Accelerated Forecasts for an Accelerated Economy: Caroline Baum
Here's some views on the possible future scenarios for the FRB containing the recession, which some doubt exists, and others see writ large in the Great Lakes area and the telecom sector, big time.
quote.bloomberg.com
03/01 17:10
Accelerated Forecasts for an Accelerated Economy: Caroline Baum
By Caroline Baum
New York, March 1 (Bloomberg) -- The recession is still young, or if you're an optimist, still in doubt. That hasn't discouraged some analysts from predicting the Federal Reserve lacks enough firepower to get the economy moving again.
Maybe that's one of the side-effects of the New Economy. Information travels quickly. Companies adjust to new information with the speed of a Pentium 4. It's only natural that analysts would rush their dire forecasts into circulation before the Fed has even begun to fight.
I didn't expect to activate my ``this time is different'' file for another few months, but the first entry arrived yesterday. In a fax to clients entitled ``We Are in a Recession. Deal With It,'' Bridgewater Associates, a money management firm in Westport, Connecticut, wrote the following:
``The markets are pricing in a V-shaped recovery in the U.S., with the Fed only needing to ease a few more times. Short-term interest rates are priced to bottom at 4.5 percent. Since World War II, no recession on record has subsided with so little easing. We doubt this one will. In fact, the risk in our mind is that the Fed may not have enough ammunition to get the economy turned around.''
In other words, with 550 basis points in the Fed's monetary quiver, Bridgewater is handicapping (thank God without giving odds) the risk that interest rates won't work.
Rerun
Haven't we been down this road before? At least the presumed impotence of interest rates cuts both ways. One year ago, analysts were claiming that higher interest rates wouldn't work to slow economic growth. The reasons went from the sublime to the ridiculous. For example, since start-up companies don't borrow money -- they have access to venture capital -- higher interest rates aren't going to slow demand.
A close inspection of the ``tech-wreck'' landscape should serve to upend that na‹ve (at best) and stupid (at worst) idea, which ignores the channels through which interest rates affect the macro economy.
All right, you say. It's one thing on the way up, when interest rates can go to infinity. There is some price of credit at which businesses and consumers will decide against borrowing, investing and spending.
On the way down, however, nominal interest rates can't go below zero. So there is a finite store of ammo.
That's true when it comes to the interest rate. But even at zero, the central bank can increase the money stock -- a ``quantitative easing,'' which is the only thing left when rates hit zero.
Excess Worry
Why opine (early and often) about the Fed's ineffective effort to stem the slowdown or recession and declare interest rates ineffective when the rate cycle is only two months old?
``Just because we had the Great Depression and the Bank of Japan hasn't gotten its economy going is no reason to assume that the Fed can't ignite a recovery,'' says Sandy Batten, senior analyst at CDC Investment Management Company.
Bridgewater analyst Greg Jensen says the risk interest rates won't do the trick has to do with the ``over-investment cycle and the problem with telecoms and debt.''
``We've knocked out the engine of the bubble, which was also the source of the productivity miracle,'' Jensen says. ``The problems are so fundamental, so deep, the debt so large that there won't be any new investment for a long time.''
The Fed can't do anything about over-investment; the economy has to grow into the excess capacity and absorb the superfluous capital stock.
`Malinvestment'
The only thing the Fed can do about excess supply is stimulate aggregate demand in the hope of working it off as quickly as possible.
Followers of the Austrian School of Economics believe that boom follows bust as night follows day, and there isn't a lot that the central bank can do about it. ``Malinvestment,'' as they called it, or inefficient capital investment, results when the central bank holds market rates too low, leading to an expansion in money and credit.
``In the Austrian view, an overly expansive credit cycle leads to malinvestment in capital goods areas,'' says economist Larry Kudlow. ``Once it plays itself out and the bubble bursts, the central bank can pump out more money and credit, but all it will do is cause inflation to go up. It might even hide the over- investment.''
Unnatural Rate
``The Austrians, such as Joseph Schumpeter, got the analysis right, but somehow they lost faith in capitalism and were characterized by an innate lack of optimism,'' says John Ryding, senior economist at Bear, Stearns & Co. ``There's almost a Marxian thread: they were afraid creative destruction would drive the economy into government hands.''
Ryding has more faith that a market economy can work through the excesses, especially if the Fed stops holding short-term rates above the unobservable ``natural'' rate. Unlike Asia, whose problem was too many office buildings and no one to fill them, the U.S. has over-invested in computers and information technology.
A computer may be a capital good, but a consumer's decision to purchase one is influenced by interest rates and prices, over which the Fed has control.
``If we invested in too much telecom equipment, and traffic on the Internet is doubling every 100 days or so, that will absorb it,'' Ryding says.
Let's hope.
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This fellow Ryding, has of course has taken hook, line and sinker on the myth that the traffic on the Internet is doubling every 100 days, the poppycock pollyanna version of reality that Gilder and other touts spread to pump the crowd. Here's something more akin to reality:
research.att.com
This version includes a lot more detailed analysis:
research.att.com
Conclusion? The telecom sector is akin to the S&L sector in the late '80's, suffering from gross over-investment and will see an exteded period of consolidation. Far beyond the horizons of any telecom bull, or incompetent and/or venal Wall Street analyst.
Best, Ray :) |
