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Strategies & Market Trends : Drillbits & Bottlerockets -- Ignore unavailable to you. Want to Upgrade?

To: Jorj X Mckie who wrote (7209)	4/4/2001 3:23:12 PM
From: MulhollandDrive	Read Replies (1) \| Respond to of 15481

I've been on record for a long time stating my belief that the accelerated spending going into Y2K and excess liquidity in monetary policy were fuel tech bubble. But I also think the macro economic issues such as high energy costs, over-regulation, over taxation, and unnecessary rate hikes have created an environment where monies that should be used for consumer and corporate spending is being siphoned off. I think recessions are made of this. Do you disagree with any of this? Causes of the Slowdown Today’s slowdown has no single cause. These are the major culprits: Fed rate hikes. The Federal Reserve began raising interest rates in June 1999 with little sign of inflation. Instead, the central bank appeared to be reacting to high growth and to a buoyant stock market. The real, after-inflation, rate on federal funds, the overnight loans that the Fed targets, reached a peak of 5.1 percent in October 2000, the highest rate since September 1989 – a year before the last recession – constricting the flow of capital. Tripling of oil prices. Eight of the nine post-World War II recessions, including the last four, have been preceded by an oil shock. It is the rising oil price plus tighter Fed policy that tends to cause recessions, and this double whammy is present today as well. The drag of high taxes and a gigantic surplus. Federal tax revenues as a percentage of GDP last year were 20.6 percent – a level exceeded only twice in U.S. history, in 1944 and 1945. The surplus itself is a reflection of these high revenues flowing into Washington. Cash that could have been used for consumption or new private investment is instead being used to retire the bonds of investors who typically use the proceeds to buy more bonds. Retiring debt – especially with debt at such low levels (about one-third of GDP) is no way to spur an economy. (I respectfully refer the committee to my article, “The Joy of Debt” in the March 26, 2001, issue of The Weekly Standard.) The end of the high-tech “enterprise zone.” The past year, especially, has seen increased government intervention in the economy, especially in the high-technology sector and federal and state mismanagement of the planned deregulation of telecommunications. A year ago, I argued that this change in political approach to high tech threatened a “regulatory recession.” We may be in it. It is no coincidence that high-tech stock prices began their 60 percent slide at almost the same moment that the Justice Department asked a federal court to break up Microsoft Corp., the software company that is credited with igniting the computer revolution in the early 1980s. While the antitrust suit against Microsoft was instigated by its competitors, the result has been to damage the capital-raising ability of nearly every high-tech firm – and to encourage further interventions at federal, state and local levels, threatening to end the status of high tech as a kind of “enterprise zone,” free from high taxes and onerous regulation. In telecommunications, the persistence of monopoly power in local markets has greatly deterred the rollout of broadband technology and deferred indefinitely much of the promise of the Internet.