W. Bush's re-election prospects, and it certainly seems to be contributing to the national alarm about outsourcing, trade and overseas investment.
But the bigger concern is that it may be starting to threaten the strength and even the sustainability of the recovery itself.
Financial Times editorial 9/3 2004

With last Friday's dismal news from

the Labour Department that just 21,000 net new jobs were added in February, total non-farm payrolls remain almost 2.5m below their pre-recession peak. For comparison, in the early 1990s at the same stage of the cycle, in what was also called a jobless recovery, non-farm payrolls had already surpassed their previous peak.

This weakness is, of course, the reflection of the economy's stellar productivity performance; while US employment has remained at a standstill for the past year, gross domestic product is up by more than 5 per cent.

If employment does not begin to show strength soon, consumers are likely to retrench, weakening aggregate demand. To avoid that, either productivity growth must, improbably, collapse, or output must accelerate.

A more plausible gentle slowdown in output per hour would need to be accompanied by stronger demand and output elsewhere.

The American consumer has been surprisingly steadfast for the past three years. Figures last week from the Federal Reserve showed why: household net worth reached an all-time high at the end of last year as modest equity increases were augmented again by gains in housing wealth. But even if the Fed stays on hold for the rest of this year - as looks increasingly likely and sensible - it has scant room to provide the stimulus that lowered mortgage rates and helped raise house prices in the past three years.

The US has had a jobless expansion for more than two years. It will soon start to test the limits of its durability.

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Varning för global bubbla
I botten på problematiken ligger att Fed har hållit styrräntan på en rekordlåg nivå efter att it-bubblan sprack 2000
Cecilia Skingsley, Dagens Industri 8/3 2004

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Berkshire Hathaway, the insurance and holding company run by legendary investor
Warren Buffett, amassed a record cash pile of $36bn in 2003 as the world's second-richest man
once again shied away from rising stock markets
Financial Times 8/3 2004

"Our capital is underutilised now...It's a painful condition to be in - but not as painful as doing something stupid," added Mr Buffett. The chairman's caution has been largely justified in the past, particularly during the technology bubble in 1999, which was the last time that Berkshire shares underperformed against the S&P 500 and the year after its previous cash peak.

Mr Buffett also highlighted a number of risks to the US economy that add to last year's warnings on derivatives, mutual funds and corporate governance.

In particular, he singled out the weak dollar as a cause for concern and revealed that Berkshire Hathaway had $12bn invested in foreign currencies to balance its exposure to the falling greenback. "Prevailing exchange rates will not lead to a material letup in our trade deficit. So whether foreign investors like it or not they will continue to be flooded with dollars," said Mr Buffett. "The consequences of this are anybody's guess. They could, however, be troublesome - and reach, in fact, well beyond currency markets."

US Trade Deficit

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Last week, Alan Greenspan was a study in contradiction.
On Monday, he extolled the virtues of the levered-up homeowner to a credit union conference. The next day, in a speech to the Senate Banking Committee, he was singing a different tune altogether. Fannie Mae and Freddie Mac, the giant providers of mortgage capital, he warned, "are expanding at a pace beyond that consistent with systemic safety," and that "preventative actions are required sooner, rather than later."
The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of
CNBC on MSN Money - 1/3 2004

The next day, in a speech to the Senate Banking Committee, he was singing a different tune altogether. Fannie Mae and Freddie Mac, the giant providers of mortgage capital, he warned, "are expanding at a pace beyond that consistent with systemic safety," and that "preventative actions are required sooner, rather than later."

For a Federal Reserve chairman who has demonstrated that he couldn't identify reckless behavior if it ran him over, it was rather surprising to hear him chide Fannie and Freddie for their recklessness. (I should state, however, it’s an opinion I tend to share.)

Before quoting from the above, I would just note that Greenspan's latest comments reminded me of a speech he gave on March 6, 2000, which I have dubbed "An Ode to Technology." In the speech, he waxed on about the wonders of technology and how it had brought us a new era and all that other stuff. Folks may not remember that date, but it was four days before the Nasdaq Composite hit its all-time high of 5,048.62.

Despite the recovery over the past year ago, the composite is still down nearly 60% from the March 2000 peak.

This is not the first time Easy Al has been way off. On March 7, 2000, I wrote a column called “Alan Greenspan: Friend or Foe” that chronicled some of his prior quotes, speeches and the like. It includes his Jan. 7, 1973, utterance (right before the recession that ranks as our worst, at least until we get through the one we're in but haven't completed): "It is very rare that you can be as unqualifiedly bullish as you can be now." http://www.fleckensteincapital.com/old_raps/friend_or_foe.htm

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Remarks by Chairman Alan Greenspan
The revolution in information technology
Before the Boston College Conference on the New Economy, Boston, Massachusetts
March 6, 2000

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The fall in real yields
Rising real yields may come as a nasty shock to the stock

See also: The Next Bubble - cted virtue". As the stock of foreign currency accumulates, speculation on an appreciation rises, making it ever more costly to hold the currency down. In addition, foreigners start complaining about the trade surpluses, arguing that they are the unfair result of currency undervaluation.

Whatever Europeans may desire, the prognosis is that Asia will continue to run huge current account surpluses and interfere in exchange markets. Its governments will not lightly abandon policies that they believe work well for the convenience of any outsiders.

Ronald McKinnon: The East Asian Dollar Standard
http://siepr.stanford.edu/papers/briefs/policybrief_jan04.html

Dollarn

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"Det mest sannolika", skriver han, "är att vi får se ett börsras utan like följt av ett sammanbrott för dollarn, en händelsekedja som kan tänkas göra slut på USA:s imperieställning".
Carl Johan Gardell, SvD Kultur 17/2 2004

Emmanuel Todd - Låtsasimperiet. Om det amerikanska systemets sönderfall.
(Après l"empire. Essai sur la décomposition du système américain) Övers: Pär Svensson 216 S.
Bokförlaget DN. CA 247:-

Under det sista århundradet före vår tideräknings början förvandlades romarriket från en regional stormakt i Italien till ett Medelhavsimperium som sträckte sig från dagens Irak till de brittiska öarna. Inflödet av tributer från erövrade provinser slog ut det italienska näringslivet. Tillverkningsindustrin blomstrade i periferin där efterfrågan stegrades och produktionskostnaderna var låga. Imperiets kärnområden blev ett svart hål - eller en keynesiansk konjunkturstimulator - med en stormrik samhällselit som konsumerade det överskott som den då kända västvärlden producerade. Relativt obetydliga störningar - som krig eller skördekatastrofer - riskerade till slut att utlösa en veritabel statskollaps. Under senromersk tid var det mäktiga imperiet, precis som USA i dag, en koloss på lerfötter.

Ovanstående reflexioner har hämtats från boken Låtsasimperiet, publicerad på franska 2002, som i dagarna kommit ut på svenska. Författare är den franske antropologen, demografen och historikern Emmanuel Todd som sedan 70-talet skrivit flera internationellt uppmärksammade böcker.

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The power and influence of the United States is being overestimated, claims French historian and demographer Emmanuel Todd. "There will be no American Empire." "The world is too large and dynamic to be controlled by one power." According to Todd, whose 1976 book predicted the fall of the Soviet Union, there is no question: the decline of America the Superpower has already begun.

http://dominionpaper.ca/features/2003/the_conceited_empire.html

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After the Empire, The Breakdown of the American Order, Emmanuel Todd
Translated by C. Jon Delogu Foreword by Michael Lind
$29.95 November, 2003 cloth 192 pages ISBN: 0-231-13102-X Columbia University Press

"A powerful antidote to hysterical exaggeration of American power and potential by American triumphalists and anti-American polemicists alike. A best-seller in Europe, Todd´s book should be read by all thoughtful Americans for its provocative and well-informed analysis of their nation and its prospects." –from the foreword by Michael Lind

"The most effective and most talked about of the new anti-American texts." –Adam Gopnik The New Yorker

http://www.columbia.edu/cu/cup/catalog/data/023113/023113102X.HTM

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US government will run up a budget deficit of nearly $500bn in 2004 - the largest in US history in absolute terms, 5% of GDP
BBC 27/1 2004
Highly recommended - good links

The non-partisan Congressional Budget Office says the US government will run up a budget deficit of nearly $500bn in 2004 - the largest in US history in absolute terms, and, at 5% of GDP, the largest since 1993 as a percentage of the economy.

The budget deficit is now one quarter of total Federal spending, and 80% of the total receipts from Federal income taxes.

It is equal to $1,600 per US citizen this year, and the accumulated deficit over ten years would be nearly $20,000 per person.

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"USA har ryckt åt sig ett stort försprång och har världens mest framgångsrika ekonomi"
Klas Eklund på SvD:s ledarsida 2000-08-11

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SINCE September 11th 2001, it has become obvious to all that the world is a risky place. Even before that atrocity, the world had seemed far from safe to many, especially those concerned with business and finance.
The end of the dotcom craze and the bursting of the stockmarket bubble had already created huge uncertainty. But those are only the most recent examples of unexpected events that can make a mockery of people's plans.
The Economist Survey 22/1 2004

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The dogs of Davos don't bark at the real dangers
continuing overoptimism about Europe, a Democrat in the White House, inflation
Anatole Kaletsky, The Times January 22, 2004

This “view from Davos” is certainly a valuable guide, but not quite in the way intended. Rather than pointing to where the world is going in the next 12 months, the annual consensus established in Davos shows what will not happen.

Last year, the message was one of profound gloom — the war in Iraq would engulf the world in years of violence, the global economy would slide into depression and stock- markets would suffer another collapse. In the event, of course, the opposite occurred. Looking back, a similar pattern emerges over the years: the view from Davos is usually a contrary indicator, at least of t House prices

he short-term trends. In 2002, Davos expected another terrorist attack even worse than that of September 11. In 2001, the consensus anticipated a Thirties-style depression, triggered by the collapse of technology shares. In 1999, there was the global peril of the millennium bug.

The view from Davos is not always gloomy, although the rich and powerful are often very insecure about the future, presumably because their happiness is so bound up with their power and their fortunes, which can quickly evaporate. In 2000, the consensus was manically enthusiastic, celebrating the limitless wealth created by the internet. In 1998, there was equally misguided jubilation about the launch of the euro and the new economic superpower it would create.

My aim is not to suggest that the participants at Davos are purblind or foolish, although it is true that success as a businessman or politician requires such fanatical concentration on a single company or political project that it is easy to miss the wood for the trees.

This, however, is not the main reason why the Davos consensus is so often misguided. There is another problem — the very fact that these elites are so powerful and so rich. Between them, they control most of the world’s economic output and almost all of its military might. If they all focus on one opportunity or one danger, then the chances are that this particular opportunity has already been largely exploited or this danger warded off.

It is when no consensus exists among the world’s rich and powerful — for example, on climate change or Israeli expansionism, or the Saudi support for Islamic terror — that the dangers fester and grow. When a subject is not even mentioned at Davos it has maximum capacity to surprise and therefore to change the world, for good or ill.

Last year, I was struck by three huge economic issues which Davos completely ignored.

As I wrote here last year, the rise of the euro and its devastating effect on Europe hardly even got a mention.

I was also amazed that “nobody even bothered to talk about the possibility that Wall Street would rebound” rather than collapsing.

Finally, it surprised me that Davos paid so little attention to the rise of the Asian consumer and the shift in global growth leadership from America to Asia, especially China. In the event, all three of these issues turned out to be crucial for understanding the world in 2003.

So today it seems worth asking: what are the Davos dogs not barking at this year?

The easiest one to spot is the continuing overoptimism about Europe. While last year’s indifference to exchange rates has given way to a recognition that the euro is now dangerously overvalued, nobody seems to be drawing the obvious conclusion. The European economy will remain completely stagnant this year because the sharpest rise of the euro has been very recent and will not have its full impact until the end of 2004 and beyond. Unless the euro falls very soon and very abruptly, Europe will have no chance of sharing in this year’s global economic recovery. Geopolitically this means that the EU, like Japan in the 1990s, will be condemned to political paralysis and irrelevance for much of the decade ahead. The Davos elite’s outdated view of Europe as potential superpower looks like a big mistake.

A second case of rearview thinking concerns the US economy and the presidential election. Nobody in Davos seems seriously to believe that America might oust President Bush and put a Democrat in the White House. The surprise result in the Iowa Democratic Party caucuses has increased the chances of Wesley Clark, who I believe is the most plausible Democrat contender. Yet the confidence in an easy Bush victory seems to extend even to people who personally hate him. This is hard to reconcile with the opinion polls, which show the race as a dead heat. Perhaps the faith in Bush simply reflects the near-universal optimism about the US economy this year.

But what Davos ignores is that America’s economic problem in the years ahead will probably be too much growth, not too little. A booming and over-stimulated US economy will present the next occupant of the White House with a daunting challenge: to clean up the mess made by Bush not only in Iraq but also in the US Government’s budget. The only way to do this will be to create a national consensus for unpopular measures to raise taxes. But will any politician be able to do this, especially after what is likely to be one of the dirtiest election campaigns in US history?

The third, and most important, subject that is not being discussed at Davos is inflation. Will 2004 be the year when the world moves from price stability into an era of accelerating inflation reminiscent of the 1960s? In America, the combination of very loose money, rapidly growing budget deficits, devaluation, protectionism and military spending has always been a recipe for inflation in the past. Rising oil, gold and commodity prices all point in this direction, as does the global boom in property prices and the new bubble in stockmarkets now being created by the US Federal Reserve.

Yet despite all these warning signs, the Davos consensus sees economic weakness, not inflation, as the main economic peril in the year ahead. This is exactly the situation in which inflation is likely to start. The people supposed to control inflation — central bankers, politicians and bond investors — are part of the global elite represented at Davos. So if Davos ignores inflation, the same will be true of the Federal Reserve and the other anti-inflationary vigilantes. Thus nothing will be done to pre-empt an inflationary spiral before it takes off.

The same is true of the other dangers overlooked at Davos. If the Davos elite is caught napping by European stagnation or by US political turmoil or by the rising euro, the central banks and governments and other guardians of global stability will also be taken unawares and will fail to ward off these dangers. That is why the Davos consensus is genuinely important — and why it so often turns out to be wrong.

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This page is,Stephen Roach, chief economist at Morgan Stanley, is more pessimistic.
By keeping interest rates unnaturally low and greatly increasing fiscal spending, U.S. policymakers have fueled the creation of a series of bubbles in asset markets
International Herald Tribune 22/1 2004

Roach has been consistently bearish as the global economy weathered the dot-com stock collapse three years ago, followed by a recession in the United States and elsewhere and a less-than-scintillating recovery over the last year.

By keeping interest rates unnaturally low and greatly increasing fiscal spending, he said, U.S. policymakers have fueled the creation of a series of bubbles in asset markets. A new one might be forming now in technology stocks, he added.

By opening the fiscal and monetary taps, Washington policymakers have also inflated the current account deficit, the broadest measure of trade in goods and services. The current account shortfall has been cited by many economists as a cause of the falling dollar; the United States requires net inflows of close to $2 billion a day just to finance the current account, because it imports far more goods and services than it exports.

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Greed, fraud, credulity and the bull market
By Philip Coggan Financial Times; Oct 23, 2003
BULL! A HISTORY OF THE BOOM, 1982-1999
What drove the breakneck market and what every investor needs to know about financial cycles
By Maggie Mahar
Harper Business, £16.85

The bull market ofthe 1980s and 1990s was one of the most powerful in history. It incorpo rated all the classic features of abubble: easy credit, mass participation, fraud and a naive belief in a "new era" that would justify the euphoria.

Much analysis has focused on the final excess, the dotcom bubble and its idiocies. But in the history of the bull market, this was just the cherry on the cake. There was a lot more to the rise in share prices than profitless e-tailers.

Maggie Mahar, one-time English professor at Yale turned financial journalist, has attempted a more comprehensive look at the period. It is an entertaining romp, complete with pen portraits of the heroes - bears such as Gail Dudack and David Tice - and villains. The latter are clearly more numerous, ranging from the anchors of the financial TV network CNBC to the senators who in 1993 blocked an accounting standard that aimed to spell out the true cost of executive options. On this evidence at least, we must hope that Senator Joseph Lieberman does not win the Democratic nomination for president. For anyone who was involved in the bull market, the book does not provide any great new revelations. It is the incidental detail that keeps the story motoring, such as the abusive phone calls received by internet analyst Henry Blodget when whenever he dared question the credentials of one of his client's favoured stocks. Blodget, made a scapegoat for the sins of the analysts' community, emerges as a fairly sympathetic figure, a man clearly out of his depth.

