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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (23995)	2/21/2005 6:33:43 AM
From: shades	Read Replies (1) \| Respond to of 116555

Is having HIGH CASH a good economic indicator for future growth or a massive restructuring? morganstanley.com Japan’s first recession was dominated by a severe contraction in business capital spending; the fall in the sector was more than 80% larger than the cumulative decline in real GDP over the 1991–93 interval. Similarly, America’s first post-bubble recession, as well as the early stages of the recovery from that downturn, was dominated by a precipitous decline in capital spending. The corollary of that observation is that consumers are usually spared from the first wave of post-bubble aftershocks. That was the case in Japan in the early 1990s and has also been the case so far in the US. But that initial resilience may be deceiving. The post-bubble purging of excess capacity invariably leads to a wrenching wave of restructuring, which then deals a sharp blow to job and income security that eventually imparts a downward bias to consumer demand. That trend kicked in with a vengeance in Japan’s second post-bubble recession; in the downturn of 1997–99, the sharp contraction of real consumer spending accounted for fully 72% of the cumulative decline in real GDP. institutionaladvisors.com JAY TAYLOR INTERVIEW.pdf TAYLOR: Corporations have had great profits in 2004, and they are building up a huge amount of cash or they are buying their own shares. But they don’t seem to be borrowing much or using the cash they have to invest in plant and equipment. That, along with the fact that corporate insiders have been selling their own shares en masse, suggests to me that the folks who manage corporate America are not overly optimistic about U.S. business prospects, even though profits have been so high. Would you agree and do you see any long-term significance of the cash buildup of American corporations? HOYE: Cash is at a 35-year high. You have had a huge buildup of plant and equipment during the ’90s boom. One of the features of past post-bubble contractions is that corporations with cash keep it because they get concerned about their AA or even AAA credit rating. And then at the same time, banks will only lend to AAA accounts. So corporations stop spending, and banks stop lending. It’s classic. TAYLOR: So the Fed can’t expand the money supply when that happens? HOYE: Yes. Central banks can increase reserves but if corporations don’t borrow, that’s it, game over. That’s why Keynes and all that bunch just went crazy about people hoarding money in the 1930s. Keynes said that if you saved a schilling, you put a man out of work. So now in the U.S. and Canada where we have adopted the Keynesian model, we are now down to virtually a zero savings rate. So if Keynes was right we should have 100% employment. He was a flaming idiot.