Wednesday, October 08, 2003

The Expansion Conundrum

For those of you who feel the economy Is doing fine, check this out:

Max Fraad Wolff is a Doctoral Candidate in Economics at the University of Massachusetts, Amherst,

Over recent months the skeptics among us have stood back in wonder and disbelief as indexes soared closer and closer to the sun. Waxen wings were deemed unmentionable as most were transfixed by the beauty and relief of soaring flight. Sure, they are many wise voices mentioning the inevitability of rapid decent if and when heat triumphs over structural lack of integrity.

What can we make out through the haze of uncertainty shrouding the current “economic expansion?” We know, if we believe the, Census Bureau, that it teeters on wobbly legs. This news came in the form of declining median household income of 1.1%, approximately $500 per year between 2001 and 2002. This occurred alongside rising poverty, severity and rate, and a first world-leading rate of child poverty. Not to worry, spending increased nonetheless. If that was not enough, we watched global currency policy coordination slip and drag the greenback along with it. This is less than shocking given rising protectionism and declining economic co-prosperity among leading blocs. What does all this indicate?

Consumption drags our economic sled. At more than 70% of GDP its growth is clearly of paramount import. The income needed to sustain recent levels of aggregate economic activity has yet to emerge from labor earnings. This has been papered over by feverish optimism, debt growth and asset income. The great equity boom (1982-2000) kept many heads above water. When equity speculation gave out, housing and bond market surges picked up some of the slack, but not enough to prevent real pain. These secondary bubbles acted to limit the severity and length of the initial economic decline. This substitute source of wealth was fueled by 13 Federal Reserve System rate cuts, global lending and the reallocation of resources toward housing and bonds. To the extent that this worked it required global cooperation, optimism and wave after wave of debt provision. Perhaps this goes some way toward explaining why the technically measured recession was short lived yet, economic pain and suffering persists.

The debt crutch has proved essential to the patient who cannot stand without it. Consumption has, and continues to run, well ahead of earnings. This was facilitated by the emergence of staggering indebtedness, particularly in the period since 1990 when private debt more than doubled. What made this possible? Strong dollars and massive external imbalances. The strong dollar policy was adhered to by trading partners with an avid demand for US assets. They gladly loaned Yen, Pounds, Swiss Francs, Yuan and would-be Euros. After all they had to if we were to keep buying their exports. They are loaning us back our money. Even this far into the “recovery,” debt and asset appreciation strain to save the day. Markets react euphorically to the lack of depth and duration of pain. {article continued link}

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