All the main issues are covered, from dodgy accounting, the explosion in mutual funds, the belief in the new economy and the cheerleading role played by investment bank analysts. But if there is a flaw in the book, it is that it focuses almost entirely on the US and on the personalities in that market. While the US was undoubtedly the home of the great bull market, a proper history of the phenomenon would have to include Europe, where in the late 1990s, the equity culture appeared to sweep the continent.

New Era

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Risk management for the masses
Mar 20th 2003 From The Economist print edition
Robert Shiller is professor of economics at the International Centre for Finance, Yale University, and the author of “Irrational Exuberance” (Princeton University Press, 2000).

His new book, “The New Financial Order: Risk in the 21st Century” (to be published by Princeton University Press on April 2nd; $29.95 and £19.95), on which this article (Risk management for the masses, Mar 20th 2003 The Economist) is based, lays out a vision for the future of finance, insurance and social welfare.

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Warren Buffett, the influential investor, warned derivatives were “financial weapons of mass destruction” and that they were “potentially lethal” to the economic system.
In his letter to shareholders of Berkshire Hathaway, Mr Buffett said he and Charlie Munger, the investment and insurance company’s vice chairman, viewed derivatives and derivative trading as “time bombs”.
Financial Times 4/3 2003

The boom that did not bust
By John Plender
Published: February 6 2003 21:02

Greenspan's fight
Low interest rates is not enough
By Martin Wolf
Financial Times, November 12 2002

America is not in danger of deflation
Glenn Hubbard
The writer is chairman of the US president's council of economic advisers
Financial Times, October 9 2002 22:19

Behovet av ett nytt ekonomiskt tänkande
/ finansiella bubblor/Mattias LundbäckSvD Inblick 2002-10-04

Bubble, bubble default trouble
By John Plender
Financial Times, October 3 2002 20:15
RE: Very important article - as always with John Plender

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BBC 12 September, 2002
US economic guru Alan Greenspan has warned lawmakers that their inability to balance the federal budget threatens the country's economic stability. Mr Greenspan, chairman of the US Federal Reserve, urged Congress and the administration of President George W B obviously, under reconstruction, click here for old page

News

ush to restrain the urge to cut taxes while raising levels of public spending. ...more

Vilken bubbla spricker härnäst? Det amerikanska undret
Mats Johansson 1/9 2002

USAs sparare flyr aktiefonder
DI 2002-08-28

Uttagen ur aktiefonder nådde en ny rekordnivå under juli månad i USA, då investerare plockade ut omkring 50 miljarder dollar netto.

Senast i september i fjol, efter terrorattackerna i USA, rapporterades rekordstora uttag ur aktiefonderna. De uppgick nettouttagen till 30 miljarder dollar. Det kan också jämföras med juni månad i år då uttagen var cirka 18 miljarder dollar netto.

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There may be a knighthood for Greenspan in stage-managing a bubble, but there's nothing but pain for everyone if we tell lies to each other to keep it going.
By Bill Fleckenstein CNBC website 2002-08-19

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John Plender
Financial Times; Jul 15, 2002
So you think this bear market is rough? It is positively limp-wristed when compared with the depths of the mid-1970s.

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Watching out for the great bear
Jul 4th 2002 From The Economist

The dilemma facing policymakers was neatly encapsulated by the European Central Bank (ECB), whose main governing body met on July 4th to decide what to do about interest rates.

The ECB continues to be worried about inflation: it has often failed to hit its inflation target (no bad thing say those economists who believe the target is too tight), and Wim Duisenberg, the bank’s president, admitted that “the risks to price stability remain tilted to the upside.” Yet the ECB left rates unchanged because, said Mr Duisenberg “the uncertainties were too large to come to a decisive decision.”

Since, in theory, at least—and in public—the ECB insists that its only target is inflation (and not, unlike America’s Federal Reserve, economic growth as well), the principal uncertainty for Mr Duisenberg and his colleagues is the possible inflationary impact of recent currency swings.

By themselves, falling stockmarkets do not usually cause recessions. It is now generally accepted that the blame for the Great Depression in 1930s America does not lie with the Wall Street crash of 1929 but the unreasonably tight monetary policy which followed it.

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Illusory profits cloud USA Inc
Sunday, 30 June, 2002

Nearly a year ago, Graham Turner warned that the US economy was driven by a huge bubble of artificially inflated profits. Writing for BBC News Online, he explains why the Enron, WorldCom and Xerox scandals are just the tip of the iceberg.

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More about New Era

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Den starka dollarn är bara en bubbla - den enda som inte spruckit än.
USA:s ekonomi växer troligen långsammare än omvärldens de närmaste åren. Risken för ett nytt bakslag, en så kallad "double dip", är över 40 procent.
Det budskapet levererade Steve Roach, chefsekonom på den amerikanska investmentbanken Morgan Stanley, när han gästade Sverige i förra veckan. "

Vi har levt över våra tillgångar och kommit undan med det", säger han. "Jag är här för att tacka er å hela det amerikanska folkets vägnar, för att ni pumpade in pengar i USA och hjälpte oss att blåsa upp en spekulationsbubbla."
Mer av Roach

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The surprising fact is not that /US stock/ markets have fallen, but that they remain so overvalued.
Martin Wolf: The bubble will keep deflating
Financial Times 2002-06-19

Terrible twins?
Economic parallels between America and Japan
America's economy looks awfully like Japan's after its bubble burst
Jun 13th 2002 From The Economist print edition

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The recovery myths
The world economy is coping with the aftermath of two huge asset-price bubbles: the Japanese of the 1980s; and the US-led worldwide bubble of the second half of the 1990s.
Adjustment to the end of the first is not yet over. Adjustment to the end of the second has, contrary to conventional wisdom, hardly begun.
By Martin Wolf, Financial Times June 11 2002

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- Det exklusiva svenska fondbolaget Brummer & Partners har värvat en riktig pessimist som USA-chef, eller "bear" (björn) som det heter på Wall Street.
DI 2002-06-10

"Jag vet att jag har det ryktet, men jag vill hellre kalla mig realist", säger Douglas "Doug" Cliggott.

Sin pessimistiska syn på aktiemarknaden har Cliggott som sagt tagit med sig från J P Morgan.

"Kurserna är fortfarande höga, P/e-talen för de breda aktieindexen i USA är extremt höga", säger han.

"Förväntningarna om vinsttillväxt är uppblåsta och under de nästkommande två till fem månaderna är det hög sannolikhet för att förväntningarna kommer att skruvas ned. Det sätter press på börsen."

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Capitalism and its troubles
SURVEY: INTERNATIONAL FINANCE
May 16th 2002 From The Economist print edition

CAPITALISM has had a rotten time lately. Not as rotten as in 1917, when those revolutionary shots in St Petersburg launched a form of anti-capitalism that ended (except in Cuba and North Korea) only just over a decade ago.

Nor, with luck, as rotten as in 1929, when a stockmarket crash on Wall Street set off the global Great Depression.

But rotten, nonetheless. Nobody knows for sure yet, but 2001 might come to be seen as the year when two decades of mostly unbroken progress for capitalism gave way to something more ambiguous a

nd uncertain.

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Analysts sense day of reckoning for dollar:
A fall in capital inflows to the US has alarm bells ringing
Christopher Swann Financial Times; Apr 27, 2002

The key problem for the US currency is that investors do not need to sell US assets for the dollar to fall. All that is necessary is that they fail to buy. The bloated US current account deficit, running at about 4 per cent of gross domestic product, means that the US needs to attract a net inflow of around Dollars 1.5bn (Pounds 1.04bn) every day in order to stop the dollar falling. The latest figures from the US Treasury provide strong indications that capital inflows are finally drying up. In January the net inflow into US equities and fixed income was just Dollars 9.5bn. This is weak even compared with the Dollars 17.8bn the US attracted in September.

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What glitters ain't gold
The Economist April 11th 2002

There are two theories about Wall Street's role in the bubble years of the new economy. Either investment analysts were swept up, like everybody else, in the prospect of extraordinary gains in efficiency that the Internet would bring, so justifying ever higher share prices.

Or Wall Street saw a golden chance to peddle dirt.

New York's attorney-general, Eliot Spitzer, is a promoter of the second theory. On April 8th he delivered an affidavit to the state's supreme court that paints Merrill Lynch's share-buying recommendations for Internet companies during 2000 as little more than a pretext to stuff gullible buyers with the shares of rotten businesses. (Big customers, meanwhile, were whispered the truth.)

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Why Greenspan allowed irrational exuberance
Gerard Baker, Financial Times, March 07 2002

Riksgäldskontorets ledning och förre börschefen varnar:
"Banker vilseleder aktiespararna" (realränta)
DN Debatt 2002-03-19

"Hög produktivitet rättfärdigar inte p/e-tal"
DI 2002-03-11

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2 067 miljarder kronor.
Så mycket har Stockholms börsen minskat i värde sedan IT-bubblan sprack den 6 mars för knappt två år sedan. Summan är drygt 100 miljarder kronor högre än Sveriges BNP för 2001.
Den motsvarar nuvärdet på sex Ericsson eller 20 Telia. Märkligt nog är det just Ericsson som stått för två tredjedelar av detta ras. Sedan den 6 mars 2000 har telejätten dalat i värde från 1 790 miljarder kronor till 360 miljarder kronor i dag.

SvD Näringsliv 2002-03-04

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The houses that saved the world
Mar 28th 2002 From The Economist

By the end of 2001, American debt service burdens relative to disposable income
were at forty-year highs
John H. Makin, American Enterprise Institute, March 2002

There is still worth in value
Philip Coggan
Financial Times, January 26 2002

The doom-mongers
The Economist 2002-01-24

America sails serenely through a perfect storm
Gerard Baker, Financial Times, Jan 24 2002

The 1990s’ Boom Went Bust. What’s Next?
Milton Friedman
Wall Street Journal 2002-01-22

USA i kraschläge
DI:s Cecilia Skingsley 2002-01-21

Hoping for a recovery
Financial Times editorial, January 19 2002

The Future of Money and of Monetary Policy
Fed Governor Laurence H. Meyer December 5, 2001
http://www.federalreserve.gov/boarddocs/speeches/2001/20011205/default.htm

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Chairman Alan Greenspan January 11, 2002
Although the quantitative magnitude and precise timing of the wealth effect remain uncertain, the steep decline in stock prices since March 2000 has, no doubt, curbed the growth of household spending. Although stock prices recently have retraced a portion of their earlier losses, the restraining effects from the net decline in equity values presumably have not, as yet, fully played out.
Future wealth effects will depend importantly on whether corporate earnings improve to the extent currently embedded in share prices.

A world without easy money
Martin Wolf, Financial Times, Dec 11 2001 19:33:18 GMT

A poor defence for share prices
Martin Wolf Financtial Times, Oct 23 2001

It’s time to come back down to earth
By Philip Coggan, Financial Times, October 5 2001

The troubles with technical trends
Barry Riley, Financial Times, October 4 2001 19:35

Summer of discontent
Barry Riley, Financial Times, September 28 2001

Global Recession—Longer and Deeper
Stephen Roach, Morgan Stanley
2001-09-25

As The Implosion Begins . . .?
Prospects and Policies for the U.S. Economy: A Strategic View1 Wynne Godley and Alex Izurieta Jerome Levy Economics Institute, July 2001 (rev. August 2, 2001)

The great bear - Stock markets have been in decline since early 2000.
Philip Coggan, Financial Times, September 21 2001
This is now one of the worst bear markets in history. In early trading on Friday, the Dow Jones Industrial Average had fallen 31 per cent from its January 20

00 peak, one of the worst 10 declines the US market has experienced since the first world war.

Augusti kommer före september
Rolf Englund i mail 2001-09-20

Jeff Madrick: Will the Market Crash?
The New York Review of Books, Cover Date: August 10, 2000

Different Times, but the 1990s Do Resemble the 1920s
By Robert J. Samuelson The Washington Post
International Herald Tribune, Thursday, April 23, 1998

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Två tredjedelar av hela börsvärdet på
Stockholmsbörsen försvann på två och ett halvt år
DI-ledare 30/12 2002

År 2002 uppenbarades att vi just har varit med om en av historiens största finansbubblor. Och Sverige drabbades hårdast, två tredjedelar av hela börsvärdet på Stockholmsbörsen försvann på två och ett halvt år.

Det behövs en uppgång på 200 procent för att komma tillbaka till nivån från mars 2000 något som kan ta decennier. Att Frankfurt ligger nästan lika illa till är en klen tröst.

Bara två av den moderna historiens finanskriser har varit värre, New York 1929 och Tokyo 1989. I det första fallet tog det 25 år för börsindex att komma tillbaka och i det andra fallet pågår raset fortfarande efter 13 år. Tokyoindex ligger i dag 73 procent under 1989. Börsbubblor är inget att ta lätt på.

Fyra av det sena 1900-talets största hjältar i svenskt näringsliv - Percy Barnevik, Lars Ramqvist, Jan Stenbeck och Jan Carendi - har fått se sina livsverk radikalt omvärderade.

Wallenberg, den finansfamilj som dominerat scenen i Sverige i 70 år, är nu på sin höjd den främsta bland jämlikar. Betyget över Peter Wallenbergs insats får skrivas ned.

Investors förlorade pengar överskuggas av de 100 miljarder kronor som statens AP-fonder lyckades bränna på kort tid genom att kasta in den statliga sparreserven i pyspunkan.

Det sena 1990-talets it-entreprenörer liknar mest - så här efteråt - bondfångare. En del var naiva och andra smarta. Frågan är i vilken av kategorierna namn som Mandators Lars O Petterson, Icon Medialabs Johan Staël von Holstein, Sprays Jonas Svensson, Mirror Images Alexander Wik, Ledstiernans Jan Carlzon, Connectas Christer Jacobsson, Framfabs Jonas Birgersson och Emerging Technologies Kjell Spångberg ska sorteras. Det som förenar är att it-bubblan löste deras försörjningsproblem.

Socialdemokratin, som tog över hegemonin i svensk politik efter Kreugerkraschen, har nu hjälpt till att blåsa upp två nya bubblor, först en i fastigheter och finans år 1989 och därefter den senaste i it och telekom år 2000.

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The boom that did not bust
By John Plender
Published: February 6 2003 21:02

In the developed world it appears that financial crises no longer derail economies. Even in Japan, which has experienced four years of price deflation and where the banking system has been in crisis for over a decade, the output loss has been minor. And now the collapse of a phenomenal stock market bubble in the US has defied historical precedent by spawning only a modest recession and no banking crisis at all.

There are many possible explanations for the failure of this financial dog to bark. Much more of the risk-taking was happening outside the banking system than in the 1980s. Banks appear better capitalised as a result of the Basle capital regime. Most important, policymakers in the US have been acutely aware of the risks of deflation and swift in their monetary and fiscal response to the bursting of the bubble. Thursday's cut in UK interest rates likewise suggests that the risks in UK policy are not being taken on the side of deflation.

So now the politicians and central bankers are intensively managing the business cycle, can we stop worrying about the impact of financial instability on economic growth? Not in the emerging markets, where financial crises in Asia, Latin America and Russia have inflicted devastating losses of output and employment. And there is one important snag in the developed world, especially in the English-speaking economies.

The existence of a monetary and fiscal safety net creates moral hazard. That is, companies, financial institutions and private individuals engage in balance sheet adventuring - an evocative phrase used by the economist Hyman Minsky, whose thinking on financial instability and the business cycle is particularly relevant in the post-bubble world.

Financial crises serve a purpose. In cycles that have been characterised by debt-financed and unremunerative over-investment, the discipline of bankruptcy ensures that debt is written down to realistic values and capacity is brought into line with demand to pave the way for an upturn. But the adjustment is painful.

