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Pastimes : The Big Picture - Economics and Investing
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To: Sid Turtlman who wrote (616)7/6/1999 8:14:00 AM
From: Arik T.G.  Read Replies (1) of 686
 
Sid and all,

Five months have passed since the last on topic post, and here I am again pointing to the lack of, or maybe inverse correlation between the stock market and the economy.

True, the economy is still expanding at a very impressive rate, but let me quote from the latest Skeptical Investor (http://www.chebucto.ns.ca/~an388/current.html) that gives a very alarming interpretation to AG's speech:

<quote>
...unsustainable asset prices are now creating imbalances that threaten the central policy goal of maximum sustainable growth. Here are his own words:-

- the persistence of certain imbalances pose a risk to the longer-run outlook.

He goes on to say what (he believes) these imbalances are:-

- Despite its extraordinary acceleration, labor productivity has not grown fast enough to accommodate the increased demand for labor induced by the exceptional strength in demand for goods and services.

- That last development represents an unsustainable trend that has been produced by an inclination of households and firms to increase their spending on goods and services beyond the gains in their income from production.
<end quote>

In short: the current economical growth is unsustainable because it is driven by negative savings rate which is in turn propelled by the equity bubble.
Furthermore, the increasing trade deficit numbers show that the US economy is also carrying half the world on its back.
The conclusion- when the bubble pops, the economy will lose its main propulsion and the Fed would need an extremely clever plan to "address the consequences".

ATG
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