Jolly Misperceptions
"...Recent reports about the U.S. economy’s recovery have turned from optimistic to outright euphoric. But disputing the existence of a genuine U.S. economic recovery, we focus on inherent key ingredients and conditions: Job creation, income growth, investment spending, corporate balance sheets and profits. They continue to display familiar weakness. No recovery will seem real and lasting until employment and income figures strongly improve..."
Dr Kurt Richebächer
SourceCannes, France - Recent reports about the U.S. economy's recovery have turned from optimistic to outright euphoric. Conventional projections for real GDP growth in the third quarter have been jacked up to the range of 5-7% at annual rate [and most recently, heralded at 8.2%]. Considering that this growth rate comes from 1.4% in the first quarter, this acceleration certainly looks highly impressive.
The general, conventional argument is that, beginning with the second quarter, spending both by consumers and businesses has been surging. As to that quarter, we can only repeat what we have always emphasized: it is statistical spin. Virtually all of the reported acceleration in real economic growth has resulted from sharply lower price deflators, expressed in chained dollars.
But in the real world, all money paid and received is in current dollars. In these dollars, being the dollars that reflect actual sales growth and that also make the profits, economic activity has just edged forward.
As to the third quarter, we read in BusinessWeek that splendid third-quarter profits have "investors dancing in the aisles." Considering the dismal profit performance of the past several years, we fully understand that any improvement, however modest, causes great cheers. But we do not see the rebound that is normal and necessary for a sustained economic recovery. Though earnings are up on average, the results vary tremendously between sectors and firms. From the same report, we learn that profits of industrials in the S&P 500 were down 16% against the same quarter last year, even though the dollar's decline boosted most multi-national earnings.
Disputing the existence of a genuine U.S. economic recovery, we focus on inherent key ingredients and conditions: Job creation, income growth, investment spending, corporate balance sheets and profits. They continue to display familiar weakness. No recovery will seem real and lasting until employment and income figures strongly improve.
Measured by quantity of money and credit growth, the Greenspan Fed's monetary policy is definitely by far the most successful in history. During the two-and-a-half years from the start of the recession-year 2001 to mid-2003, total outstanding credit skyrocketed by $5.7 trillion, of which $3.4 trillion was nonfinancial and $2.3 financial.
But measuring the traction of this fantastic money and credit creation on the economy, Mr. Greenspan's policy was the most ineffective in history, resulting during the same period in merely $823 billion nominal GDP growth. It took about seven dollars of new debt to generate one dollar of GDP growth. It was the highest debt-to-GDP ratio ever, and what's more, it keeps getting worse.
For comparison: During the two-and-a-half years from the start of the recession-year 1991 to mid-1993, total credit grew $1.8 trillion, of which $1.3 trillion was nonfinancial and $0.5 trillion financial. In the wake of this modest credit expansion, nominal GDP grew $793.5 billion. For each dollar added to GDP, there were only 2.2 dollars added to total indebtedness.
This certainly signifies a tremendous loss of traction for credit growth between these two periods that essentially raises the question of its causes. Policymakers and economists, in any case, discard the runaway debt growth as harmless because it has been accompanied by still bigger gains in market valuations of stocks and houses. Taking them into account, consumer net worth - that is, the value of assets minus debts - has effectively been rising.
Thinking this over, the first thing to appreciate is that this jolly perception of increasing asset prices as wealth creation is a complete novelty in economics. The old economists would have laughed at the idea. For centuries, wealth creation meant only one thing to economists as well as ordinary people around the world: creation of productive, income-creating capital assets such as buildings, plant and equipment through saving and new investment.
Even in the United States, as a matter of fact, the use of this new popular label for rising asset prices is of recent origin. It was definitely not yet customary in the 1980s. When Japan's real estate and stock prices exploded in the late 1980s, the Japanese policymakers frankly referred to it as an asset bubble and a bubble economy. Manifestly, the two expressions are not to the liking of American policymakers and economists. Their preference is to call it wealth creation.
Many times before we have expressed the same reservations about the U.S. economy's "recovery," and especially its reported performance in real GDP, showing a sharp acceleration. To us, these GDP numbers are flatly inconsistent with the disastrous employment numbers, which definitely are the far more reliable statistic. The compelling conclusion for us is that the trumpeted recovery is not a genuine recovery.
Respected International Banker, Economist and Author
Dr. Kurt Richebächer's articles appear regularly in The Wall Street Journal, Barron's, the US edition of The Fleet Street Letter and other respected financial publications. France's Le Figaro magazine did a feature story on him as 'the man who predicted the Asian crisis.'