If financial crises are eliminated, the business cycle is extended. Asset prices continue to rise, generating wealth effects that encourage people to run down savings and borrow on the strength of the rising value of their collateral. As the Montreal-based Bank Credit Analyst points out, the failure to correct balance sheet excesses in the downturn means that each new US expansion begins from progressively lower levels of liquidity.

US household debt has gone from less than 40 per cent of gross domestic product in 1960 to close to 80 per cent in 2002. The comparable rise for the non-financial corporate sector has been from 26 per cent to 46 per cent. The greater the balance sheet excesses, the more painful the corrective process will ultimately be. So with each new cycle, say the BCA editors, the stakes become higher, pushing the economy closer to a deflationary end-point. An end is inescapable since debt cannot rise faster than incomes for ever.

The denouement of the debt drama is sparked by deteriorating credit quality, which exposes the vulnerability of a banking system that hitherto appeared well capitalised. The risk is of a 1930s-style deflation and liquidity trap, as banks stop lending and the private sector tries to restore its balance sheet. It was on such grounds that Peter Warburton, the British economist, warned in a recent book - Debt and Delusion, Penguin Books - of an explosion thatould shock the western financial system rigid.

Yet there is a problem with timing. Governments have become used to managing the cycle and deferring the debt problem. For their part, private individuals in the US and UK continue to be happy to borrow for home ownership without fully grasping the extent of the repayment burden in a low inflation era.

Many feel a high level of debt is affordable on the basis of a one-off fall in interest rates to very low levels. Yet there is no such thing as a one-off fall in interest rates. Throughout history interest rates have gone up as well as down. And the debt will not go away.

So while Mr Warburton, like Noah, builds his ark, a question remains. If debt continues to accumulate over the next economic cycle, will central bankers and governments be able to confront an apocalyptic financial crisis by simply muddling through?

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Greenspan's fight
Low interest rates is not enough
By Martin Wolf
Financial Times, November 12 2002

Last week, the Federal Reserve decided to blow, once again, into the flapping sails of the US economy. The puncturing of the bubble economy continues to create fierce headwinds. Further interest rate cuts - perhaps more unorthodox measures - remain likely.

The last time the Fed Funds rate was as low as this was July 1961. The decisions to cut the rate from 6.5 per cent in late 2000 to the lowest rate for more than 40 years underlines the devastating impact of asset price bubbles on economic stability.

The aggressive easing of monetary policy is not the only stimulant on offer to the economy. The rate of just over 4 per cent on 10-year Treasuries is the lowest since 1963. Moreover, according to the Congressional Budget Office, the fiscal stimulus this year is worth 2.4 per cent of gross domestic product, the biggest since records began in the early 1960s.

If not for these huge fiscal and monetary boosts, a deep recession would surely have occurred. They have also returned the economy to reasonable growth this year, at 3 per cent over the 12 months to the third quarter. This is much stronger growth than in other leading industrial countries, except Canada.

The remarkable productivity record of the US economy is now a two-edged sword. Over the year to the third quarter, output per hour in the non-farm business sector grew 5.4 per cent. As Alan Greenspan, chairman of the Fed, has noted: "Over the past seven years, output per hour has been growing at at an annual rate of more than 2? per cent, on average, compared with a rate of roughly 1? per cent during the preceding two decades."* This suggests trend growth in the economy is in the neighbourhood of 3? per cent.

If this productivity performance is sustained, economic growth of less than 3? per cent means rising excess capacity and downward pressure on profitability, wages and prices. Worse, given that there is substantial excess capacity today, still faster growth is needed first, to bring the economy back to more normal levels.

The current account deficit has reached 5 per cent of GDP. Absent a miraculous turnaround in demand in the big economies outside the US, the only way this could shrink, in the short run, would be via a huge US recession. Far more likely is a continuing rise in the deficit, with 7 or 8 per cent of GDP readily imaginable in the not too distant future. This is how the US is stimulating demand in parasitic economies elsewhere.

For a long time, consumer spending grew faster than disposable income, as the household saving rate fell and borrowing increased. In the second quarter of 1992, the household saving rate was 8.9 per cent of disposable income. It had fallen to 0.8 per cent by the end of last year. It is on its way back up this year, as stock market wealth has fallen, unemployment risen and uncertainties increased. The financial balance of the household sector went from close to plus 5 per cent of GDP in 1992 to minus 2 per cent in the last quarter of 1999. It has still to recover.

US Trade Deficit

Greenspan and the Asset Price Bubble

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Bubble, bubble default trouble
By John Plender
Financial Times, October 3 2002 20:15

The most damaging bubbles are those in which stock market exuberance is accompanied by lending euphoria. This was true of the 1920s and of the 1980s Japanese bubble.

What makes the combination so destructive is the pro-cyclical nature of credit expansion, which causes asset prices, incomes and profits to rise in a boom that feeds on itself. It then becomes viciously self-feeding in the downturn, courtesy of the regulators, since banks' capital adequacy requirements go up instead of down when credit quality deteriorates.

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John Plender Financial Times; Jul 15, 2002
So you think this bear market is rough?
It is positively limp-wristed when compared with the depths of the mid-1970s.

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The surprising fact is not that /US stock/ markets have fallen, but that they remain so overvalued.
Martin Wolf: The bubble will keep deflating
Financial Times 2002-06-19

The story is told in my chart.

This shows the Standard & Poor's composite index (deflated by consumer prices) since the 1880s. On this logarithmic scale, the steeper the slope the faster the rate of growth. There have been several bull markets: the fastest rise was in the 1920s, but the longest and cumF" VALIGN="TOP">
real interest rates, which are relevant, with changes in inflation, which may not be.

Nobody is behaving as if the expected real return on - and cost of - capital is far lower than ever before. If this were true, surveys would suggest lower expected returns from markets than before: the opposite is the case. In addition, companies would sustain investment as returns fell: the recent investment "bust" suggests just the opposite.

Either this has been a bubble the scale of which is making deflation slow and painful, or the long-run real return on - and cost of - capital in the US is lower than before. If it is the former, markets remain very expensive. If it is the latter, everyone expects historically low returns.

I, for one, think the market is simply expensive.

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Terrible twins?
Economic parallels between America and Japan
America's economy looks awfully like Japan's after its bubble burst
Jun 13th 2002 From The Economist print edition

The similarities between America's financial bubble in the 1990s and Japan's in the 1980s have been well rehearsed. In both cases, share prices and capital spending soared; households and companies went on a borrowing binge. Japan, like America a decade later, enjoyed a spurt in productivity growth, suggesting to some that it had a superior economic model.

Yet the conventional wisdom now is that the economies have taken divergent paths since their bubbles burst. Thanks to resilient consumer spending, America is widely tipped to enjoy robust growth this year and next. Meanwhile, Japan is expected to languish in perpetual recession.

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The recovery myths
The world economy is coping with the aftermath of two huge asset-price bubbles: the Japanese of the 1980s; and the US-led worldwide bubble of the second half of the 1990s.
Adjustment to the end of the first is not yet over. Adjustment to the end of the second has, contrary to conventional wisdom, hardly begun.
By Martin Wolf, Financial Times June 11 2002

According to that wisdom, the world's largest economy is leading the rest of the world into a durable, if restrained, recovery after a surprisingly brief and shallow recession. Yet this may turn out to be no more than a fairy story for frightened children. Recent falls in the stock market and the US dollar suggest the children are unconvinced. At its closing price of 1,031 on Monday, the Standard & Poor's 500 was only 7 per cent above its post-September 11 low and 33 per cent below the peak reached in March 2000. Similarly, on a trade-weighted effective basis, the dollar had lost 6 per cent of its value since its peak on January 25 2002.

To understand the risks ahead, it is necessary to analyse where the world economy now is in its post-bubble adjustment. Between 1996 and 2000, the US economy generated 40 per cent of global incremental real demand (at market exchange rates). While US real domestic demand rose 26 per cent over those years (a compound rate of 4.7 per cent a year), output grew by 22 per cent (a compound rate of 4.1 per cent). The difference was the rise in the US current account deficit, to 4.5 per cent of gross domestic product in 2000.

This expansion was unsustainable and, last year, came to an end. Symptoms of excess were, as Brian Reading of London-based Lombard Street Research argues (Monthly International Review 115, April 2002), too much investment, too little saving and too big a current account deficit. Behind these three phenomena was belief in the miracle of the "new economy", as demonstrated by asoaring stock market, huge capital inflows and a surging dollar.

Over the past year and a half, the US economy and, given the global role of the US, the world economy, has begun its post- bubble adjustment. Yet what is remarkable about this period is how modest that adjustment has been.

On June 7, the price/earnings ratio for the overall stock market was still close to double its long-run average. Measures of underlying value suggest that the market is still more generously valued than at any period in the past hundred years, apart from the peak of the recent bubble and in 1929. On a trade-weighted basis, the US dollar is 35 per cent higher than in May 1995. Estimates of the real exchange rate suggest the dollar remains almost as high as in 1985.

Last year, business fixed investment in the US was only 3.2 per cent below its level in 2000. This year, it is forecast by Goldman Sachs to be down only another 7 per cent. The resilience of consumption has been astounding. Supported by rising house prices and low interest rates, 00">1925
1929

Alan Greenspan's Federal Reserve has, in effect, restricted the post-bubble adjustment almost entirely to the corporate sector. It has propped up asset prices and supported household borrowing and spending. The big question today is whether it has durably averted or temporarily postponed that adjustment.

The answer is that, however unpredictable its timing and speed, it is highly implausible that adjustment can be averted for ever. That would imply a continuation of extraordinarily low household saving. It would also mean an explosive rise in the current account deficit. If the US were to continue to grow faster than most of the rest of the world, the deficit could reach 5 per cent of GDP next year. Under plausible assumptions, net claims by foreigners on the US would also rise from 20 per cent of GDP to 50 per cent of GDP, or more, five years from now.

This looks inconceivable. A more natural outcome would be a weakening dollar, weak domestic demand and an improving external balance. That change could, in turn, be triggered by a diminished willingness of foreigners to purchase US assets. The vulnerability is evident. As a gigantic net borrower from the rest of the world, the US depends on foreigners to sustain the value of its corporate assets and its currency. As London-based Smithers & Co says, domestic corporate cash flow is now weak and US households have been persistent net sellers of the stock market. This is, in part, to finance the purchase of other assets, especially houses. If foreigners fail to fill the gap, stock prices, as well as the dollar, must fall.

Further asset price adjustment is thus likely. If it coincided with weakening household demand and if the adjustments, particularly in the dollar, were slow and limited, it would also be helpful for the US. If, for example, the trend rate of economic growth were to be 3? per cent a year and domestic demand were to grow at, say, 2? per cent, there could be a steady contraction in the current account deficit at half a percentage point of GDP a year.

Instead of adding demand to the rest of the world, the US would then be subtracting from it. The question is where this would be offset. The eurozone has, alas, generated growth in domestic demand of more than three per cent in only two years - 1997 and 1998 - since 1993. Growth in demand averaged only a little over 2 per cent between 1993 and 2001. Over these years, Japanese growth in demand averaged 1.2 per cent.

With Japan's room for manoeuvre limited, much would depend on the ability of the eurozone to generate faster growth in demand. Without aggressive action by the European Central Bank, that seems depressingly unlikely. It is at least as plausible that weaker export growth and a strengthening currency would undermine investment and consumption in the eurozone.

One can therefore envisage three alternative scenarios for the medium term.

First, there may be no significant further adjustment in the behaviour of the US consumer or in US asset prices. In that case, the US would generate strong additional demand for the rest of the world and even more un- balanced household and national balance sheets. This would be a Gadarene rush for the cliff. But that cliff may only be reached years from now.

Second, there may be smooth adjustment in US household behaviour and the dollar. The latter would help offset weak demand at home by forcing adjustment on the rest of the world. This scenario would be most beneficial for the US but decidedly problematic for the rest of the world.

Third, there may be brutal adjustment in the near future, with a vicious downward spiral in US and world equity prices, higher long-term interest rates, an exodus of capital and dollar weakness. This would force a strong reduction in investment and consumption in the US and an unpleasant adjustment on the rest of the world. This would be the world of the double dip.

None of these alternatives can be ruled out. But the second is preferable, for both the US and the world. If the dollar were now set on a gradual decline, that would be altogether helpful. Unfortunately, this scenario is too rosy to be plausible. The true choice may be between going over a high cliff some years from now or going over a rather lower cliff quite soon.

The consensus view is not necessarily wrong. There may be a US-led recovery in the next year or two. But it is too short-sighted. The post-bubble adjustment can only have been postponed. It would be better if adjustment continued at a moderate pace right now.

See also Dollar and US Trade Deficit

Klas Eklund: USA har världens starkaste ekonomi

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"Hög produktivitet rättfärdigar inte p/e-tal"
DI 2002-03-11

Även om den amerikanska ekonomin permanent skulle bibehålla den starka produktivitetstillväxten från slutet av 1990- talet så skulle inte det rättfärdiga de "urvuxna" p/e-talen för amerikanska aktier. Det sa chefen för Federal Reserve i St Louis, William Poole.

Under det sena 1990-talet upplevde den amerikanska ekonomin en kraftig produktivitetstillväxt, enligt flertalet ekonomer drivet av införandet av ny digital teknik och av ett fördjupande av den generella kapitalbasen i ekonomin. William Poole varnade dock för att historien visar att tekniska innovationer "inte har bestående effekt på företagens intjäningsförmåga, som slutligen ofrånkomligt måste konvergera med den generella tillväxttakten i ekonomin."

Det genomsnittliga p/e-talet i S&P-500-indexet är 26,0 baserat på prognoserna på resultaten 2002, enligt Standard & Poor's. Enligt William Poole skulle även ett genomsnittligt p/e-tal på 20 "vara en generös nivå givet att det historiskt genomsnittliga p/e-tal har legat på 15."

Beträffande Nasdaq-100 indexet sade William Poole att p/e-tal på 1FONT>

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The houses that saved the world
Mar 28th 2002 From The Economist

IT IS somewhere to live; but a home is also, for many folk, a valuable asset. No wonder people love talking about house prices over the dinner table. In this economic recovery, however, homes have done much more than shelter people from wind and rain. They have helped to shelter the whole world economy from deep recession.

Many economists were worried last year that the wealth loss from falling share prices would force consumers to cut their spending. Even after the recent recovery, American stocks are still worth 25% less than two years ago. Yet, as falling share prices made some households feel poorer, rising house prices have made many more feel richer. Over the past year average house prices in America have risen by 9%, their fastest-ever in real terms.

Although American households as a whole have more of their wealth in equities than in housing, a relatively few rich people hold the bulk of the shares. For most people, housing is by far their largest form of wealth. Two-thirds of Americans own their homes, and gains in the value of those assets have encouraged them to keep spending.

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John H. Makin, American Enterprise Institute
By the end of 2001, American debt service burdens relative to disposable income were at forty-year highs

Between September and December of last year, real consumer spending rose at an 8.1 percent annual rate, above the smoothed quarter-over-quarter rate of 5.3 percent reported in the GDP statistics, while real disposable income fell at a 7.2 percent annual rate. The rush to buy homes and automobiles on favorable terms was financed largely on credit rather than through a surge in incomes.

Indeed, by the end of 2001, American debt service burdens relative to disposable income were at forty-year highs, though still sustainable provided that the economy bounces back.

At the end of last year, American households and investors believed in a quick recovery of the U.S. economy and increased spending at a rate that will be sustainable only if that recovery fully comes to pass.

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There is still worth in value
Philip Coggan
Financial Times, January 26 2002

It may be time to dust off that list of high-yielding stocks

Sophisticated investors sneer at the division of their profession into "value" and "growth" schools, seeing it as the kind of simplistic generalisation beloved of lazy journalists.

But last year, one of the simplest valuation measures available - dividend yield - was the key to successful UK investment performance. Value stocks, as represented by the highest yielders in the FTSE 350, outperformed the low-yielding growth stocks by 23 percentage points. According to the statisticians at CAPS, that followed a 30-point outperformance by value in 2000.

After all the fuss about "sophisticated" market measures such as EV/Ebitda (enterprise value/earnings before interest, tax, depreciation and amortisation), it may seem odd that something as rough and ready as the dividend yield could have been so useful.

