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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Mike M2 who wrote (68048)	9/22/1999 1:33:00 PM
From: pater tenebrarum	Respond to of 132070

that is right of course...i'm always surprised at how many people swallow this new era crap. they should know better, we have seen all of this before. regards, hb

To: Mike M2 who wrote (68048)	9/22/1999 2:18:00 PM
From: Mike M2	Respond to of 132070

To all, excellent article HO HO HO gold-eagle.com The real crux here though is that profit growth has slowed, if not stagnated, since the middle of 1997 and returns on equity have been maintained largely through leveraging the balance sheet, issuing relatively cheap debt to retire equity. This has been effected not so much to secure long term capital at favourable rates, but to make the quarterly numbers and thus maintain favourable stock price momentum. Nothing to do with CEO stock option packages, you understand. The scale of this trend can be seen from the flow-of-funds accounts; non-financial businesses retired $305 billion of equity and issued $418 billion in debt, effectively raising gearing $723 billion, or a twelfth of GDP, in the last four quarters, a total which has hit over $2 trio in the bubble years. So whence other have the phenomenal stock returns originated? Multiple expansion, or, in plain English, a heady combination of the inflation of the present price attached to the future value of earnings and the estimated trajectory of those earnings. It is all a long way from the cautionary words of Graham and Dodd who asserted in their investment bible, Security Analysis, ' Value based on a satisfactory trend must be wholly arbitrary and hence speculative, and hence inevitably subject to exaggeration and later collapse.' Yet here is the paradox: the unprecedented rise in the multiples, both of earnings and book value, suggests, in isolation at least, a decline in time preference, ie a greater willingness to forego consumption today for the command over resources which will allow consumption at some later date. How then are we to reconcile this with an economy which has seen the personal savings rate decline from 6% of income when Greenspan assumed the chair to a negative 1.4% today? This suggests an extreme degree of time preference ? or in less anodyne language - a voracious demand for the satisfaction of immediate wants such that the 'originary' rate of interest (the intrinsic discount rate applied to future satiety) is in fact infinite! Less academically, America is a nation which has so outstripped its own productive capacity that it has seen the current account balance deteriorate from a deficit of around 1.5% of national product just four short years ago to 3.7% today. It is a nation where household debt has risen from two thirds of income in 1987 to over 82% today, where the level of mortgage debt as a proportion of income has been raised to a new height of 62% from 38%, where consumer credit is well over a trillion dollars, where over a third of 'savers' borrow against their 401(k) retirement nest-egg. Americans are consuming capital on a vast scale. They have become a nation of Tomorrow Eaters. So how do we square the circle? In part the strong dollar policy of the Rubin years sucked in capital from abroad. The four quarters to June alone have seen $573 billion flood into the States on the capital account, with less than half that being recycled, such that the net inflow of $322 billion has more than covered the $208 billion deficit on goods and services racked up in the period. So far, so good. If Americans collectively wish to rearrange their balance sheets in the pursuit of the greatest degree of the satisfaction of their wants, that is their privilege. The darker side is the debt explosion and here we can blame none other than the Monetary Messiah himself, Alan Greenspan. Like his predecessor in the Twenties, Ben Strong, Greenspan has not noticed that his much-vaunted supply-side revolution should have depressed prices throughout the period. The fact that the rate of increase has merely slowed shows that the supply of money, broadly defined, has been too rapid and thus masked this. Furthermore, he has been so pre-occupied with international events since his own salutary encounter with the mild debt deflation of the early 90s domestic 'credit crunch' that - staggering from Mexico to Thailand to Korea to Russia and back to Brazil, pouring in liquidity at every juncture - he has since foresworn the hard decisions necessary to restore monetary order at home. In the last four years, commercial paper outstanding in the US has doubled while commercial bank assets as a percentage of GDP have burgeoned from roughly 55% to over 60%. Repurchase agreements (a subtle way to monetize government debt if there ever was one - cf the German Reichsbank in the Great War) have increased 50% i