Danger time?

20060114issuecovus400This week’s Economist pulls the gloves off and laces into Mr. G pretty good. In a pair of articles, they diussect the US economy, analyze it shortcomings, and hold Greenie largely responsible for a significant percentage of these economic problems:

"Mr Greenspan’s departure could well mark a high point for America’s economy, with a period of sluggish growth ahead. This is not so much because he is leaving, but because of what he is leaving behind: the biggest economic imbalances in American history."

And they’re just getting started. They note that "the Fed’s policies of the past decade look like they are having painful long-term costs." 

Further, the issue is not a housing bubble; rather, its the over reliance on mortgage equity extraction as the key source of GDP growth:

"The problem is not the rising asset prices themselves but rather their effect on the economy. By borrowing against capital gains on their homes, households have been able to consume more than they earn. Robust consumer spending has boosted GDP growth, but at the cost of a negative personal saving rate, a growing burden of household debt and a huge current-account deficit… Part of America’s current prosperity is based not on genuine gains in income, nor on high productivity growth, but on borrowing from the future."

Csf117 Next up:  weaker than usual job creation and sluggish real wage growth: 

"American incomes have increased much more slowly than in previous recoveries. According to Morgan Stanley, over the past four years total private-sector labour compensation has risen by only 12% in real terms, compared with an average gain of 20% over the comparable period of the previous five expansions. Without strong gains in incomes, the growth in consumer spending has to a large extent been based on increases in house prices and credit."

Hardly the robust economic scenario made out by so many cheerleaders in the U.S.

The Economist reserves their harshest criticism for the man himself, noting "The accolades bestowed upon Alan Greenspan ahead of his retirement on January 31st have a strong whiff of irrational exuberance."

The rest of the articles details the shortcomings and failures of Mr. Greenspan and his policies. It is must reading for anyone even remotely curious how we got into the situation we currently find ourselves: The current belief by many that the economy is robustm inflationis contained, and the structural economic imbalances are merely bothersome, not outright dangerous.

In the words of Austrian economist Ludwig von Mises: “It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises.”

Danger time indeed, on this Friday the 13th . . .

Danger time for America
Jan 12th 2006
From The Economist print edition

Monetary myopia
Jan 12th 2006
From The Economist print edition

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  1. kaan commented on Jan 13

    reckless monetary and fiscal policies stoked fire across whole world. The glut of torrent liquidity flooded everywhere except south pole. It may be telling of the zeitgeist that the finance minister in Turkey claims a current account deficit at 7% of GDP ıs no problem at all and accuses worrıed experts as beıng ıgnorant.

    I wonder how hıstory wıll judge the bubble maestro who bet the whole world?

  2. Frank commented on Jan 13

    An interesting cover indicator. Emotional negativity suggesting a contrarian positive outlook for the short term anyway?

  3. D. commented on Jan 13

    Although the US has created huge problems for itself, the problems it has created for the developing world are probably greater.

    When global growth slows and credit spreads head up, will money flow out of the emergent markets back into… the US, Europe, safer ground?

    Or just instantly disappear, like Enron’s and Nortel’s value and artificial revenues?

  4. B commented on Jan 13

    You are right. It is F-13th. The Devil will be out in force today. And his first order was a whiff of inflation that the CNBCers sloughed off. He appears to also have gotten the best of Christmas with poor sales. Who the hell does he think he is? God? lol.

    With the Fed’s open market actions of the last few weeks that will ultimately stimulate demand thus inflation and the PPI going up again, I still think gentle Ben is going to get an indoctrination by fire. Raise rates and kill inflation or stop to save the economy. The Fed cannot afford to crater the economy so the long term trend of inflation is still in place regradless of what any manufactured indicators say. Indoctrination by crisis and he’ll unfairly be blamed.

  5. KirkH commented on Jan 13

    Any idea what caused Greenspan to change his tune? He sounded a lot more like von Mises back in the ’60s.

  6. Andy Nardone commented on Jan 13

    Kirk, he was invited into the “Star Chamber,” kinda found it cozy in there and never came out. Mises is rolling over in his grave watching this chameleon at work.

  7. Daniel Secrest commented on Jan 13

    One concern probably not noted by the Economist — The U.S. political system is fraying, and a jolt to the economy could cause it to become unhinged. There could be a period of confusion until a new political order emerges…

  8. Bububu-boooyaaah! commented on Jan 13

    Are you saying we could fall into anarchy? “a new political order”? If that is what you meant, you need to lighten up and get laid. We all hate politicians but I think you are about 200 years too late or 200 years too early for another revolution.

    If that isn’t what you meant, then have a capitalist-loving Triple BK Kong burger on me. Where else can you get a sandwich with 1230 calories and 83 artery clogging grams of fat?