But that may simply reflect the extremes to which the market's obsession with growth had driven valuations in the late 1990s. At the peak, according to Credit Suisse First Boston, the price-earnings ratios of the most highly rated stocks were 6.5 times those of the lowest-rated. That compares with a ratio of less than 3 for much of the 1990s.

All that we have seen, therefore, is a correction of the insane valuations witnessed during the technology bubble.

But the odd thing is that growth investors do not seem in the least bit abashed by their battering over the past two years. As soon as the market began to bounce in late September, they piled into the TMT (technology, media and telecommunications) stocks all over again. Because earnings have fallen as fast as share prices over the past two years, valuations in the technology sector are still up in the stratosphere. According to Thomson Financial, the historic price-earnings ratio on the sector is about 100.

So why are investors, having been once bitten by the technology bug, not twice shy? One answer, according to Bart Dowling, director of global asset allocation at Merrill Lynch, is that investors are not entirely rational.

His statistical analysis shows that investors are much more influenced by recent returns than they are by long-run performance. In the late 1990s, the returns from owning technology stocks were phenomenal. Any fund manager who was underweight in the sector underperformed the indices and was in danger of losing clients.

The passion for growth stocks may be reinforced by the feeling that overall returns from equities are likely to be low in future years. An annual return of 7 per cent or so simply looks unappetising to most investors. Growth stocks offer stronger meat.

Value stocks, in contrast, are seen as working just once in the cycle (as an economy emerges from recession) but are not serious long-term investments.

Academic evidence, however, suggests that, over the long term, value strategies such as buying companies with low price-to-book ratios tend to outperform the market. Remarkably few fund managers have attempted to exploit such apparent anomalies.

This may simply be a function of the lack of respect with which the fund management community holds academics. They did not believe the academics when they said the markets were efficient and that most active fund management is a waste of time; they do not believe them now when they are told to concentrate on value stocks.

Where are we now in the cycle? It is tempting to think, after two fantastic years for value, that it is time to switch back into growth. But bubble valuations have not entirely disappeared, even if one dismisses the price/earnings ratio of the technology sector as a statistical fluw.prudentbear.com/bc_library_book_store4.html">Books ke (on the grounds that the sector has virtually no earnings). Other measures such as price-to-sales still leave the market looking more expensive than it was in the early 1990s.

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The doom-mongers
The Economist 2002-01-24

The doom-mongers (including The Economist) who predicted a deeper downturn have, many argue, been proved wrong. Perhaps. But what the optimists have lost sight of is that America's recession was caused neither by the events of September 11th nor, like every previous post-war recession, by tightening by the Federal Reserve in response to rising inflation.

The root cause of this recession was the bursting of one of the biggest financial bubbles in history. It is wishful thinking to believe that such a binge can be followed by one of the mildest recessions in history—and a resumption of rapid growth.

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Remember fiscal policy?
How to use fiscal policy in a recession
The Economist Jan 17th 2002

When it works, monetary policy is fine. But sometimes it does not work. Problems arise, especially, under the circumstances that most interested Keynes when he first developed his thinking on deficit spending as a cure for recession—that is, at times of low, or even negative, inflation.

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America sails serenely through a perfect storm
Gerard Baker, Financial Times, Jan 24 2002

The US has gone through its own elemental sequence of shocks in the past three years that ought to have left it in a slump at least as bad as anything it has experienced in the postwar period.

Beginning at the end of 1998, it was hit with the financial damage from the Asian and Russian financial crises, followed by rising interest rates, a steep increase in energy prices, the bursting of the dotcom bubble, the sharp fall in the equity market, the steepest drop in capital spending in decades, the most destructive terrorist attack in history and a hot war all over the world which, for the first time in more than a century, poses a clear risk to US security at home.

For good measure, on the political front, it had the impeachment of a president and an election that failed to produce a winner until the courts ruled five weeks after polling day.

It has been, to use the current cliche, the perfect storm of economic and political shocks. And yet, here we are, almost before we have come to grips with recession, staring at the growing probability that a recovery is under way.

Output began falling last March. If it stops falling in the current quarter - and then climbs again - the entire decline in GDP will be less than 1 per cent. In other words, if the current trends take hold, it is possible that, having enjoyed the longest expansion in its history, the US is now climbing out of the shortest and shallowest recession on record.

Let me enter some caveats. Recovery is by no means assured, of course.

The US has not eliminated imbalances that built up in the late 1990s. Levels of corporate and personal sector debt remain high and could act as a drag on growth. The extent to which the capital-spending binge of the latter stages of the expansion created an investment overhang is still unclear, with capacity utilisation rates remaining low. Corporate profits are weak and could act as a further constraint on an investment recovery. Stock market valuations still look presumptuous and vertiginous. Above all, perhaps, the durability of the productivity miracle that seemed to be behind the rapid growth of the late 1990s is uncertain, although output per hour has held up remarkably well during the downturn so far.

But consumption has remained robust in the past year and consumers' balance sheets have been improved by falling interest rates, rising house prices and last year's tax rebate.

If recovery does take hold, there will be plenty of candidates for the credit: the Federal Reserve, certainly, for cutting interest rates more aggressively than at any time in living memory; Congress, probably, for shrewdly ignoring the initial request of the Bush administration not to pass an immediate fiscal stimulus and for providing tax rebates at just the point when they were most needed. The Bush administration's original tax cut proposals - until last April - were all long-term and it opposed the idea of rebates last summer.

Luck has played a part too, of course. Falling oil prices have raised consumers' spending power. Inflation has all but disappeared. There have been no more terrorist attacks so far.

If we see a recovery as 2002 unfolds, it is possible it will not be a particularly robust one. Unemployment may still rise, especially if the productivity gains are maintained. And in any case, since consumption did not fall all that much last year, it may not stage its traditional rally into the recovery. Corporate profits will probably stay weak, and an overvalued equity market may still hover over the economy's prospects. But in the face of a whirlwind of adversity over the past two years, it would be remarkable if there is any recovery at all.

To listen to much of the commentary on the US at present, you would think there was something rotten in the very foundations of America's economic structure. The Enron collapse, and the evident greed, corruption and negligence that went with it, certainly point up the need for reforms to the system of checks and balances in American capitalism.

But in condemning and setting right the weaknesses, it would be wise, too, to pause for a while, look at what has happened to the US economy in the past few years, and, quietly, marvel.

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The 1990s’ Boom Went Bust. What’s Next?
Milton Friedman
Wall Street Journal 2002-01-22

To an economist, the 1990s bear an uncanny resemblance to two earlier decades: the 1920s in the United States and the 1980s in Japan. In all three decades, technological change produced extraordinary economic growth, leading to talk of a “new era” and triggering a bull market in stocks that terminated in a market collapse-widely regarded as the bursting of a speculative bubble.

The 1920s were followed by the Great Depression in the U.S., the 1980s by stagnation and recurrent recession in Japan.

What will the 1990s bring? And what role has monetary policy played in these episodes?

Economic growth during the first 10 years of each episode was remarkably similar. Real gross domestic product grew an average of 3.3% per year in the U.S. from 1919 to 1929; 3.7% in Japan from 1980 to 1990; and 3.2% in the U.S. from 1990 to 2000 -- clearly, remarkable similarity.

In the two earlier episodes, what followed was very different-a major catastrophe in the U.S., stagnation in Japan.

From the peak in 1929 to the trough in 1933, U.S. GDP fell by more than a third, and had not returned to the 1929 peak by the next cyclical peak in 1937. In Japan, GDP fell below the initial peak level by trivial amounts for a few quarters, plateaued for about two years, and then resumed slow but highly erratic growth.

In the U.S., unemployment reached 25% at the trough of the depression in 1933. During the rest of the decade, 1934 to 1939, unemployment averaged 18%. In Japan, reported unemployment never exceeded single digits. This number understates the severity of the situation, thanks both to different methods of recording and different national cultures bearing on employment. Nonetheless, it seems clear that an estimate comparable to U.S. figures would never have reached anything like 25%.

The three bull markets in stocks likewise display remarkable similarity, even extending to the early stages of the current decline. In the six years prior to the stock market peak, the indexes rose 333% in the U.S. from 1923 to 1929, 387% in Japan from 1983 to 1989, and 320% in the U.S. from 1994 to 2000.

The subsequent decline was decidedly less in Japan in the 1990s than in the U.S. in the 1930s -- 55% compared to 80% from the peak to the initial trough. However, the Japanese index remained flat throughout the 1990s. and more recently has fallen sharply again, while the U.S. index rose rapidly from its 1933 trough.

The quantity of money rose fairly steadily in all three of the decades preceding the stock market peak, but at a much higher rate in the Japanese decade -- 9.1% per year from 1980 to 1990, compared with 3.9% per year from 1919 to 1929 and 4.1% per year from 1990 to 2000 in the U.S. The higher rate in Japan may explain why the Japanese bubble was so much more sweeping than its counterparts in the two U.S. episodes.

The behavior in the following years differed much more sharply. The U.S. quantity of money fell by more than a third from the cyclical peak in 1929 to the trough in 1933. The Japanese quantity of money fell by two-tenths of one percent in the first year after the cyclical peak, and then rose by 2.5% per year in the next two years. In the current episode, the quantity of money in the U.S. has already risen by more than 11% during the first five quarters after the cyclical peak.

These differences in monetary growth are a major reason why the contraction in the United States from 1929 to 1933 was so much more more severe than the flat economic growth or modest contraction in Japan. They also suggest that the current reaction in the U.S. will be far less severe than in either of the earlier episodes.

The evidence linking the behavior of the stock of money with the behavior of the economy goes well beyond these three episodes. Every great depression has been accompanied or preceded by a monetary collapse-banking difficulties plus a decline in the quantity of money-just as every great inflation has been accompanied or preceded by sharp increases in the quantity of money.

Central bankers, like other students of money, have learned this lesson, which is part of the reason that there has been no repeat of the Great Depression in the post-World-War II period despite repeated scares. The Federal Reserve under Alan Greenspan is currently applying that lesson, which is reason to believe that the current recession will be mild and that expansion will soon resume.

What the future brings will depend of course on how monetary policy evolves. While the current rate of monetary growth of more than 10% is sustainable and perhaps even desirable as a defense against economic contraction and in reaction to the events of Sept. 11, continuation of anything like that rate of monetary growth will ensure that inflation rears its ugly head once again.

However, the Fed preempted on the downturn and I suspect it will again preempt on the upturn, so as to avoid such an outcome.

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Klas Eklund:
USA har ryckt åt sig ett stort försprång och har världens mest framgångsrika ekonomi

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USA i kraschläge
DI:s Cecilia Skingsley 2002-01-21

Hur stor är risken att USA glider in i samma långvariga stagnation efter IT-kraschen 2000 som efter börskraschen 1929 eller hamnar i samma decennielånga bekymmer som Japan efter deras krasch 1990?

Det finns alltför många otrevliga likheter mellan USAs 1920-tal, Japans 1980-tal och de senaste årens händelser.

Om historien håller på att upprepa sig måste man skrota alla proffsprognoser om en konjunkturvändning i år, likaså är finansmarknaderna på tok för optimistiska om 2002.

Amerikanskt 1920-tal, japanskt 1980-tal och amerikanskt 1990-tal kännetecknades av extrema uppgångar i tillgångspriser. Danske Bank har tittat närmare på perioderna och konstaterar att Dow Jones steg med 135 procent från 1927 till kraschen i september 1929.

Tokyobörsen steg med dryga 140 procent 1986 till 1990. Den uppgång 1990-taleONT COLOR="#000000">Dollar and
Trade Deficit t bjöd på var ännu större: Standard & Poor's 500 klev upp 230 procent från januari 1995 till mars 2000. Värst var Nasdaqbörsen som steg med mer än 500 procent mellan 1995 och mars 2000.

Andra likheter mellan tidsperioderna är den kraftiga tillväxten i investeringar och konsumtion. Optimismen om framtiden flödade. På 1990-talet gav den långvariga konjunkturuppgången upphov till begreppet "ny ekonomi".

IT och telekommunikation utmålades som nyckeln till framtiden. Det glada 1920-talets version av IT- upphetsningen var bilen. Antalet bilar mångdubblades mellan 1920 och 1929 och symboliserade framtidsanda och dåtidens teknologiska under.

Japan slog på 1980-talet igenom som Det Ekonomiska Undret. Japanska företag ansågs allmänt vara mer effektiva än sina europeiska och amerikanska konkurrenter.

Produktivitetsutvecklingen var imponerande i båda USA och Japan under uppgångsfaserna och de ackompanjerades av investeringsplaner som bågnade av framtidstro.

Tillgångsprisernas påverkan på konjunkturförloppet har kommit mer i fokus både i centralbankernas beslutsfattande och den ekonomiska forskningen. Den grundläggande tanken är att hushåll försöker sprida ut sin konsumtion ganska jämnt över livet.

Den så kallade förmögenhetseffekten blir då viktig. Om hushållen bedömer att deras egna tillgångar har blivit varaktigt mer värdefulla (till exempel aktieportföljen eller ett eget hus) spenderar de mer pengar.

Flera amerikanska studier visar att 1 dollar mer i förmögenheten leder till en permanent uppgång i hushållets konsumtion med mellan 3 och 5 cent.

På detta beteende kan man också lägga hävstångseffekter som uppstår när optimistiska hushåll (och företag) belånar sina värdestegrande tillgångar och använder det till ökad konsumtion eller nya investeringar. Sparandet faller och blir till och med negativt (i Japan på 1980-talet och i USA under 1990- talet).

När spekulationsbubblan har blivit uppenbar och tillgångspriserna börjar falla igen sker en rad anpassningar i samhällsekonomin som försätter konjunkturutvecklingen i nedförsbacke.

Investeringarna faller kraftigt och konsumtionen brukar samtidigt mattas av när hushållen inser att de är för skuldsatta för att fortsätta sin köpfest och i stället börjar betala av på lånen.

Om spekulationsbubblan involverat stora krediter från finanssektorn finns också risken för en bankkris. Den amerikanska bankkrisen på 1930-talet och den japanska på 1990-talet försämrade kreditförsörjningen till näringslivet så mycket att den försatte USA i depression och har försatt Japan i en långvarig lågkonjunktur.

I dagens ekonomiska bekymmer i USA saknas en bankkris vilket är en välkommen indikation på att historien inte behöver upprepa sig. En viktig skillnad mellan dagens situation och de tidigare historiska faserna är att den ekonomisk-politiska reaktionen i USA har varit så mycket snabbare.

Centralbanken Federal Reserves många räntesänkningar under fjolåret underlättar lånesaneringen hos företag och hushåll och det minskar mängden kreditförluster i bankssystemet. Skulle förlusterna tillta i banksektorn kommer Federal Reserve att reagera snabbt.

Vid de tidigare börskrascherna i Japan och USA var den politiska reaktionen till en början felaktig och i bästa fall otillräcklig. Den japanska centralbanken förde en stram penningpolitik med hög styrränta under en stor del av 1990-talet. Detta försvårade skuldanpassningen och kreditförlusterna exploderade.

I USA efter börskraschen drog man visserligen ned ränteläget, men eftersom inflationen föll dramatiskt ned till negativa tal blev realränteläget ändå mycket högt.

Den misskötta bankkrisen som uppstod fick kreditförsörjningen att haverera och det skulle dröja till 1933 innan politiken lades om.

Trots att USA nu befinner sig i lågkonjunktur efter den ovanligt äventyrliga resan i tillgångspriserna måste alltså inte historien upprepa sig.

Den ekonomisk-politiska reaktionen har varit så snabb och kraftfull man kan begära och det är en viktig förklaring till den vitt spridda uppfattningen att USA ska återhämta sig under året.

Klas Eklund:
USA har ryckt åt sig ett stort försprång och har världens mest framgångsrika ekonomi

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Hoping for a recovery
Financial Times editorial, January 19 2002

Recessions end. This one will be no exception. One can even identify the sources of a turnround: the reversal of the worldwide collapse in manufactured output. The question is whether this will be much more than the proverbial dead-cat bounce. "Highly unlikely" is the answer.

To understand what lies ahead, one must start with the downturn. Not so long ago people argued that new technology meant the end of the business cycle. It is now evident that new technology has, instead, generated the cyclical extremes - via the stock market bubble, the investment surge in high-technology equipment and subsequent collapse, and the inventory cycle.

