NY Times, Mar. 24, 2003 OP-ED CONTRIBUTOR Battling the Fog of Finance By JAMES GRANT
War has enough to answer for without being blamed for problems not of its own making. Last week the Federal Reserve excused itself from venturing any forecast about the United States economy pending the abatement of "geopolitical uncertainties."
But it isn't the fog of war that has shortened the vision of our monetary policymakers. It's rather the fog of finance, particularly the long legacy of America's greatest stock-market bubble. The truth about the three-year decline in stock prices and the hot-and-cold-running economy is that they have their roots in prosperity, not in war.
The paradox is easily explained. High stock prices invite capital investment. Ultrahigh stock prices invite redundant capital investment. Stock prices higher even than those on the eve of the 1929 crash invite titanically redundant capital investment. No wonder, then, that business spending on new plant and equipment has been so weak for so long: The sky-scraping stock market of the late 1990's (which indeed commanded valuations higher than those of 1929) induced enough corporate spending to sate demand and cause a recession.
That recession, which began in March 2001, is probably over by now (the official cyclical timekeeper, the National Bureau of Economic Research, continues to weigh the evidence). But the recovery is heavy-footed and faint-hearted. High energy prices and stay-at-home travelers haven't helped. Nor has worry about a new terrorist attack. But the source of America's persistent financial aches and pains is something more basic: the preceding mispricing of capital.
In the manic phase of the bull market, capital was essentially free. The frittering away of American savings wasn't intentional. It happened inadvertently, through investing: in telecommunications equipment, semiconductor manufacturing plants, computer servers, power generators, office furniture, Internet initiatives, etc. We invested more than we should have — in fact, more than we had. We borrowed to invest, from creditors both domestic and foreign.
And because the law of supply and demand is everything it's cracked up to be, the bull market ended. More productive capacity spurred higher output, which led to more intense competition and — no surprise — to lower profit margins. And those things led to lower stock prices, which, in turn, led to a crash in capital investment.
There was no "new economy" after all. Now almost one-quarter of corporate productive capacity is lying idle. All too many job seekers find themselves in the same predicament
full: http://www.nytimes.com/2003/03/24/opinion/24GRAN.html
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NY Times, Mar. 24, 2003 Skeptical Economic View Takes in More Than Iraq By DAVID LEONHARDT
With the battles having begun in Iraq, the United States economy once again looks as if it might be on the cusp of emerging from its torpor. The Standard & Poor's 500-stock index rose more last week than it did during any week since September 2001, and Wall Street forecasters predict that a quick military victory will reduce economic uncertainty, causing a surge of corporate and consumer spending.
But this has become a familiar refrain. A year and a half ago, many economists said that the country would prosper as soon as it recovered from the Sept. 11 attacks. Early last year, the scandals at Enron, Worldcom and elsewhere were supposed to be all that was preventing a new boom.
With each new month of layoffs and other corporate cost-cutting, however, the exceptions begin to look more like a rule. Increasingly, corporate executives and some economists worry that the slow-growth economy of the last three years might in fact be the new reality, one that will bedevil workers and investors for a few more years.
"When it all comes out, we're going to have a significantly less sanguine outlook than we did in the late 90's," said Dale W. Jorgenson, an economist at Harvard University and an expert in productivity, widely seen as the most important factor for future growth. "That's something we're just going to have to get used to."
full: http://www.nytimes.com/2003/03/24/business/24ECON.html
Louis Proyect, Marxism mailing list: http://www.marxmail.org
