>>You see inflation because you live in the (Euro)land of negative productivity<< - means the better one works, the greater the losses, I assume. Your math is usually better than that.
Re US: Where's profits, AC? Where's CapEx?
Re "US manufacturing labor productivity in 1Q '02 was (+)8.6%" (probably un-dehedonized)
from
prudentbear.com
Question: “It appears today that the U.S. recession that began in March 2001 will have been the mildest in terms of GDP loss of any in the U.S. for the past 50 years. Despite two consecutive quarters of positive GDP growth, however, doubts remain with regard to the expansion’s strength and sustainability. Nonetheless, some investors and analysts are worried that inflation and currency risk have been underestimated in light of the impressive combination of the very low Fed funds rate and powerful fiscal expansion. Finally, admiration is universal for the striking U.S. productivity surge, but there is substantial uncertainty about the prospective case of productivity. How do you assess the U.S. economy’s prospects and the attendant risks?
Greenspan: “...in order to get a sense of where the U.S. economy is going, I think it is first important for us to understand how we managed to get through what was an extraordinary period the last 18 months and, as you put it, end up with the most narrow recession in 50 years and, indeed, there are obviously some people who are quibbling as to whether there was in fact a recession... What is important is that the United States economy exhibited a remarkable degree of flexibility and resiliency in the face of the types of shocks that in past history would have upended the economy, breached the fabric of confidence of both business and consumers and set us tumbling into a recession far deeper than anything we have obviously experienced in the most recent period.
The dramatic decline in stock prices in the United States starting in the early months of 2000 would ordinarily have had a very marked effect in the United States, more sensitive to asset value changes, as best we can judge, than our other economies with the possible exception of the sensitivity of the British economy to the residential capital gains issue. Yet, we experienced that with some difficulties, but essentially a reflection of the sharp declines in the rate of growth. And then, of course, we had the tragic events of September 11th, which for a very short period of time induced a very sharp contraction in economic activity in the United States. We came back really quite dramatically and, indeed, in the aggregate figures, which we publish on a quarterly basis, a goodly part of that change was obscured.
The question I think we have to ask ourselves is, how is it possible? What happened and what does that portend about the future of the American economic structure? First, we obviously have to ask and hopefully answer why were we able to do it when we were not in comparable periods in the past able of doing so? One clearly is the dramatic improvement in information technology, which I have argued elsewhere has been an extraordinarily important element in creating real-time reaction to economic imbalances. There is very little evidence that we as economic forecasters have improved our capacity to forecast very well, or very much better. But we are far more capable in the business sector of identifying and responding to economic imbalances before they deepen and fester into very difficult problems. And as a consequence of that, we are getting a degree of flexibility when shocks hit us, which we did not have previously.
The technology and, indeed, the deregulation that has occurred in the United States in the last twenty years, especially in the financial area, have also been a major contributor to the flexibility of the system. Indeed, it’s hard to remember the notions about derivatives, which were fairly negative as recently as a year ago. Yet, the experiences that we have had with the proliferation of derivatives, which, as you know, on the latest worldwide reading at notional values of $100 trillion. It means somebody found these things very useful. And indeed, we found looking at the pattern of the dispersion of risks, especially from financial intermediaries, during the period such as this, we ran into remarkably few dislocations. Indeed, even though credit derivatives are still a small element within the system, we are clearly aware of the importance that they have been in essentially dispersing risks beyond the initiator of the risk-taking. And we have had a really quite remarkable experience, especially in Europe, where there were these extraordinarily large loans that were made to telecommunications companies - that in excess of $1 trillion over a period of a couple or three years – and while a number of them were in very serious difficulty and, indeed, the carnage is all over the place. But they did not manage to undermine a major financial institution.
And the reason is that the advent of collateralized debt obligations and credit derivatives, basically enabled a dispersion of risks to those who did not have highly leveraged balance sheets and were able to absorb the losses in a materially easier way than those who in the past have found their capital under very severe strain. So that the system is clearly improving and I think in a permanent way. Once you have knowledge – once you have information technology – you cannot reverse it. So our capacity to respond to these things has materially improved. Now, I’m not going to say - because there are a lot of other issues involved which relate to the question of whether the United States is permanently in a more flexible and a posture for which we are not subject to shocks in the extent that we had been in [other] periods. There are other elements which are working in the other direction, and I often discuss them, namely the question of major change toward conceptualization of GDP which, without getting into the details, creates a higher degree of leverage than otherwise would be the case and makes the system subject to mistakes more readily than in the past.
How this all unwinds I am not sure, but one of the things I am reasonable sure of is that the very considerable improvement in productivity we have seen in the last, especially, six months - and there are questions about the data which I don’t think are a real problem - something fundamental is going on in our system which is remarkably improved: The underlying productivity growth in the economy, and that is going to be a materially positive factor for long-term growth.”
Well, I am not going to do my usual and ramble on for pages, but instead will try to keep my “Counterpoint” concise. In short, I don’t see how it would be possible for Alan Greenspan to adopt more flawed analysis, although we all should hope he is proved correct. The resiliency of the U.S. economy is not due to “something fundamental going on in our system, which is fundamentally improved.” We surely don’t buy into the productivity story, not for a consumption and import-based de-industrialized “service sector” economy – no way. And we certainly don’t accept that there has been some miraculous fundamental improvement over the past six months; not with profits and capital spending in virtual collapse, while surging government spending, a Bubbling housing sector, and a strong “service” sector have been responsible for increased “output.” We are similarly no fans of New Age notions of the “conceptualization of GDP.” (For one, it reminds us too much of Enron, Tyco, and the like). When this long period of Credit excess wanes, we will be left facing the harsh reality that a significant amount of “output” that finds its way into GDP and productivity calculations is tied specifically to financial excess and consequent asset inflation. Our incredibly “productive” service sector (real estate agents, appraisers, securities brokers, insurance salespeople, investment professionals, attorneys, accountants, consultants, media participants, athletes and entertainers, chefs, auto and retail salespersons, etc.) will not appear so impressive with the bursting of the Credit Bubble. We tend to believe the issue is more accurately described in terms of the “quantification in GDP of inflationary Credit creation.” |