Can US consumers pull all these rusty freight cars along behind them? With difficulty, alas. Normally, during a recession savings rates rise. This provides the platform from which subsequent rapid rises in consumption begin. But such a correction has not yet happened in the US.

On the contrary, US household savings remain very low, particularly given rising unemployment and a stock market well below its peaks. Yet the stock market is also, once again, highly valued, with a trailing price/earnings ratio roughly double the historic average.

True, monetary policy has been loosened heroically. But the US Federal Reserve's activism has not come through into lower long-term interest rates.

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A world without easy money
Martin Wolf, Financial Times, Dec 11 2001 19:33:18 GMT

A little sunshine is breaking through the clouds of recession. That is what equity markets are saying. The question is whether this upsurge in optimism rests on reality or is a temporary high induced by a flood of cheap money.

Scepticism about the wisdom of markets is warranted by experience. Remember what they were saying about prospects for the high-technology sector in March 2000, when the Nasdaq composite index reached 4,959, against just 1,992 on Monday.

It is equally wise to be suspicious of macroeconomic forecasts. In its World Economic Outlook of October 2000, the International Monetary Fund forecast world economic growth in 2001 at 4.2 per cent and the US at 3.2 per cent. The latest consensus of forecasts suggests that the world economy will grow by only about 1.2 per cent and the US by 1.1 per cent. Moreover, the authoritative National Bureau of Economic Research has decreed that this slowdown was well under way by September 11. It has now set the end of the record-breaking US expansion in March.

The November consensus of forecasters was for growth next year of just 1.3 per cent in the world economy, with 0.7 per cent in the US, 1.5 per cent in the eurozone and minus 0.6 per cent in Japan. Thereafter, mainstream forecasts become more cheerful. The Organisation for Economic Co-operation and Development forecasts growth in the OECD area of 3 per cent in 2003, with the US on 3.8 per cent, the eurozone on 3 per cent and Japan on 0.8 per cent. The OECD’s underlying view, again close to conventional wisdom, is that the rebound will begin in the middle of 2002.

The strength of a recovery depends on what caused the downturn. The standard explanation would include soaring oil prices during 1999 and 2000, tightening of monetary policy during late 1999 and 2000, particularly in the US, and the bursting of the high-technology bubble. These changes in background macroeconomic conditions triggered a cutback in investment, a decline in demand for manufactured output, an accumulation of unsold inventories and then a still greater cutback in output. In the US, for example, output of manufactures in October 2001 was 7 per cent below its peak in June 2000.

The slowdown has become global partly because the background forces - higher oil prices, tighter monetary policy and the bursting of the high-technology bubble - were also global. But between 1996 and 2000, the US alone generated just under half of total world incremental demand, at market exchange rates. With that gone, there was not much demand dynamism left. September 11 was merely the coup de grace.

The justification for optimism is that these conditions have changed. Oil prices are now down about 40 per cent in real terms from their peak in 2000. Monetary policy has eased dramatically, particularly in the US, with short-term rates down 4.5 percentage points in less than a year. With inflation subdued, there seems to be little constraint on further monetary easing. Fiscal policy is also becoming more expansionary, particularly in the US. Aware of this and aware, too, of the success of the first stage of the war against terrorism, markets have recovered strongly: the Standard & Poor’s 500 is up 18 per cent from its low on September 21.

All this seems to justify expectations of a fairly normal recovery. Some optimists suggest that the quantity of monetary petrol poured by the Federal Reserve on the dying embers of the US expansion will even generate a vigorous resurgence.

Alas, the opposite is more likely. The view that there will be a more or less conventional recovery rests on the assumption that this was a conventional downturn for which conventional demand management policies are an effective remedy. But that cheerful view could turn out to be grievously mistaken.

The case for pessimism has two elements. The first is the dependence of the world on US demand. The second is the fear that the US is now a post-bubble economy. The argument has been well laid out by Stephen King of HSBC (Decline and Fall - Bubbles, Busts and Deflation). Its analytical heart goes back to non-Keynesian and non-monetarist views of recession. A period of unwarranted optimism can generate exaggerated asset market valuations and equally inappropriate investment. A consequence is likely to be falling propensities to save. These will be associated with rising indebtedness, in relation to incomes if not to (temporarily) elevated asset values.

The US in the 1930s and Japan in the 1990s were the 20^th century’s most spectacular examples of post-bubble economies. Mr King argues that it is particularly difficult for very large economies to grow out of post-bubble corrections, because they cannot easily use the rest of the world as a source of demand. The US can hardly do so today.

This description fits the US experience of the 1990s disturbingly well. If one takes the cycle as a whole, economic growth, at 3.1 per cent a year, was no faster than in the 1980s and far slower than in the 1960s. The stock market reached a valuation peak never seen before in history. The share of non-financial corporate profits in non-financial corporate gross domestic product recovered strongly during the 1990s, only to fall back to the levels of the early 1980s. There was a big investment surge in the private sector, while household savings rates fell. The wealth held in the stock market soared by $12,000bn between 1994 and 2000, equal to more than six years of normal gross saving in the economy. Why save when the stock market does it painlessly for you?

The US is now in what Mr King calls an “unplanned recession”, one that the policymakers did not want and desperately wish to halt. This is a correction that originates more in disappointment than in overheating. But the correction among households has hardly begun. It is also this that easy money is intended to prevent.

If this view of the forces at work is correct, a normal postwar recovery is unlikely. More probable is an extended period of weak growth in private demand, offset by a sizeable fiscal expansion but not, alas, by demand from abroad. This then would be a limping recovery, stronger, no doubt, than Japan’s in the 1990s but far indeed from the “new economy” of the late 1990s.

Is this certain to happen? No. Is it likely? Yes. This story of post-bubble correction is not yet over. It may have hardly begun.

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A poor defence for
Klas Eklund
Rolf Englund share prices
Martin Wolf Financtial Times, Oct 23 2001

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Europe's Economies Find Convergence, Easing the Formation of Monetary Policy
Wall Street Journal, October 5, 2001

The economies of the euro zone are finally starting to move in step, though unfortunately they're all heading in the wrong direction.

The convergence makes it much easier for the ECB to operate a one-size-fits-all monetary policy.

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Monstruöst, sade Economist (om stabilitetspakten)
Rolf Englund i EU-krönika i Nya Wermlands-Tidningen 2001-08-30

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It’s time to come back down to earth
By Philip Coggan, Financial Times, October 5 2001

A share is just that - a share in the assets and profits of a company. Its value depends on the current and future level of those assets and profits.

But for a while in the late 1990s, investors seemed to ignore those fundamentals. They bought shares because they were going up and let the next investor worry about things like assets or profits.

What about the professionals? When stocks were trading at 100 times historic profits, it was pretty hard to recommend their purchase on the basis of traditional valuation methods.

Did this mean that analysts told investors to sell such stocks? Not a bit of it. Instead they went in search of new valuation methods that might justify a holding in the stock.

There is a problem with many of these short cuts, however. Take the price-earnings ratio. It may appear to provide a useful rule of thumb as to whether a share is cheap or dear.

But the p/e is based on earnings per share, a figure which managers find relatively easy to manipulate. To take just one example, when a company with a high p/e uses its shares to make a successful bid for a company with a low p/e, its earnings per share go up. This is nothing to do with whether the bid is a business success.

In the late 1990s, many analysts shifted their attention away from the p/e ratio and towards a measure based on “ebitda” (earnings before interest, tax depreciation and amortisation). This measure was an attempt to look at the cashflow available to service all the obligations of a company (debt as well as equity) and allowed the comparison of companies with different capital structures or accounting treatments.

Secondly, companies shifted to returning cash to investors via share buy-backs, rather than dividend payments; in the US, in particular, buy-backs had tax advantages. The UK government gave this change momentum by abolishing the dividend tax credit in the late 1990s.

*A full discussion on valuation models appears in

Determining Value: Valuation Models and Financial Statements by Richard Barker, published by Prentice Hall.

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The troubles with technical trends
Barry Riley, Financial Times, October 4 2001 19:35

Those eight years took in a stock market bubble. This in part reflected favourable economic trends, and especially growth in corporate profits. But the scale of the price rise also reflected uprating. When I started writing the column, the S&P 500 offered a dividend yield of 2.7 per cent and a price/earnings ratio of 23, falling to 16 in 1995: at the market peak in March 2000 the yield was just 1.07 per cent and the p/e ratio had reached 35.

This bubble was often presented at the time as being created by day-trading amateurs, but it can be better viewed as a collective mistake by investment professionals. How did it happen? Here are a number of the themes I discussed during the late 1990s:

http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT34WZHVESC&live=true

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U.S. Lost 199,000 Jobs in September
Oct. 5 (Bloomberg)

U.S. payrolls plummeted in September, posting the largest drop in more than a decade, the Labor Department said in a report that doesn’t reflect job losses after the terrorist attacks. Unemployment stayed at 4.9 percent.

Payrolls fell by 199,000 last month after declining by 84,000 in August, as service businesses lost more jobs than factories did. The largest previous drop, of 259,000, occurred in February 1991, toward the end of the last recession.

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Summer of discontent
Barry Riley, Financial Times, September 28 2001

This is turning into the worst bear market since 1973-74. It is not only deep (a 37 per cent decline in the S&P 500 at its lowest close on September 21) but it has also been unusually long, with the Dow so far into the 21st month of decline.

That compares with 23 months in 1973-74, when the total fall was 45 per cent, and almost three years in the record-setting 89 per cent collapse between 1929 and 1932. In contrast, the peak-to-trough decline of 36 per cent centered on the October 1987 crash was fitted into just 8 weeks.

This time it is different, as they say. In recent months the world has been awash with liquidity, and bond yields have been relatively steady: no problems there. It has been the valua tion error that has dominated: a vast gap has become apparent between the incredibly optimistic future growth rate implied by equity market levels at the peak and the rather sombre economic reality now unfolding.

How this mistake happened is too complex a subject to discuss here now. But some vital points are raised in a paper published this week by Bob Semple, UK equity strategist for Deutsche Bank, entitled (with an arguably superfluous question mark) The end of the equity cult? In particular, institutions like pension funds and life insurance companies have accepted too much risk in equities. The great bubb le turned out to be a disaster for risk contr
Gold ol: the current bear market represents a restructuring of portfolios in favour of safer assets, notably fixed income bonds.

The puncturing of the bubble now under way bears a worrying resemblance to the post-1929 Wall Street correction and the ending of the Japanese "miracle" in 1990. Such a comparison would fit in with the extended nature of the adjustment now taking place: but more optimistically, we can reasonably hope that today's governments in the US and Europe will not make the mistakes made in the early 1930s in the US, or more recently in Japan.

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Global Recession—Longer and Deeper
Stephen Roach, Morgan Stanley
2001-09-25

Needless to say, this downwardly revised prognosis -- 1.9% average growth in world GDP over the 2001-02 period—depicts a world in deep recession. After all, 2.5% growth is usually viewed as the global recession threshold. Moreover, if the verdict ultimately falls at the lower end of our new risk range, it would qualify as the worst global recession of the post-World War II era—both deeper and longer than the contractions of the mid-1970s and early 1980s.

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As The Implosion Begins . . .?
Prospects and Policies for the U.S. Economy: A Strategic View1 Wynne Godley and Alex Izurieta Jerome Levy Economics Institute, July 2001 (rev. August 2, 2001)

The U.S. economy is probably now in recession,2 and a prolonged period of subnormal growth and rising unemployment is likely unless there is another round of policy changes. A further relaxation of fiscal policy will probably be needed, but if a satisfactory rate of growth is to be sustained, this will have to be complemented by measures that raise U.S. exports relative to imports.

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Över 2 600 miljarder kronor, eller 54 procent, av börsvärdet den sjätte mars i fjol är borta. Det är det tredje största raset någonsin på Stockholmsbörsen mätt i procent och förstås det största mätt i värde.
Bengt Carlsson i DN 2001-09-22

2001 tampas med Kreugererans 1931 om att vara det sämsta börsåret någonsin, mätt i real kursuveckling. I löpande kurser ligger ännu 1931 och börskraschåret 1929 något före 2001.

Ericsson slutade efter en liten uppgång i fredags 84 procent under toppkursen från 2000. Det motsvarar ett tapp på ofattbara 1.500 miljarder kronor, mer än den svenska statsskulden, i värde.

I procent har Nokia klarat sig bättre, vilket är rättvist med tanke på att det finska bolaget är det enda stora i sin bransch som tjänar pengar, men nedgången från toppen är ändå 69 procent, och fallet i börsvärde är med 1 750 miljarder kronor rent av värre än Ericssons.

Och ABB har, medan huvudkonkurrenten General Electric i fredags kunde avisera att de håller fast vid sin tvåsiffriga vinsttillväxt, gått från problem till problem. Kursen har fallit med 81 procent, detsamma gäller Skandia det främsta exemplet på svensk tjänsteexport och en tillväxtstjärna för världens aktieinvesterare så sent som för ett år sedan.

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The great bear - Stock markets have been in decline since early 2000.
Philip Coggan, Financial Times, September 21 2001

This is now one of the worst bear markets in history. In early trading on Friday, the Dow Jones Industrial Average had fallen 31 per cent from its January 2000 peak, one of the worst 10 declines the US market has experienced since the first world war.

And the Dow has held up relatively well in global terms. In Germany, the DAX index has more than halved since the peak in March 2000; in London, the FTSE 100 has fallen 36 per cent since its peak in December 1999.

What has made the bear market all the more pernicious is its length. The Dow peaked in January 2000 and many other bourses reached their highs in March of that year. Markets have been falling, with the occasional rally, for 18-20 months. In contrast, it took only two months in 1987 for the Dow to fall from peak to trough.

If one combines time and severity, only four other US bear markets since 1914 are more significant:

(Data taken from Survive and Profit in Ferocious Markets by John Rothchild, published by John Wiley & Sons)

1919-21, when the Dow fell 47 per cent over 21 months in postwar economic disruption; 1929-32, when the Dow fell 89 per cent at the start of the Great Depression; 1939-42, when the Dow fell 40 per cent in the early stages of the second world war; and 1973-74, when the Dow fell 45 per cent in the face of Watergate and the oil price surge.

There have been significant effects on certain sectors in the short term: Oliver North, speaking on CNN on Friday, said he was the only passenger on a scheduled flight to New York.

Lower interest rates, in these circumstances, may not help. Who cares if the return on cash falls from 3.5 to 3 per cent? At least by holding cash investors are guaranteed the preservation of their capital.

The problem is that the valuation case is less clear cut than at the bottom of previous bear markets. At the end of 1974, the Dow traded on a price-earnings ratio of 6.2 and a dividend yield of 10.5 per cent; at Thursday’s close, the Dow was on a p/e of 22 and a dividend yield of slightly more than 2 per cent.

These still-high valuations (in historical terms) reflect the excesses of the late 1990s bull market, when it was quite common to argue that such measures were irrelevant. The dividend yield on the FTSE 100 index, for example, moved above the 3 per cent level this week; but this level was seen as a floor for dividend yields until recent ye
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Augusti kommer före september
Rolf Englund i mail 2001-09-20

Det som hände i augusti kan inte ha påverkats av det hemska terrorattentatet, vilket skedde i september, och som av allt att döma inte låg i marknadens förväntningar.

Den avmattning som CNN rapporterar om i dag kan således inte skyllas på muslimska fundamentalister.

Vad kan den då skyllas på?

Sossarna förståss. Och 68-vänstern som åter har börjat röra på sig?

Nja, det kan ju också vara så att att den bubbla som nu brister, redan hade börjat brista i augusti, och dessförinan ,som alla innehavara av Ericsson anar.

Då var det alltså en bubbla.

Om det var en bubbla var det ingen ny Era.

Om det inte var någon ny Era kan den nya eran inte har berott på Ronald Reagans skattesänkningar i början på 1980-talet, vilket våra egna talibaner plägar hävda i sina spalter.

- We are all Supply-Siders (vi vill sänka skatterna) now, hette det förut.

