From: joedees@bellsouth.net
Date: Mon Sep 23 2002 - 13:24:45 MDT
On 23 Sep 2002 at 11:37, Michelle wrote:
> I've always been distractedly fascinated by the collective hopes and
> dreams that fuel the stock market and hold our economy precariously
> (as I see it) afloat. Does anyone have any well-formed insights into
> the memes at work? This article implies a meltdown of that fragile
> network, making my question seem more timely... the intro that came
> with it was a chicken-little-ish call to prepare for full scale Great
> Depression II!
>
There's actually a complexity-theory-based program cybermodel of
investment and disinvestiture that consistently outperforms the general
indices as well as the human prognosticators; it was created by those
chaos/complexity wizards at the Santa Fe Institute.
> *******************************************
>
> The Costs of Bursting Bubbles
>
> September 22, 2002
> By STEPHEN S. ROACH
>
> LONDON - A year after terrorism dealt a seemingly lethal blow to
> America, talk of resilience and economic recovery is in the air. The
> nation's inflation-adjusted gross domestic product has risen for four
> consecutive quarters following a mild downturn in the first nine
> months of 2001.
>
> While the estimated 3.2 percent growth rate over the past year is
> subdued when compared with the more vigorous rebounds of the past, the
> hope is that it's a down payment on bigger and better things to come.
>
> But while Sept. 11 was a defining event for America, it was not a
> defining event for the economy or the financial markets. That role
> belongs to the stock market bubble of the late 1990's that finally
> popped in March 2000. There was far more to the excesses of the
> 1990's, however, than an asset bubble. The bubble expanded high
> enough, and for long enough, to have infected the behavior of
> consumers and businesses alike.
>
> The equity bubble helped to create other bubbles - most notably in the
> housing market and in consumer spending. Their continued existence
> poses a serious threat to lasting expansion - and yet, puncturing them
> raises the grave risk of deflation. This suggests the economy will
> prove as challenging to America's political leadership as any other
> issue in the year ahead.
>
> There is good reason to believe that both the property and consumer
> bubbles will burst in the not-so-distant future. If they do, there is
> a realistic possibility that the United States, like Japan in the
> 1990's, will suffer a series of recessionary relapses over the next
> several years. Yet denial remains deep, just as it was when the Nasdaq
> composite index was lurching toward 5,000. Few want to believe that
> this economic expansion may be built on such a shaky foundation.
>
> The evidence in support of a housing bubble is compelling. The 27
> percent increase in inflation-adjusted American house prices since
> 1997 represents the sharpest five-year increase since 1945. This surge
> is about three times the increase in real housing rents over this
> period. (The divergence of home prices and rents, which usually move
> in tandem, is one measure of the speculative element of the housing
> market.) As their property values rise, hard-pressed consumers have
> been quick to extract purchasing power from their homes, taking
> advantage of low interest rates to refinance their property and use
> the savings to buy cars, furniture, appliances and other luxury goods.
> Thus the ever-expanding property bubble has become central to the
> culture of excess that is now driving the United States economy.
>
> The consumer-spending bubble will undoubtedly be the last to pop.
> Short of savings and long on debt, an aging American population must
> begin to come to grips with the looming realities of retirement. Yet
> it must now do so in an era of defined contribution pension plans
> whose performance has been battered by a devastating bear market in
> equities. We all know that Americans are addicted to shopping. Yet we
> also know that, if they want to retire with any kind of financial
> security, they must increase their savings and rein in their spending.
>
> What might cause the consumer-spending bubble to burst? It's hard to
> say, although several realistic possibilities come to mind - a spike
> in oil prices, a surge of white-collar layoffs or a collapse of the
> roperty bubble. Any one of those developments could send a wake-up
> call to the American consumer, thereby denying the United States and
> the broader global economy its main source of support.
>
> But it gets worse. The saga of the post-bubble United States economy
> doesn't stop with the bursting of the housing and consumer bubbles.
> Since these events are likely to occur when inflation is already
> running at a very low rate, they could push the United States into a
> period of outright deflation - a decline in the nation's overall level
> of prices for goods and services.
>
> This is a rare and worrisome condition for most economies. The impact
> of deflation would be most acute for wage earners and debtors. To stay
> profitable, companies would have to cut jobs or wages, eventually
> inhibiting consumer purchasing power. And the fixed obligations of
> indebtedness would have to be paid back in deflated dollars, squeezing
> overextended borrowers all the more.
>
> America is already on the brink of deflation. Our broadest price
> gauge, the G.D.P. price index, recorded just a 1 percent annualized
> increase in the second quarter of 2002. That's the lowest inflation
> rate in 48 years. Prices of goods and structures - covering nearly
> half the economy - are already contracting at an annual rate of 0.6
> percent. Only in services, where price statistics are notoriously
> unreliable, are prices still rising.
>
> The hows and whys of America's deflationary perils will long be
> debated. Two sources seem most likely. First, the bubble-induced boom
> of business capital spending led to an overhang of new information
> technologies and other forms of capital equipment in the late 1990's.
> The result was excess supply, a textbook recipe for lower prices.
>
> Also at work are the unmistakable effects of globalization. The
> modern-day American economy now has a record exposure to global
> competition. In the second quarter of 2002, America imported a third
> as many goods as it produced, well in excess of the 20 percent ratio
> prevailing at the onset of the last recovery in the early 1990's.
> Significantly, more and more of these goods are coming from highly
> competitive Asian producers who have much lower cost structures than
> their American counterparts.
>
> Moreover, with the exception of Korea, every major Asian economy is
> now in the throes of its own deflation. Consequently, courtesy of
> ever-expanding trade relations with Asia, America is now buying more
> and more from countries like China and Japan that are already in
> deflation. The growing share of these increasingly cheap foreign goods
> helps drive down prices of products made at home, thereby deepening
> deflationary pressures.
>
> History tells us that when major asset bubbles burst, deflation is
> often the result. That was true of the United States in the 1930's and
> Japan in the 1990's. Most are quick to claim that America is not Japan
> - that its more flexible, dynamic economy stands in sharp contrast to
> Japan's economic inertia. But the United States is already a lot
> closer to the deflationary edge than most concede - and it could go
> further.
>
> Deflationary risks can never be taken lightly in a
> post-bubble economy. Yet that's precisely what American investors and
> policy makers now seem to be doing. If the housing and consumer
> bubbles pop, then the risk of outright deflation will only increase.
> It's time to stop pretending this can't happen in the United States.
>
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