Goldman Sachs' Bill Dudley Warns Of 'Bubble Trouble'
WASHINGTON -(Dow Jones)- Bill Dudley, chief U.S. economist of Goldman, Sachs & Co ., said Tuesday that "we are becoming more pessimistic out the economic outlook."
In an essay titled "Bubble Trouble," Dudley said this pessimism mainly reflects the weakness of the U.S. equity market. "Never in the post-World War II period has the stock market been this weak during this stage of the business cycle," he said.
Saying the market's performance at this stage of the cycle compared with the worst previous post-World War II performance confirms that the deflating bubble was big, not small, Dudley added, "It also implies that the impact of the bubble's demise is likely to be more powerful than generally anticipated."
Goldman Sachs economists Monday revised their call for the start of Federal Reserve tightening from late this fall to the second half of 2003.
Dudley said that when a bubble is being created, most of the ripple effects are favorable and act to sustain and extend the boom. But all these forces move in the opposite direction when the bubble bursts, he said.
"The weakness of the equity market hurts confidence and spending, reduces the demand of foreign investors for dollar-denominated assets thereby weakening the currency, cuts tax revenue, and so on," the economist said. "The downward dynamic becomes self-reinforcing just as the upward dynamic created the original overshoot in investment and expectations."
He said it takes a long time for all the negative consequences associated with the bubble's demise to become apparent, and noted in this context that expectations also adjust slowly.
Dudley said his analysis doesn't mean the U.S. economy must sink back into a recession, but does suggest that "subpar growth, low interest rates and financial asset returns are likely to be the watchword until the bubble dynamics play themselves out." |