Nu hoppas alla på att de amerikanska hushållen, som redan köper för mer än 100 procent av sina disponibla inkomster, skall ta fram sina kreditkort och ytterligare öka sin skuldsättning.

Soon we will all be Keynesians again.

Utom talibanerna förstås.

Dessa tankar fick jag vid läsning av nedanstående nyhetstelegaram.

“Housing starts tumbled in the United States last month as what has been a pillar of strength in the world’s largest economy showed some signs of weakness. Groundbreaking on new homes and apartments fell 6.9 percent to a seasonally adjusted annual rate of 1.53 million units in August from July. Economists surveyed by Briefing.com expected housing starts at a rate of about 1.63 million.” (CNN 2001-09-20)

The Vision Thing - Why people don't understand
Rolf Englund på internet 1999

Fler av mina bästa artiklar

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Uncertainty
By John H. Makin
American Enterprise Institute
October 2001

The employment report for August released in early September showed a jump in the unemployment rate from 4.5 to 4.9 percent. Hours worked, the broadest indicator of the path of total economic activity, fell at a 2.9 percent annual rate during July and August. That level, unlikely to be reversed in September, is consistent with third-quarter annual growth of about minus 2 percent-i.e., a contraction of the U.S. economy-well below what had been the consensus in early September. The employment data forced second-half growth forecasts to be lowered while increasing the amount of expected Fed easing.

Again, before September 11, emerging signs of further excess capacity and disinflation or outright deflation (as in Japan) promised continued pressure on profits and further layoffs as companies attempted to cushion the negative impact of shrinking demand on profit margins. Underscoring the global breadth of this trend, second quarter nominal GDP growth in Japan was reported early in September to be falling at an annual rate of 10.7 percent. Profit growth simply cannot revive until prices stop falling, because the response to falling prices, accelerated layoffs, will weaken demand further and cause prices to continue to fall.

The global economic slowdown had, in short, reached a self-reinforcing negative phase by September 11. Attempts by companies to preserve profit margins were leading to more layoffs, which by reducing demand growth and accelerating deflation further, produced an additional negative feedback effect on profit margins.

Englund om detta

http://www.aei.org/eo/eo13322.htm

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Det ser mörkare ut än på länge
Bengt Carlsson i DN 2001-09-20

Börsvärdet har nu fallit med närmare 37 procent sedan årsskiftet, lägg till tre procents inflation och den reala nedgången är 40 procent. Samma nivå som finans- och fastighetskrisens 1990, då dock den nominella kursnedgången .htm">James Grant
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Those who argue that the Dow is now a ‘bargain’ may be highly delusional.
Dow Jones Industrial Average—August 31, 2001:
Price-to-Book: 4.61
Price-to-Earnings: 26.76
Price-to-Sales: 2.44
Dividend Yield%: 1.75%

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IMF warns of a significant danger of global recession
Financial Times, August 30 2001 19:43GMT

Economists at the International Monetary Fund have warned of a “significant danger” of a global recession along the lines of the early 1980s and early 1990s.

A leaked draft version of the IMF’s World Economic Outlook, obtained by Financial Times Deutschland, predicts the world economy will grow by 2.8 per cent this year but states that there could be “a much deeper and more protracted global downturn”.

The focus of the IMF’s concern is the outlook for the US. Although the IMF forecasters have not changed the prediction made in April that the US will grow by 1.5 per cent this year and 2.5 per cent next year - roughly in line with the US administration’s expectations - they see a serious risk of a much worse outcome.

If US productivity growth is less than expected, then stock markets could fall, triggering sharp declines in business investment and private consumption. That would cause a global recession, and possibly “substantial financial market turbulence”, including “a possible abrupt decline in the value of the dollar”.

The impact of global recession and market turbulence might be particularly severe for developing countries, the IMF economists note.

The IMF’s economists argue that the impact of a US recession on the world economy would be made more severe by the weakness of the economies of Japan and Europe.

The World Economic Outlook is to be published ahead of the IMF’s annual meetings at the end of next month. It may be revised after it is discussed by the IMF’s executive directors next week but is unlikely to be substantially changed.

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Forget the Second-Half Recovery
By John H. Makin resident scholar at the American Enterprise Institute
August 2001

Every time I hear a typical analysis of the U.S. economy in 2001, with its components of global recession, investment collapse, falling profits, record deterioration of household balance sheets, and the rising need for companies to lay off more workers, I wonder when the analysts are going to lower their U.S. growth forecasts for the second half of this year. Notwithstanding a positively awful set of economic conditions, most forecasts from investment firms call for a 1, 2, 3 scenario: 1 percent growth in the second quarter, 2 in the third, 3 in the fourth.

The “easy as 1, 2, 3” recovery outlook is beginning to look like a bad joke. It is based on the simplistic notion that 275 basis points of Federal Reserve easing since the start of this year, together with a combination tax cut–rebate that adds about $40 billion to household income in the third quarter, will boost spending enough to justify the 1, 2, 3 scenario.

Rather, rate cuts appear to have helped sustain a high level of household spending on autos and housing, but one result of that sustained spending has been a sharply elevated level of household debt.

Interest payments on consumer installment debt are soaking up 3.1 percent of disposable personal income, by far the highest level since 1968, when a continuous data series began.

As a result, U.S. consumer installment debt is also at a record high, 22 percent of GDP, while total consumer and corporate debt has reached 135 percent of GDP.

With debt-service burdens at record levels relative to incomes, will U.S. households keep spending and running up more debts just because the Fed has pushed short-term interest rates down to “neutral”—that is, neither stimulative nor contractionary—levels and a check for somewhere between $300 and $600 arrives from the Treasury this summer?

It is time for economists to quit touting a second-half recovery. Otherwise they will look as foolish as the equity (sales) “analysts” who, every week, have revised downward their earnings forecasts by 2 percent or more as negative “surprises” about prospective profits have flowed in.

The sooner analysts acknowledge that the U.S. and global economic slowdowns are intensifying—not abating—the sooner policymakers, households, and corporations can undertake necessary, realistic adjustments and the sooner the recession will be over.

Meanwhile, an unbecoming chorus of denial is only making a bad situation worse.

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Stockholm dyrast av Europas börser
DI 2001-08-14

Svenska börsen värderas i särklass högst i Europa. Trots kursfallet de senaste 15 månadernas kursras. Även om man exkluderar alla förlustbolag, i Sverige däribland Ericsson, är Stockholm dyrast i Europa.

Hittills i år har OMX-index, med börsens 30 mest omsatta aktier, fallit 22 procent. Men det behöver inte betyda att aktierna är billiga för den skull. P/e-talet för OMX, hur högt OMX-bolagens vinster värderas alltså, ligger nämligen i absolut Europa-topp. Detta enligt statistik från Bloomberg som DI tagit fram.

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Seeing Bubble
By Robert J. Samuelson
August 8, 2001

It may be that the U.S. stocktional.se/assetpricebubbles.htm">Alan Greenspan
Txt market is still overvalued, even after a year of losses that have left all the major indexes trading well below their historical highs of early 2000 (11,723 for the Dow, 1527 for the Standard & Poor’s 500 and 5049 for the Nasdaq). The Nasdaq has been virtually annihilated and is trading at roughly 40 percent of its peak. Among technology companies—even those with profits—the slaughter has been almost universal. Microsoft is down 44 percent from its high, Intel 58 percent and Cisco 75 percent. The bubble has burst. Game over.

Well, maybe—and maybe not.

Consider the market’s price-earnings (PE) ratio. The PE compares a stock’s price with the company’s earnings (profits) and is a basic tool of financial analysis. At the end of July, the PE for the entire S&P 500 group of stocks stood at almost 27: stocks were priced at 27 times their companies’ recent earnings. That’s nearly twice the historical average of 14.5 going back to 1870, according to finance professor Jeremy Siegel, author of “Stocks for the Long Run.” Stocks supposedly represent the present value of all future profits, so today’s astronomical PE must mean that either (a) despite the economic slowdown, the long-term outlook for profits remains strong, or (b) investors are collectively crazy—the market will drop or stagnate for years because stock prices have gotten way ahead of profits.

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Global Cooling
By Robert J. Samuelson,
July 18, 2001

Gathering this weekend in Italy for their annual summit, the leaders of the major industrial countries seem almost indifferent to the threat of a global recession. Despite widespread prosperity -- or perhaps because of it -- economic forecasts have consistently been too optimistic.

The United States is sputtering. Growth is slowing dramatically in Europe. Japan is in recession. Other Asian countries have been hit hard by the U.S. slowdown. Argentina may default on its debt. The danger does not lie in any one of these developments but rather in their convergence, which could create a snowball effect of weakening global trade, confidence and stock prices. The world's leaders ignore these problems at their peril.

Welcome to globalization's darker side. Connections among economies have multiplied in ways that are only barely understood. Almost universally, trade has grown in importance -- and it's not just trade. Early this year, Europeans thought they would largely escape the effect of the U.S. slowdown -- a judgment reflecting the small share (20 percent) of European exports going to America.

The logic hasn't worked. In 2000, the euro area economy grew 3.5 percent. Now, the latest estimate for 2001 from the major forecasting firm DRI-WEFA is 1.9 percent. One reason is that more European companies have operations in the United States. "As the U.S. economy got hit, these companies began to scale back -- not just in the United States, but also in Europe," says Nariman Behravesh, chief economist of DRI-WEFA.

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Inefficient Market
David Dreman, Forbes, 2001-08-06

Why it's absurd to believe investors' psychology has nothing to do with market prices.

Mark Rubinstein and fellow academic Hayne Leland are true believers in the efficient market hypothesis--holding that stocks are always correctly priced, given what's publicly known about them, and that any significant mispricings are illusions. To efficient market acolytes there is no role on Wall Street for herd psychology, fad-chasing of initial offerings or panic selling.

While this notion is ridiculous on its face, it has enjoyed a widespread following through the years and has created a lot of mischief.

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Sedan årsskiftet har 65 börsaktier förlorat mer än halva sitt värde.
DI 2001-01-12

Även om trenden bryts snart riskerar allmänhetens förtroende att vara illa sargat en lång tid framöver.

Det är de yngsta börsbolagen som varit de största förlorarna i vårens börsnedgång. Listan här bredvid – 65 aktier som fallit med över 50 procent sedan nyår – vittnar om IT- och telekombolagens tunga halvår, med företag som Adcore, Framfab och Cell i täten.

Även riktiga tungviktare som Ericsson och Nokia får finna sig i att samsas i skamvrån. Ericsson återfinns på plats 55 med en nedgång på 55 procent, tre placeringar sämre än Nokia.

Det svenska folket drabbas hårt av det dystra börsklimatet, och enligt Gunnar Ek på Aktiespararna har antalet klagomål från föreningens medlemmar ökat.

"Det finns många som är förbittrade och känner sig grundlurade. Medierna får ta på sig en stor del av ansvaret, när de har rubriker som 'Här är vinnarna!' om IT-bolagen", säger han.

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Bankers sound hard-landing alert for US economy
Financial Times; Jun 12, 2001 By ALAN BEATTIE
The US economy is at riskof a hard landing unless growth picks up elsewhere in the world, the Bank for International Settlements said yesterday.

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Dow
The Economist 20001-05-24

Well, the Dow may be the best-known stockmarket barometer, but it is also the least reliable. It is a crude average of 30 share prices. In most other stockmarket indices, share prices are weighted by market capitalisation. When Charles Dow first published his index in 1896 there were no computers, so this crude method had advantages. He simply added up the various share prices and divided by the number of stocks.

A dollar increase in the share price of the biggest firm thus has the same impact on the Dow as a dollar increase in the share price of the smallest one. This is misleading, so The Economist has recalculated the Dow, weighting shares by their market capitalisation. On this basis, the Dow is still down by 14% from its peak. The broader market indices, such as the Wilshire 5000, are down by even more (see chart). In other words, investors’ portfolios have suffered bigger losses than looking at the Dow alone would suggest.

At the stockmarket’s bottom in March, investors were comforted by the fact that the Dow had fallen by less than 20%, the conventional definition of a bear market. In fact, if it were weighted, the peak-to-trough decline would have been almost 30%: easily good enough for a grizzly.

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Analytikernas förlorade heder
Weje Sandén, t f chefredaktör Veckans Affärer 2001-04-17

På flyget hem läser jag att Wall Streets mest uppburne internetanalytiker, Henry Blodget, stämts på tio miljoner dollar av en förbannad småsparare. Blodget anklagas för systematiskt bedrägeri under flera år.

I USA är Henry Blodget en celebritet. Under fjolåret intervjuades han inte mindre än 816 gånger i TV om sin syn på börsen i allmänhet och internetaktier i synnerhet.

Gurustatusen grundlades 1998 när den då 33-årige Blodget förutspådde att kursen för Amazon.com skulle stiga till 400 dollar. Aktien stod då i 243 dollar – redan det en utmanade hög värdering, enligt andra förståsigpåare. Just detta faktum gjorde att den då okände aktieanalytikern på den lilla mäklarfirman, fick enormt stor uppmärksamhet i tidningar och TV. Gång på gång återgavs Blodgets prognos, med följd att Amazon.com tre veckor senare noterades i 400 dollar. Blodget blev omedelbart hjälteförklarad och anbuden från de stora firmorna haglade.

Merill Lynch bjöd bäst, samtidigt som man valde att kicka ut sin tidigare internetanalytiker (han hade haft sälj på Amazon.com).

Henry Blodget har fortsatt att tala gott om internetaktier – även långt efter det att kursraset började förra året. På senare tid har han dock givit uttryck för viss självkritik, men ännu i början av året hade han inga säljrekommendationer på sina bolag.

Nu har alltså Henry Blodget stämts. Något liknande är knappast aktuellt i Sverige. Men det finns all anledning att diskutera de svenska analytikernas roll i den största spekulationsbubblan i modern tid.

Det framgår av veckans Special, där VA:s Richard Björnelid försöker ge svaret på hur och varför IT-bubblan inträffade.

Det finns många som har skäl att vara generade idag: Styrelseproffsen som legitimerade och godkände excesserna, riskkapitalisterna som satte marknadskrafterna ur spel genom att finansiera dödfödda affärsidéer, PR-konsulterna som hjälpte till att sälja in dem till media och entreprenörer som ägnade mer tid att sälja aktier än att bygga företag. Det gäller i allra högsta grad också media som varit alltför okritisk och onyanserad i sin rapportering.

Men priset tar ändå analytikerkåren. Hur kunde så många, som betalas så mycket för att nagelfara företagens affärsidéer och balansräkningar, lockas med i karusellen?

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Jfr Varför gör prognosmakarna så stora kollektiva misstag?
Göran Albinsson Bruhner
SvD 2001-10-01

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A Primer on Depressions
By John H. Makin, April 2001

A depression follows a period of euphoria about the outlook for the economy and the future earnings of "new" companies. The euphoria becomes unsustainable, and the stock prices of the new companies collapse. Large wealth losses replace large expected wealth gains. Consumption growth slows, then turns negative, and stock prices of more companies fall because weaker demand erases pricing power and, with it, prospective profits. Demand falls further, and deflation sets in.

In a depression, the central bank discovers (to its horror) that stock prices, not interest rates, become the major transmission mechanism running from financial markets to the real economy. That is because after a bubble earnings fall faster than any central bank can, or will, cut interest rates, and when earnings, or more ominously, expected earnings, fall faster than interest rates, then stock prices fall.

http://www.aei.org/eo/eo12776.htm

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Why the US needs a recession
Samuel Brittan, Financial Times, March 29, 2001

Almost the first economic article I wrote for the Financial Times was in response to queries about whether there would be a US recession. In fact, there will always be a US recession on the horizon. Like most market economies, it is prone to occasional dips; and the most one can do is to be prepared and act to combat any downward spiral.

Is the US already in a recession? The question is semantic. If a recession is defined as a serious fall of growth below trend, the US has been in recession since the last quarter of last year.

What is, however, pretty clear is that significant recessions are almost impossible to predict. This emerges just as clearly from modern work on complexity theory, expounded for instance by Paul Ormerod, as from the more orthodox study by Christopher Dow , Major Recessions, 1998).

Looking at the last three international recessions, in 1973-75, 1979-82 and 1989-93, he finds that in two cases out of three the forecasting performance of the Organisation for Economic Co-operation and Development was either poor or “a failure”.