  9. Daniel Secrest commented on Jan 13

    Not revolution, just confusion. The current executive branch is unpopular, and the current legislative leadership is plagued by scandal. If the economy tanks, then there will be a demand for change and a lot of fighting to take the reins of government.

    Now, I think I’ll go buy something a little more healthy than you suggest…

  10. David Silb commented on Jan 13

    That’s it in a nutshell.

    I think we all here in one way or another have been stating what this entry summarizes.

    And as Barry says: “It is what it is.”

    Plan your positions accordingly. Sooner or later servicing the bebt, both personal and national is going extract a heavy burden on the economy.

  11. Anonymous commented on Jan 13

    Look on the bright side, if the Economist were running articles on taking out HELOCs to invest in stocks instead of foretelling doom and gloom like they are, we’d know that a major crash was at the doorstep. This way we have a little bit of time to make some money to prepare for the inevitable. ;-)

    By the way, is anyone here subscribed to Hertler SMI service (mentioned in Barry’s bear market analysis paper)? I subscribed last week and still haven’t seen anything.

  12. B commented on Jan 13

    I wouldn’t confuse dislocations with stock market performance. In fact, the long term wall of worry is in place for a great market. The best markets are when doom fills the air. That said, I do think Bernanke will have some mini crisis to deal with as Greenspan did and Volcker did. When the world is without worry as it is today, it makes me worry about what gopher is going to pop up. We can all guess what that would be but it likely won’t be any of the things printed in the press. China? Dollar crisis? GM bankruptcy? Iran? Derivative crisis? Banking crisis? Joe Biden runs for President?

    It’s the short term sentiment, high PE multiples and a meaningful bottom that are likely preventing a massive base from being built here for a meaningful multi-year advance. We likely need 10%+ dip on the S&P. Major Wall Street advances are built on compression caused by extreme fear when the retards are unloading at a price buyers will step in and gladly take their money. We are not there. Doesn’t matter whether it was 1925, 1955, 1975 or 2005 or 2155, market behavior never changes from that perspective. The market historically needs to shake out the weak hands and build some compression for another big pop.

    Remember, that long term dislocations have been in place for thirty years. And they were in place fifty years before that in some other form. If you were waiting for them to be resolved, you’d still have your capital but only a few nickels to go with it. It is one thing to be smart but another to be afraid to invest in equities at a compelling time. Predicting when and how dislocations will resolve is akin to predicting the next major earthquake as has been posted on here before.

    There is ALOT to be positive about for the future. Alot that needs fixed and hopefully Washington will keep playing partisan politics until we get near the precipice before they start finagling with anything.

  13. Algernon commented on Jan 13

    It is great to read the Economist’s excellent & fair articles. I think they have it exactly right.

    But to be fair to Greenspan, the Economist’s point of view is Austrian. What they are saying is that if we had free-market interest rates in the late 90’s (“neutral” interest rates–where no money is borrowed that hasn’t been saved), the bubble would not have gotten out of hand. Interest rates would have risen in response to investment demand, countering investment demand.

    Instead the Fed supplied fresh money because the CPI was behaving. Monetist, Keynesians, & the public approved. Greenspan would have been heroic to oppose such a consensus. And he would have been pilloried had he not cranked out the M’s to assuage the damage of the popped bubble after the fact.

    The Economist is right, but we are all expecting too much from a political appointee like Greenspan.

  14. Algernon commented on Jan 13

    In addition, it is forgotten that the Fed pumped a lot of liquidity in for fear of Y2K that probably gave the NASDAQ its last 800 points. The anxiety–now forgotten–was strong & reasonably contributed to the Feds & the markets’ excess.

  15. Jordan commented on Jan 16

    I agree with the article.

    Another thing that is bothersome is the rampant intervention in the economy by both the government and the Federal Reserve. People dont realize it- but we are slwoly moving toward socialism. Today the media has a hard on for the Fed and if they will help or hurt the economy. In the real world, goods are produced and serviced by individuals and businesses. The more fed and gov intervention, the worse off we are in the long run.

  16. Ben commented on Jan 18

    Interesting comments on how American growth has been funded by the housing market and not real income gains. Based on the article from the economist. My feeling is that naysayers have always found some reason the american economy will bust, but it hasnt happened yet. As long as the markets and business are allowed to function freely the economy should be fine in the long run.

  17. Anonymous commented on Jan 18

    As they say in economics, in the long run… we’re all dead.

  18. Karlo.Org – Weblog commented on Jan 19

    The Economist: End of the Greenspan Era

    The Economist ran some extensive coverage last week of the outlook for the U.S. economy as Greenspan prepares to pack his bags and leave office on January 31st. Worth reading, particularly if you follow the markets and real estate. When…

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