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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Henry Volquardsen who wrote (953)	8/20/1999 12:32:00 PM
From: Worswick	Read Replies (1) \| Respond to of 2794

Well, hello Henry and everyone. I have been off in the mountains of the west... on one of those violently active vacations... that needs a vacation from a vacation. I have to report: That the bears in the Sierra and Colorado are very hungry. They favor - oddly - Koolaid and Gator aid to most other people food in backpacker's Mountainsmith packs and are able to get up 20 foot bear caches to get at it. I don't know if you saw the Stratfor "write up" on China and Japan the future. The starkest thing I have ever read on the future of Asia... in 40 years of following Asia. We are now in the giggle period of investment in Asia... with the charts rising upwards... and the giddy intensity of a would-be-suicide reaching the upper stories of a Gothic cathdral. This appeared today in The Australian. Best to you and hope you are thriving, For Private Use Only The US economy in Wonderland By Gerard Jackson No. 130, 16-22 Aug. 1999 I had intended to write a very different article on the American economy but critical questions about Austrian analysis have forced me to redirect my efforts back to the monetary activities of the Federal Reserve. I firmly believe that the vast majority of economic commentators behave as if the American economy were in some Alice-In-Wonderland state. Stocks have taken a dive, the demand for labour is still rising, savings go negative, productivity declines and the current account worsens etc. What gives here? Fortunately, (or should I say unfortunately) the situation is not unique nor is it an enigma. Last week I commented on the Fed's irresponsible monetary policy. I shall do so again in the hope of shedding further light on America's economic trends. Dr Frank Shostak's Have we learnt the lesson of the Great Depression?1 reinforces my views. In less than 10 years M3 rose by about 200 per cent. Put another way, the Fed has pumped masses of credit into the economy. So what? This is all too frequently the response of orthodox economists. The answer should be self-evident. I have been told that during this decade America underwent a massive investment surge. Now hang on a minute. Household savings undergo a steep fall and then become negative and from this the US gets an investment surge while simultaneously undergoing a consumption boom? How curious, as Alice would have said. But corporate profits fuelled the investment surge, is the suggestion. Corporate profits could not have been large enough to underwrite the massive investment boom that some seem to think America has enjoyed. One only has to compare them with the size of the economy to realise that fact. What about foreign investment? Still insufficient. So where did this investment come from? No where, is the answer. If America was enjoying a record investment boom it must have had a savings boom. But personal savings are now negative, meaning that most people are borrowing. But borrowing from whom? In other words, if no one is saving how come everyone is borrowing? This is an important question because it brings us right back to investment and consumption. Growth is forgone consumption which in turn equals investment which equals savings2. No savings, no growth. So how can a country with very little savings undergo an 'investment' boom. Or as others might put it: how can investment exceed savings? (A question that early classical economists concerned themselves with). The answer, of course, is that it can't. But, and it is a big but, credit expansion can make it appear as if this miracle of "turning stone bread into bread", as Keynes once called it3, can be successfully performed. The reality is very different. When investment exceeds savings one has inflation, irrespective of how the CPI is moving. The banking system uses the fractional reserve system to inflate the number of deposits and hence artificially lower the rate of interest. Presto! New savings, or so it appears, are created at the stroke of pen. Firms are now deceived into thinking more savings have become available and so embark on investment plans that cannot be supported by the real pool of savings. Let us say that savings and investment equal 100. The central bank then creates additional deposits that raise investment to 120, even though real savings remain unchanged. As genuine savings basically amount to redirecting resources from consumption to investment it is quite clear that the bank-inspired investments are not sustainable. Nevertheless, in monetary terms investment has leapt by 20 per cent. This is what has been happening in America. (The same thing happened in Asia on a massive scale). Eventually the true savings rate redirects resources back to consumption signalling the end of the 'investment'. All of those additional 'investments' are now revealed as malinvestments. The longer interest rates are held below market rates more and more malinvestments will be accumulated. In the meantime, the additional spending that the central bank created through credit expansion translates into a consumer boom. This is the stage America has now reached. It should now be clear that there is no paradox of negative savings and positive investment. As the boom moves through its final stage the phenomenon of falling productivity tends to emerge. The demand for labour continues to defy economic gravity even as its output falls, caused by more marginal workers being employed at full if not raising wage rates while marginal activities expand their output4. The inevitable result is depression. As for credit expansion, it is the Keynsians' equivalent of smoke and mirrors. A cheap monetary trick with the most dire consequences. Note: It has been put to me that corporate profits and the demand for labour prove that the American economy is in a healthy state. Is that so? In 1929 corporate profits were at an all time high in real terms, as were dividend payments, while unemployment stood at 0.9 per cent of the workforce. Within a few months America had sank into the longest and deepest depression in its history. ?..the US economy is severely out of balance. The reason for this is the prolonged loose monetary policies of the US central bank. The federal funds rate which stood at 17.6 per cent in April 1980 fell to the current level of 5 per cent. At one stage in 1992 the rate stood at 3 per cent. The money stock M3 climbed from $1824 billion in January 1980 to $6152 billion at the end of June 1999. In a time span of less than a decade it grew by over 200 per cent. Another indicator of the magnitude of monetary pumping is the Federal debt held by the US central bank. It jumped to $465 billion in the first quarter of 1999 from $117 billion in the first quarter 1980, a 300 per cent rise. Obviously the sheer dimension of the monetary pumping and the accompanied artificial lowering of interest rates has caused a massive misallocation of resources which ultimately will culminate in a severe economic slump.