Failures are particularly likely when the recession is due to a shift in confidence or the bursting of a financial bubble, the timing of which is almost unknowable. The same agnosticism applies to predicting the depth and length of any recession.

Gavyn Davies of Goldman Sachs cites a study showing
Txt

The forecasting record this time round has if anything been worse. As Mr Davies says, it seems likely that “the herd-like tendencies of forecasters was being maintained” - or perhaps they were reacting to their wrong-headed recession predictions after the Asian crisis of 1998.

What can be said with more assurance is that the US needs a recession after a long and excessive boom. In saying this, I am doing no more than following the implications of the mainstream analysis espoused by most central bankers.

They have mostly accepted the view that there is something like a normal degree of resource utilisation or employment level above which we are likely to get not merely inflation but accelerating inflation.

My main departure from this mainstream is that I do not think that this equilibrium rate - and therefore the safety limits to the growth rate - can be estimated even approximately. We do not know how far it has been changed either by labour market reforms or by the so-called revolution in information technology.

There are, however, a good many indications that the US was growing in the past few years at well above these safety limits. It was not merely the stock market: the pressure on the whole economy, including labour markets, had become too high.

It is of course undesirable to have a secondary depression over and above the slowdown required to squeeze out inflation and reduce the investment overhang; but that is very difficult to achieve in practice.

It is bad manners to say “I told you so” but we would not have got to the present point if Alan Greenspan, chairman of the Federal Reserve, had not put so much faith in the New Economy and its ability to suspend the normal generalisations about business cycles and the economy.

There is a sufficient degree of recession in the US pipeline to avoid having to advocate a deliberate and corrective slowdown.

Exact rates of output performance and inflation or deflation are outside the control of central banks or other authorities. What they can do is to pursue sufficiently expansionary policies to maintain a normal 4 per cent or 5 per cent a year growth of nominal demand, while leaving the market to sort out the division between real growth and the price changes.

A panic policy of “cheap money and plenty of it” would (except in Japan) either not work or stimulate a deceptive recovery leading to a greater downturn in later years.

Samuel Brittan’s website is www.samuelbrittan.co.uk

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Street cries
FT, March 17 2001

Welcome to the I-told-you-so market. Like fickle citizens who claim to have been freedom fighters after the totalitarian regime falls, US stock market commentators have rushed to demonstrate in recent weeks how they spotted the collapse coming.

With exquisite timing, Warren Buffett, one of the few US investors who can claim to have been part of the resistance all along, released his letter to shareholders of Berkshire Hathaway, the investment company he heads, last Saturday, on the first anniversary of the Nasdaq Composite's peak. A new wave of investors had learnt some very old lessons, he wrote: "First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest."

Right now, nobody believes speculation is easy. The Nasdaq is down more than 60 per cent from its high of more than 5,000 and concern about the US economy has infected the wider market.
The Wilshire 5000, the broad-based index of all publicly traded shares that Alan Greenspan, the Federal Reserve chairman, is said to watch, is 27 per cent below its peak.
This week, the Standard & Poor's 500 joined it in bear market territory, down more than 20 per cent from its high, and
the Dow Jones Industrial Average dipped below 10,000 for the first time in five months.

The headline-grabbing slump in the main indices prompted even the president to worry publicly about US investors' well-being this week. "I'm concerned that a lot of Americans' portfolios have been affected," President George W. Bush said during a visit to New Jersey on Wednesday, but added: "I've got great faith in our economy."

Mr Bush is not the only influential figure weighing up the stock market on one hand and the economy on the other. Mr Greenspan and his colleagues at the Federal Reserve will have to pay attention to both next week when they meet for the first time since the end of January to discuss monetary policy.

"The US economy, while it has certainly slowed down considerably, has not fallen off a cliff," says Alan Skrainka, chief market strategist at St Louis-based Edward Jones. "The Nasdaq is down 60 per cent but the US economy isn't."

Employment, retail sales and housing data released in the last two days indicate that the economy is stalling rather than diving into recession. The University of Michigan's consumer sentiment index - which most analysts had expected to fall further in March - rose slightly, according to figures circulated yesterday.

"Clearly we see some slowdown but we don't see a recession, by any means," says Deborah Cannon, president of Bank of America in Houston, Texas.

But so far there are surprisingly few signs of outright fear in the marketplace. Investors have poured more money into money market mutual funds but, according to anecdotal evidence, they have not started to flee equity funds. Treasury bonds - the traditional haven of risk-averse investors - have risen as the stock market has declined but there is little indication of a headlong rush to quality as there was in 1998 when the Russian financial crisis and collapse of Long-Term Capital Management precipitated a global liquidity crunch.

Policymakers are conscious of the risks. Lenders and their supervisors "should be mindful that in their zeal to make up for past excesses they do not overcompensate and inhibit or cut off the flow of credit to borrowers with credible prospects", Mr Greenspan told a banking conference this month.

Unfortunately for equity investors, Tuesday's Fed decision will be only NT>

http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3G5C6BEKC&live=true

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What a difference a year makes
By Barry Riley FT, March 17 2001

There were plenty of smiles at a cocktail party hosted by pension fund managers Phillips & Drew at the Eastbourne investment conference of the National Association of Pension Funds this week.

Its "value" investment style has been prospering again, and although the firm lost a lot of clients last year, this month it has retained a 2bn management contract with the Greater Manchester local authority pension fund.

Yet it is only twelve months since Tony Dye was forced out as Phillips & Drew's investment director. Attaining notoriety as London's Dr Doom, he had been bearish for too long during the extended and extreme bull market.

The timing of his exit turned out to be perversely precise: within days the global stock market bubble reached its peak of over-inflation and America's Nasdaq Index subsequently collapsed 60 per cent.

More significantly, the broad S&P 500 Index was down 24 per cent at its low point this Wednesday. London's FTSE 100 Index declined by a slightly more modest 19 per cent.

Now Tony Dye is launching the Contra Fund, a European hedge fund in which he can not only accumulate the shares of his beloved value companies but he can indulge in the additional pleasure of short-selling overpriced growth stocks.

He may, though, require a better sense of timing than he showed at P & D.

http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3BUJ94EKC&live=true

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Det blir ingen mjuklandning
DN-ledare 2001-03-14

I backspegeln verkar det envisa fasthållandet vid ett mera optimistiskt perspektiv därför nästan lite naivt.

Men de flesta prognosmakare, börsmäklare och andra ekonomiska analytiker har varit lika goda kålsupare.

Man har talat om en tillfällig avmattning, en "mjuklandning" för ekonomin eller en "normalisering". Vad som ökat oemottagligheten för negativa signaler är förmodligen att den senaste högkonjunkturen har varit onormalt lång, nästan åtta år.

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Waking up to equity risk
Can the global equity culture survive its first bear market?
Mar 8th 2001 The Economist

WE ASK all our readers to observe a one-minute silence on March 10^th to mark the first anniversary of the Nasdaq peak. Over the past year this index, once the beacon of Americas new economy, has tumbled by 55%.

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Klas Eklund på SvD:s ledarsida 2000-08-11 För 20 år sedan inledde Ronald Reagan en våg av skattesänkningar i västvärlden. När USA sänkte sina skatter skärptes trycket på andra att följa efter. Under en period blundade många i Europa och en rad ekonomer (däribland jag själv) hävdade att Reaganomics var ett oansvarigt tänkande. Men vi hade fel. USA har ryckt åt sig ett stort försprång och har världens mest framgångsrika ekonomi.

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Americas broadest stockmarket index has lost more than 20% of its value. Markets around the world are now, on average, at least one-fifth below last years peak, as share prices have also tumbled from Tokyo to Frankfurt, Sao Paulo to Seoul.

Over the past year, around $4 trillion has been wiped off the value of American shares alone, a sum equivalent to 40% of the countrys GDP.

The collapse in share values after the stockmarket crash of 1987 was only half as big, at 20% of GDP. Welcome to the global bear market, the grizzliest for a generation.

Nowadays, falling share prices hurt economies more than they used to because stockmarkets are everywhere much bigger not just in absolute terms but also in relation to national income. As a result, Americas economy may yet face a recession that was not supposed to happen (see article).

But is even more at stake than the course of the business cycle in the United States and elsewhere? Might the fall in share prices spell the end of the publics passionate new fondness for equities? If so, that would be a more significant change than you might suppose.

The 1990s will be remembered as the start of the Internet age, but also the decade when the worldnot just Americadiscovered shares. Global stockmarket capitalisation hit $35 trillion last year, 110% of global GDP, up from 40% in 1990.

Stockmarkets used to be seen as the reserve of pinstriped brokers and their wealthy clients. No longer. Over half of all Americans now own shares, twice as many as on the eve of the 1987 crash. Share ownership is even higher in Australia, an economy which not so long ago was run by trade unions.

In Germany, where cautious investors used to put their money in bonds, one-fifth of adults are now shareholders, twice as many as three years ago. Even poor countries, even communist onesChina is bothhave become crazy for shares.

Will the slump in share prices kill this emerging equity culture? Plainly, it depends on how much worse, if at all, the share-price slump gets, and how quickly it is reversed. Share prices might recover as swiftly as after the crash of 1987. But by many traditional yardsticks they remain overvalued. And just as stockmarkets overshoot at the top, they often undershoot at the bottom.

Falling share prices have already dented enthusiasm for shares in Japan and many emerging markets. But after a pause, strong structural forces should continue to support the eq>Txt
Keynesuity culture in the long term. In particular, as state pay-as-you-go pension schemes strain under the weight of ageing populations, governments around the world are keen to encourage a shift to private pensions. This will fatten the funds that invest in equities.

After an 11-year bear market in Japan it is hardly surprising that less than 10% of households still own shares. Here, too, a rapidly ageing population poses a big challenge to pension finance. In the short term, on the other hand, a severe bear market would make it even harder to privatise state-run social-security systems, such as Americas.

Meanwhile, companies are struggling to cope. The supply of fresh equity capital has more or less dried up in America in recent months. This has had severe consequences further down Americas capitalist food chain, because venture capitalists rely on the exit route of an IPO to get their money back (ideally multiplied many times over).

Entrepreneurs with bright ideas are finding it hard to raise fundsa state of affairs that could do serious harm to prospects for further innovation. Small individual investors, especially, have lost some of their enthusiasm for equities.

In America, day trading over the Internet is not the national pastime it was; these days it is regarded more as a mild form of mental illness. Actually, that is no bad thing. Small investors need to take a cautious long-term approach to the stockmarket.

With luck, the new equity culture will survive, but with added wisdom. The popularity of shares ought to reflect the underlying profitability of the companies that issue them, not delusions of instant riches at no risk.

It ought to be guided too by something closer to intelligent analysis than the comments of one American dotcom analyst this week. Asked to explain why his recommended stocks were down 79% since the start of last year, he replied: The market went from saying, We like companies that are growing quickly but are losing a lot of money, to saying, We want to see earnings. Its very hard to predict a 180-degree turn like that.

Actually, it was dead easy to do so.

Enough of a bear market to discredit the dispensers of such drivel can only be salutary.

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Don’t mention the R-word
The Economist 1 mars 2001

IS THE flurry of gloomy economic news in America giving you nightmares? Fear not. According to a recent survey, only 5% of economic forecasters predict that the American economy is heading into recession. But before you drift back into a peaceful slumber, remember that the dismal scientists have a dismal record in predicting recessions. Not only are their forecasting tools blunt, but many also seem to have an inbuilt bias against uttering the dreaded R-word.

Consider forecasters’ record during America’s past two recessions. In late 1981, when we now know that the economy was already in recession, the average forecast for GDP growth in 1982 was over 2%. In the event, output fell by 2%. In August 1990, the very month that America dipped into its next recession, the consensus forecast was for 2% growth in 1991; output actually declined by 0.5%. By chance, the average forecast for growth this year is again close to 2%. But, of course, this time is different: the forecasters couldn’t possibly blunder again. Could they?

To be fair, economic forecasting is even harder than weather forecasting. At least weathermen know whether it is hot or freezing right now. Economists, in contrast, have to forecast the immediate past, which is constantly being revised. However, there are also much less excusable factors at work, such as the “tell ’em what they need to hear” syndrome or the wimpish tendency to run with the gang. Predicting a recession is never popular, especially if you work for an investment bank. Economists who do not want to jeopardise their career may prefer to stay close to the consensus forecast. Better to run the risk of being wrong in good company, they reckon, than be right and an outcast.

There have long been suspicions about the objectivity of research done by investment-bank analysts, who, even as the ceiling falls in, advise their clients to “buy”, “hold” or “accumulate” (apparently different from “buy” or “hold”) rather than sell. Coincidentally, these banks earn fat fees for flotations or merger deals from the companies they analyse. Investment banks, which have made billions out of the boom, also have a vested interest in remaining bullish about the economy at large. Most Wall Street firms are still officially forecasting no recession in America. But an alarming number of their economists have privately admitted to The Economist that they believe that the risk of recession is higher than their published forecasts say. They are not alone in their dishonesty. International organisations such as the IMF are no doubt just as inhibited about forecasting a recession in the country that is their biggest shareholder.

So as not to alarm their clients, economists are also swiftly redefining a “soft landing”. A few months ago this was widely viewed as growth of around 3%. Today, many economists, reluctant to admit they were wrong, are counting anything short of outright contraction as a soft landing. Shame on them: a slowdown in growth from a rate of 5% early last year to, say, zero this year would certainly feel like a hard landing.

Economists can always quibble about what “recession” means. The popular definition—two consecutive quarters of decline—is too crude. It might make more sense to define a recession as a period when the unemployment rate rises by at least one percentage point—that is, when GDP growth falls significantly below its potential rate. Alternatively, there is a less technical solution. When your neighbour loses his job, it’s a slowdown. When you lose your job, it’s a recession. When an economist gets sacked, that’s a depression. Economists afraid to say what they think deserve to be a bit depressed.

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"One of the most striking features of the present chapter in stock market history is the failure of the trading community to take serious alarm at portents which once threw Wall Street into a state of alarm... Traders, who would formerly have taken the precaution of reducing their commitments just in case a reaction should set in, now feel confident that they can ride out any storm which may develop. But more particularly, the repeated demonstrations which the market has given of its ability to 'come back' with renewed strength after a sharp reaction has engendered a spirit of indifference to all the old-time warnings. As to whether this attitude may not sometime itself become a danger-signal, Wall Street is not agreed." The New York Times (Sept. 1, 1929)

"The economy is showing secular productivity growth of a magnitude not seen in decades. Inflation remains under control. The U.S. boasts budget surpluses as far as the eye can see. The build-out of the Internet, so rich in promise, is still in its embryonic stages. The stock market excesses of early this year have largely been purged from the system, without exacting any systemic damage. In short, the Goldilocks economy is alive and well and the bull rules."
Barron's (August 28, 2000)

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Martin Wolf, A testing year for the world
Financial Times, January 3, 2001-01-03

This is, for the purist, the first year of the third millennium. As befits such a year, it will be a challenging time for the world economy.

The first test is for Alan Greenspan.

Views on the chairman of the US Federal Reserve fall into two camps. The larger one believes his institution has mastered macro-economic fine-tuning. The smaller camp believes he has helped create a bubble economy.

If the growth of US demand slows smoothly to about 3 per cent, with no big declines in the stock market and a modest depreciation of the dollar, the first group can feel vindicated. If not, it cannot.

The second test is of the “new economy”.

Not long ago, believers thought that the business cycle was dead, profits were irrelevant to technology companies and the US was in the middle of an unparalleled technological revolution.

2000 gave the lie to the first two propositions. But what is the plausibility of the third? Even the Organisation for Economic Co-operation and Development accepts that the potential rate of growth of the US economy is 4 per cent. This implies long-term growth in labour productivity of a little below 3 per cent, close to double the 1973-95 trend. If so, productivity growth should remain robust even during this year’s slowdown.

The third test is for the US stock market.

Those who believe that the US miracle is just another bubble economy point to the extraordinary valuations in the stock market. This, they insist, generated unsustainably high rates of private sector investment and unsustainably low rates of private sector savings.

