[A-List] End of the Business Cycle?
Henry C.K. Liu
hliu at mindspring.com
Tue Dec 17 21:57:48 MST 2002
This was posted by me to PKT on February 11, 2000 when the Dwo was
heading towards 12000. A few days after, the equity markets started to
fall and has since lost $8 trillion in market capitalization, the entire
face value of M3 money supply in 2000, and 80% of GDP. E-commerce is
stuck in the mud.
End of the Business Cycle?
11 February 2000 17:50 UTC
Usually, when confidence crosses over to hubris, disaster is not far
The Clinton Administration's annual economic report for 2000 claims that
the longest economic expansion in US history can continue
"indefinitely", as long as "we stick to sound policy", asserts Chairman
Martin Baily, according the to WSJ. The NY Time's report differs
somewhat by quoting Baily as saying: "stick to fiscal policy". Putting
the two papers together, one get the sense that the Administration
thinks current fiscal policy is sound policy.
I trust PK economists may have something to say about that.
Economics scholars, unlike those of us mortals who are unfortunate
enough to have to float in the daily turbulence of the market, tend to
focus on longterm trends and their congruence to economic theories.
Yet, longterm is increasingly being re-defined. In the technology and
comunication sectors, longterm evokes periods lasting less than 5 years.
Two factors have been identified by the report as responsible for the
"good" news: technology driven productivity and trade globalization.
Even with somewhat slower productivity and spending growth, the CEA
believes the economy can continue to expand. As for the huge trade
deficit, the CEA expects global recovery to boost demand for US
exports. Yet the US officially pursues a strong dollar policy. The
optimism on e-commerce has yet to be substantiated by the results of the
current federal data-gathering initiative. B to B portion of e-commerce
is expected to rise to $1.3 trillion by 2003 from $43 billion in 1998.
CEA does not address the question whether this a merely a shift of
commerce or a real growth. Does the possibility exist for technology to
generate negative growth? It happened to IBM - the
increased efficient (lower unit cost of calculation power) of IBM big
frames actually reduced overall IBM sales.
Creative destruction leaves real bodies in its path, not just phantom
concepts. Are financial intermediaries and stock exchanges sunset
industries, killed by ECN?
On fiscal policy, government spending declined as a share of the economy
during the Clinton watch. This in no small way contributed to a
polarization of both income and wealth, with visisble distortions in
both the demand and supply sides of the economy. The wealth effect tied
to equity markets can be reversed suddenly. Private debt is at all
time high and celebrated as a positive factor. Household spending seems
to be heavily based on expected rising future earnings or paper profits,
both of which may vanished on short notice.
Politically, trade globalization is facing complex resistence world
wide. It will either slow further globalization or force the terms of
trade to be revised.
Now, it may be interested to do a role-playing gaming simulation
execercise: assuming PK eonomists gain control of the CEA, what kind of
report would they issue and what different policies would such a CEA
Henry C.K. Liu
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