Hi Greg, RE: "is a LOT different than others I've survived "
I think the following article is interesting. From the CSCO thread:
To:Monty Lenard who wrote (50028)
From: GVTucker Thursday, Mar 15, 2001 7:47 AM
Monty, there's an interesting article in this week's Economist that fits a lot with your thinking. I'm not sure if it's on the pay side or the free side, but here's the link.
economist.com
Basically it states that this is unlike all the post WWII recessions or downturns because it isn't Fed driven, it is capital market driven. Thus, this cycle might resemble more the old US cycles of boom and bust, which were unfortunately a lot worse than the post war busts.
While I'll buy the argument that this is a capital market driven downturn, I'm not yet to the point that I buy the argument that this factor will exacerbate things.
AMERICA'S ECONOMY
What a peculiar cycle
Mar 8th 2001
>From The Economist print edition
For the past ten years America has enjoyed a remarkably prolonged economic expansion. Does the “new economy” have a new kind of business cycle?
AMERICA’S economic expansion is already by far the longest in its history. If the economy proves to have grown during the first quarter of this year—opinions are divided on whether it will—then the expansion is exactly ten years old. This means that it has lasted more than twice as long as the average expansion since the second world war. The average forecast for growth in America in 2001, according to The Economist’s poll of forecasters, has fallen from 3.5% in October to only 1.6% this month. Most economists
still believe that a “recession” (two consecutive quarters of contracting output) can be avoided. Others doubt it. In either case, most base their view on a particular understanding of business-cycle economics. Perhaps, in
light of recent developments, that understanding needs to change.
Most economists—including, it seems, Alan Greenspan, the chairman of the Federal Reserve—are assessing the current downturn as if, in key respects, this were a business cycle like any of the other nine that America has experienced since 1945. A main braking force, they believe, comes from the efforts businesses are making to shrink their inventories, which have grown because of slowing demand. If they are right, the interest-rate cuts that have already been made, together with others in the pipeline, should be a
swift, effective remedy. They will revive demand and narrow the gap between desired and actual inventories. The question is, does the cycle still work this way?
One observer who demands attention thinks not. Larry Summers, who has just retired as America’s Treasury secretary, has recently argued that America’s current cycle is fundamentally different from its post-war predecessors—though not because it is “new”. He argues that it has more in common with economic cycles as they worked before the second world war—or even, wait for it, with Japan’s during the late 1980s. That is a comparison he thought it unwise to draw while still in office. Mr Summers still hopes
that a recession will be avoided in America. But if he is right about how things now work, predictions based on orthodox business-cycle calculations are of little use.
In the Bible, seven years of plenty were followed by seven years of lean. Business cycles have never been that regular. Since 1945, expansions have varied in length from 12 months to the current 120 months and counting (assuming the economy has not already contracted). Recessions have ranged from six months to 16. The deepest modern recession was in 1973-75, when output dropped by 3.4% from peak to trough. The shallowest was in 1969-70, when output barely dipped (see table 1).
No two cycles are identical, yet the pattern during the past half-century has been reasonably familiar. After several years of expansion, aggregate demand outpaces supply. This causes inflation to accelerate. The Fed raises
interest rates, which squeezes demand. As inventories build up, firms cut production. The economy moves into recession. Next, the Fed cuts interest rates. Demand recovers, and so does output. The next expansion has begun. This sequence once prompted Paul Samuelson, one of the past century’s most
celebrated economists, to remark that American recessions come stamped “Made in Washington by the Federal Reserve”. This time, if the economy does move into recession, it will not be because of high interest rates.
Every recession during the past four decades has been preceded by a marked rise in inflation. During this expansion, inflation has remained relatively subdued. As a result, the Fed raised interest rates by only one percentage
point between the summer of 1998 and their peak in 2000; real interest rates actually fell slightly over that period. Demand is currently weakening not because of a sharp increase in interest rates, but because of factors such as weaker profits, falling share prices and falling investment.
The trouble with low inflation
Economists at Goldman Sachs, as opposed to stockmarket analysts at Goldman Sachs, have long been warning about the “dark side of the new business cycle”. Greater vigilance from central banks, industrial deregulation and
ample productive capacity (as a result of strong investment) have all helped to hold down inflation. The traditional trigger of recession, therefore, has not been pulled. Deregulation and new technology may also have made it easier for firms to avoid the build-up of unwanted staff and inventories, another precursor of traditional recessions. As a result, the expansion has endured for longer than usual.
The snag is that longer periods of expansion allow other sorts of imbalance—notably, personal and corporate debt, and overinvestment—to build up instead. Lulled into a sense of security, with expectations of everlasting prosperity, lenders relax their standards, and consumers and investors lose their inhibitions about borrowing. Lenders and borrowers alike take bigger risks, though it does not feel that way. Fuelled by credit and optimism about future profits, investment increases and asset prices soar. Success breeds success—but then, at some point, excess. Eventually, overinvestment reduces the return on capital and firms decide to cut their spending on capital. Consumers feel overburdened with debt and increase their saving. Optimism gives way to pessimism, and demand falls sharply. In the 19th and early 20th centuries, in fact, this was the typical business-cycle pattern.
The “investment boom and bust” model seems a far better way to understand the current cycle than the usual one based on rising inflation and higher interest rates. This has two important implications for policy.
First, if the American economy does now slide into recession, interest rates may be less effective than usual in reviving demand.
....(snip) |