At minus 11.6 per cent, total returns on US stocks last year (with dividends reinvested) were the lowest since 1974. Yet even this was but a modest offset to the staggering 270 per cent cumulative return enjoyed over the previous five years (a compound rate of 30 per cent a year).

If the bubble story is right, last year’s negative return will be followed by more miserable years. If not, returns will soon be back to positive, albeit presumably more modest, levels than in the second half of the 1990s. What happens in 2001 will indicate which it will be.

The fourth test is for the euro.

Launched with optimism, it spent almost all of its first two years sinking abjectly against a currency its founders had hoped it would rival. Finally, towards the end of 2000, the euro began to show some strength as the US economy weakened, bouncing back from a low of $0.83 on October 25 to $0.94 by the end of the year. 2001 will indicate whether this is a durable reversal or a temporary respite for what one analyst rudely labelled a “toilet currency”. If the former, the euro’s proponents would feel great relief. The European Central Bank would also enjoy greater freedom of manoeuvre in response to a sharp slowdown than if the currency had continued to remain weak.

A fifth test concerns unemployment in the euro-zone.

After years of high and rising unemployment, the trend started to turn in 1997. Since then the unemployment rate has fallen from a peak of 11.7 per cent in 1997 in the euro-zone as a whole to 8.9 per cent in October 2000. Employment rose from 118.5m in 1997 to an estimated 125.4m last year. The test for the European economy is whether it can continue to generate jobs and lower unemployment. This depends partly on how far the ECB stabilises the economy but also on whether the recent rise in the employment-intensity of growth will be sustained.

The sixth test is for Japan.

Here, yet again, there are polar views: one is that the economy is finally on the mend; the other is that it remains on the critical list, with the semblance of vitality solely explained by unsustainable fiscal transfusions.

The optimistic view of Japan rests on an expected recovery in consumption along with increasingly strong investment driven by the adoption of information technology and the need to replace outdated capital. This will more than offset the weakening of the external account as the US economy slows. Meanwhile the fiscal deficit is set to remain unchanged: the OECD forecasts general government financial deficits at about 6 per cent of gross domestic product over the next two years.

The counter is partly that the financial sector remains very weak. Worse, just as inflation makes the profitability of net debtors appear worse than it is, so deflation makes it appear better. Smithers & Co, a London-based investment adviser, estimates that the true return on non-financial corporate equity was 2.7 per cent in fiscal year 2000, not the published figure of 6.5 per cent, hardly the ideal backdrop for a needed surge in investment.

The underlying challenge remains that of balancing demand with potential supply. This is an economy with a gross national savings rate of about 30 per cent of GDP but it also has a declining labour force, an unprofitable corporate sector and an exceptionally high ratio of capital to GDP. A return to recession this year would force policymakers to try something radically new.

The seventh test is for emerging market economies.

Russia is particularly intriguing. Goldman Sachs estimates economic growth last year at 7 per cent, after 3.2 per cent in 1999. True, this is a modest turnaround given the huge decline of 44 per cent in the (admittedly defective) measures of GDP between 1989 and 1998. Yet it is at least a sign that the bottom has been reached. Another such year would suggest that the
Txt
Txt< recovery is more than a temporary reversal helped by a jump in oil prices.

Also important this year will be whether Turkey remains on its exchange rate peg, how Latin America, particularly Mexico, copes with a US slowdown and whether east Asian economies dependent on US markets are able to sustain their recoveries from crisis. More broadly, the ability of emerging market economies to survive a slowdown in the US will be the clearest possible test of how far they have strengthened after the financial crises of the 1990s.

My last test is for the UK.

Here everything looks almost bewilderingly healthy, with a strong fiscal position, robust currency, low inflation, modest unemployment and a manageable current account deficit. The International Bank Credit Analyst even described the country as a safe haven in its December review. A turbulent 2001 would show whether the economy has been transformed or not.

Yet 2001 will be first and foremost the testing year for the US. Is the world about to witness the popping of a bubble economy or a smooth adjustment from temporary overheating to sustained and rapid growth? If, after a record-breaking nine years of expansion and a modest slowdown the US takes off yet again, we can reasonably conclude that the notion of a new economy is more than mere fool’s gold.

More by Martin Wolf

More about New Era

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"Many of today's investors were still in diapers during the great stagflation of the 1970s. Those who weren't will never forget the darkest period in modern financial market history."

Stephen Roach Morgan Stanley Dean Witter

The Return of STAGFLATION
Stagflation: a term coined by economists in the 1970s to describe the previously unprecedented combination of slow economic growth and rising prices.

http://www.gold-eagle.com/editorials_00/blanchard123000.html

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The Perfect Storm - Inflation with Dollar Collapse or Depression with Hyperinflation

http://www.gold-eagle.com/editorials_01/puplava010201.html

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Den som vill kan muntra upp sig med tankar av Mats Johansson och Klas Eklund, som trots sina skiftande bakgrunder, är eniga om att EMU är jättebra....

Felet med Mosesteorin
SvD-ledare 2000-03-02, utdrag
Efter decennier av skleros och Delorium har EU mycket att lära av den ekonomiska förnyelsen i USA, som tog sin början under Reagan-åren. Aven statsministern bör ta sig tid att studera Prodi-programmets förslag till reformer.

Perssons ekonomiska filosofi samman fattas numera i sentensen om sju feta år, följda av sju magra, den s k Mosesteorin.

Den stämmer inte på USA, som har upplevt en ekonomisk framgång av historiska mått över de senaste decennierna.

Trots flera börschocker, av vilka vi sannolikt inte har sett den sista, förefaller den amerikanska modellen överlägsen den svenska och den europeiska; inte i alla avseenden, men många. .......... I så fall bör vi fortsätta att vända blicken bort från den amerikanska modellen och till siste arbetslös hålla fast vid alla de gamla krusbärsdogmerna. Då har vi inget att lära av det ekonomiska språnget i väster. Då kan vi lugnt fortsätta att irra i öknen och yra om sju år av olika vikttillstånd.

Klas Eklund på SvD:s ledarsida 2000-08-11
För 20 år sedan inledde Ronald Reagan en våg av skattesänkningar i västvärlden. När USA sänkte sina skatter skärptes trycket på andra att följa efter. Under en period blundade många i Europa och en rad ekonomer (däribland jag själv) hävdade att Reaganomics var ett oansvarigt tänkande.

Men vi hade fel. USA har ryckt åt sig ett stort försprång och har världens mest framgångsrika ekonomi.

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The governor of the Bank of England, Sir Edward George: "it's not a nightmare scenario"

The governor of the Bank of England, Sir Edward George, has warned that the United Kingdom is likely to be affected by the economic slowdown in the United States.
BBC 2000-12-29

He said the current data did not suggest anything "deeply damaging to our situation" and that it was "too soon to become seriously concerned", but warned the "biggest cloud on the horizon" would be "a sharper slowdown in the United States than we expect".

"We will see slower growth than we expected", Sir Edward said, "but it's not a nightmare scenario".

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LETTERS TO THE EDITOR: History’s biggest credit bubble will collapse
Financial Times; Dec 19, 2000 By KIM EVANS

Sir, Prof Rudi Dornbusch has it half right (”A rendezvous with bankruptcy”, December 15). The US does matter - and he glosses over the extent of our problems. Yes, Japan is in parlous circumstances and yes, unless they let their debts liquidate and markets clear, there is no solution on the horizon.

US indebtedness is a much bigger problem. It now exceeds Dollars 2,600bn. The vaunted US surplus is a chimera, as the Federal budget is in deep deficit. Why? The unfunded Social Security and Medicare obligations of the US, coupled with unfunded government workers’ retirement, are a black hole. If there were an actuarial requirement to provide for these obligations, the US budget would show a deficit by one reckoning that pushed Dollars 1,000bn a year.

The purported ”surplus” is due primarily to capital gains taxes and exercise of options by the US’s senior executives. The gap between average worker and CEO has never been greater, at a ratio of 475 times, as a result of options.

Before 1995, Nasdaq and personal consumption in the US had a weak correlation of 0.24. Since 1995, this correlation has increased to 0.74. As the Nasdaq bubble further collapses, a negative wealth effect will occur, lowerin/A>
Txt g corporate profits, wage gains and capital gains.

The US savings rate will increase from a negative rate currently, resulting in diminished US profitability. Rising joblessness means more government payments. Presto! Lo and behold, the deficit reappears.

Since 1995, broad money in the US expanded by Dollars 2,600bn and total credit by Dollars 9,300bn, yet nominal GDP was up only Dollars 2,700bn. In the second quarter of 2000, credit expanded by Dollars 1,400bn, a record pace. Credit has been growing at 4-5 times the rate of GDP growth. Consumer credit has never been greater, mortgage indebtedness as a percentage of total housing value has never been greater and US corporate indebtedness has exploded as US executives have bought back shares to make their options profitable. Downgrades by credit agencies, rising personal and corporate bankruptcies and wide credit spreads indicate a systemic credit problem. Pimco’s Bill Gross said to avoid corporates ”at any cost”. Profit downgrades increase daily.

The US debt situation and credit bubble make Japan look prudent fiscally. No amount of Fed legerdemain can overcome the collapse of the greatest credit bubble in history.

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Pushing On A String
Sean Corrigan Capital Insight 22 November 2000
http://www.capitalinsight.co.uk/Home/Home.asp

Back in the early 90s, global interest long-term rates - as measured by our IRS index, weighted for outstanding global OTC positions and adjusted into USD - were in excess of 10% as the UK attempted to cool the Lawson Boom, the Bundesbank was making Helmut Kohl pay for his 1 Ost = 1 West decision, Greenspan was pricking the latest debt bubble in the US and Mieno was all-too successfully restoring sanity to Japanese asset markets.

Rates then halved as the ERM crumbled, Japan imploded and America’s banks began to domino. Soon, however, bust began to turn again to boom, and it was time to lurch onto the other side of the boat in an attempt to keep it from capsizing under the weight of its own contradictions. The Fed’s 1994 tightening - and the associated leveraged and structured derivative cascade - took us screeching back over 8% before Mexico collapsed and Japan begun to pump dangerous amounts of liquidity into the system in order to reverse the Yen’s debilitating rise.

Then the Bubble began in earnest and interest rates embarked upon a fairly uninterrupted decline to their nadir of 3.8% in the early Spring of last year. Not only was this unprecedentedly low, for the modern age at least, but it represented a global zero real rate if we compare it to OECD composite indices and it came at a time when the ability to manufacture credit had received an enormous (and still only dimly-understood) fillip from the launch of the Euro and the consequent consolidation of European banking and capital markets......

Full article

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The Credit Bubble Bulletin - by Doug Noland
At Gold Eagle

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Corporate-Bond Market Faces a Gloomy Outlook
From Wall Street Journal 2000-10-18

Faced with unrelenting bad news, the U.S. corporate-bond market is staggering through its worst period since the bleak days of 1998.

Though it had been a strong year for corporate bonds until recently, investors' losses have mounted of late, corporations are finding it difficult to sell their bonds and Wall Street dealers are becoming gun-shy about trading them for fear of getting stuck with bonds while prices are falling.

If the problems get worse, the U.S. economy could feel the pinch as companies find it difficult to raise financing.

Treasury securities, the safest bonds, still sell like hot cakes (they rallied Tuesday as stocks continued to fall). But other, riskier bonds suddenly are struggling. Taking the biggest hit: junk bonds, otherwise known on Wall Street as high-yield bonds, a major source of capital for many growing companies that pose a higher credit risk. The proportion of junk bonds trading at distressed prices surged during the past month to the highest level since the early 1990s, when the market was paralyzed by recession and the collapse of Drexel Burnham Lambert.

Nearly one in four junk bonds is trading at distressed levels, defined as yielding 10 percentage points or more over Treasurys, says Martin S. Fridson, chief high-yield strategist at Merrill Lynch & Co. The distress ratio "is a leading indicator of the default rate [for corporate debt], so it suggests some further pain coming," Mr. Fridson says.

Tuesday morning, Gary Goodenough decided to sell $12 million of top-rated corporate bonds, which normally would be a snap for a professional money manager. Not now. When he picked up the phone and asked six Wall Street dealers for bids, two passed. Three made bids that weren't close to the market price. The sixth gave an initial price indication, but said he would only buy the bonds at a lower level.

A year ago, Mr. Goodenough would have hung up the phone. Tuesday, the co-head of fixed-income investments at MacKay Shields Financial in New York said, "Sell 'em" to the sixth dealer. Even though he wasn't happy with the price, Mr. Goodenough was relieved to get out of his position amid a tumbling corporate-bond market -- where it suddenly has become much harder just to get in and out of positions.

"There's been a massive erosion of liquidity," says Margaret Patel, manager of the $120 million Pioneer High Yield Fund, referring to the ability of investors to easily get in and out of bond positions without moving prices.

The average junk bond is trading at 80.65 cents on the dollar, down from more than 84 cents in early September, and almost 90 cents at the beginning of the year, according to Merrill Lynch. Junk bonds now trade at their lowest level since March 1991.

Junk bonds sell at a yield of 7.1 percentage points above comparable Treasurys, markedly higher than the 4.5-point
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If bond issuance remains difficult, it will put pressure on an important area of financing for U.S. and global companies, potentially hurting economies around the world. Further, the premium that investors are demanding for riskier bonds could be a signal that the U.S. economy's growth is set to slow substantially, perhaps resulting in a recession.

"I lean toward a hard landing" for the U.S. economy, says William Gross, of Pacific Investment Management Co., the bond heavyweight.

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Is the end in sight?
From The Economist, October 18, 2000

Wall Street is rediscovering fear—this week in its high-tech stockmarkets, but more particularly in the junk-bond market THERE is trouble brewing in the world’s capital markets, especially at their most speculative end. Although the blue-chip Dow Jones Industrial Average has fallen by only a bit—well, 10% actually—this year, Nasdaq, the main market for high-tech shares, has had a torrid time. Since its high point in March, it has fallen by some 40%, and it shows few signs of hitting bottom. The profits of technology companies are failing to meet expectations—and even the rare ones that do, such as Yahoo!, find that this is not always enough to spare their share price a beating. Telecoms firms are saddled with huge debts. Internet firms are near-untouchable. At mid-week, the Nasdaq Composite index had fallen for 13 of its 15 most recent trading days.

So much for shares. But an even scarier story may be unfolding in a market mostly ignored by those who day-trade Nasdaq’s dreamy paper: that for corporate debt. In recent weeks, disappointing profits have meant that some blue-chip companies have seen their investment-grade debt pummelled. The victims include Xerox, Eastman-Kodak, and just about every telecoms firm (“death, taxes and the long-term deterioration of the phone sector are among the few certainties in life,” wrote Credit Suisse First Boston in a recent report).

After announcing bad results, yet again, last week, the spread on Xerox’s bonds over Treasuries tripled to 330 basis points. Hitherto, investment-grade bonds had generally stood above the fray. Cowboy junkies The fray has, in particular, surrounded those bonds without an investment-grade rating: described by Wall Street’s marketing folk as “high-yield bonds”, but formerly (and perhaps again) known simply as “junk”. These bonds, particularly those issued by non-blue-chip telecoms and tech companies, have been by far the worst of a poorly performing bunch. Merrill Lynch’s high-yield index is now nearly as ugly as in 1998, during the panic over the failure of Long-Term Capital Management (LTCM), a hedge fund that owned lots of junk

This week, some big investment banks were rumoured to have lost a fortune—$1 billion is the gossips’ favourite sum—on junk debt they underwrote but could not shift even to their most gullible customers. Among the names bandied about in the market were Morgan Stanley Dean Witter, Deutsche Bank and CSFB. Each denied, more or less, that it had lost lots of money on junk debt.

Since Credit Suisse bought Donaldson, Lufkin & Jenrette (a high-yield-bond specialist), $12 billion—coincidentally, the price it paid for DLJ—has been wiped off Credit Suisse’s market value.

Investment banks hold many billions of dollars of debt and have lots of risky loans on their books. One market participant reckons that there is, perhaps, $25 billion at serious risk in the big investment banks’ portfolios. It is conceivable, he says, that among them, they could lose $10 billion of this. If so, the grim reaper seems likeliest to be the telecoms sector—which is fast looking less like the foundations of a glorious Internet future and more like another outing for the emperor’s new clothes.