Art, What Gateway has done is recognize profits and revenues on what will eventually be writeoffs.
Cutting rates can indeed fuel a stock market speculative bubble, which we have seen. It is possible that it can also fuel a consumer spending spree, which I think the bulls were looking for and didn't really happen. Consumers increased spending but not that much. What it cannot do is increase productivity, profits, or real capital investment in a world economy that has overcapacity. For example, we are likely to see revenues up and profits down from such action, and already are seeing it.
Bank credit increased $100 billion in October. For a whopping 22% annualized rate of growth. Half of this went to fund stock purchases. Bank deposits only increased by $23 mm, which means they are extending credit far beyond their resources. Meanwhile, Latin America is falling apart, Russia sure hasn't gotten any better, Asian stock markets have improved but not their economies, and big US cos. are showing little if any profit growth.
Here are some of the many walls Greenspan's reckless rate cutting will run into: 1. A weaker dollar. 2. Larger spreads for lesser credits. 3. Lower savings. If you saved a negative amount at 5.5%, you are not going to save more at 4.75%. 4. Over time, the volatile productivity #s will continue to head south and may even hit negative growth. 5. Lower profits. 6. With a disastrous balance of payments, foreigners will desperately start seeking something other than the dollars, preferably something in less abundant supply. 7. And, the utltimate, a forced rebalancing of the economy. Somewhere along the line, we have to again start making things well that people want to buy other than bubble stocks. That requires something new on a consistent basis, and we are the world's most innovative country. But something new requires capital investment, which we do not have. Money has to come out of fluff investment in non-companies producing air and has to be shifted to real companies making something of value. There also has to be demand. Unlike what bulls say, supply of good stuff does not make demand. And demand only increases when folks are doing well. Most of the world is in recession/depression. They will recover, but not until we stop siphoning off all the world's speculative capital. This will happen and it will not be pretty for the stock market or the corporate bond market. Treasuries could go either way, though I expect the direction to be higher rates. MB |
