----- Original Message ----- From: "michael" <[EMAIL PROTECTED]>
The Wednesday Wall Street Journal was particularly interesting. The front-page had an article about the massive vacancies in office buildings. Supposedly, a potential crisis has been averted because, among other things, landlords have been more successful in the locking-in tenants and because the developers are no longer depending on the banks, so can negotiate lower rents. These explanations leave something to be desired. =============================================== [But property cycles have been abolished!] [The two economists in the third paragraph seem to be Larry Summers and Joe Stiglitz or Laura D'Andrea Tyson] http://www.weforum.org/site/homepublic.nsf/Content/Annual+Meeting+2004%5CList+of+Selected+Participants [Stephen Roach, today] http://www.morganstanley.com/GEFdata/digests/latest-digest.html The Davos crowd embraced the notion that US-centric global growth was sustainable indefinitely. Drawing support from recent pronouncements by Alan Greenspan, the related view was expressed that there would be no problem in financing the extraordinary external imbalances that were spawned by such lopsided global growth (see Greenspan's January 13, 2004 remarks before the Bundesbank Lecture 2004 in Berlin). As he did at the end of the equity bubble, Greenspan seems to be making a special effort to portray old concerns in a new light. Last time, it was a productivity breakthrough; this time, it's the nimble financing of a new globalization. The Davos consensus was quick to agree. With the entire world perceived to be on a de facto dollar standard, America's rapid build-up of external dollar-denominated debt was not perceived to be a problem. After all, Asia is funding the bulk of the new increments to that debt, and most were utterly convinced that nothing could break the "daisy chain." As long as America continued to buy Asian-made products, Asian investors would continue to buy American-made bonds - thereby avoiding the lethal back-up in real interest rates that such imbalances would normally spawn. One participant characterized this arrangement as "a massive Asian export subsidy program." Another cited the artificially depressed US interest rates that fall out of this arrangement as a foreign subsidy to the spendthrift American consumer. Either way, no one could conceive of any circumstances that would cause Asian investors - private or official - to change their mind on the funding of America's massive external imbalance. And so the Davos crowd believes the music will continue to play on. Quite honestly, none of this really surprised me - these are precisely the assumptions that ever-frothy financial markets must be making in order to sustain asset values at current levels. If imbalances were perceived to be the problem I suspect they are, markets would be in a very different place. As predictable as this response was, I was totally unprepared for what hit me immediately after the conclusion of this opening session. Two of America's leading academics rushed the stage - one a renowned economics professor and the other the president of a top university - and loudly proclaimed that the traditional macro of saving shortages and current-account deficits is a scam. America was not in any danger whatsoever, they argued vociferously. The imbalances that I worried about are simply the logical and entirely rational manifestations of a New Economy. Seems to me I had heard that one before. But I held my tongue and pressed for more. The New Paradigm in this case is that America has now become an asset-based, wealth driven economy. As such, it need not worry about scaling its imbalances by national income - instead they need to be judged against economy-wide net worth. On that basis, debt loads - either internal or external - can hardly be characterized as worrisome when measured against the elevated wealth of the US economy. Sure, that wealth took a "bit" of a hit when the equity bubble popped in 2000. But the baton of the US wealth creation machine was quickly passed on to property markets, and the US economy never even skipped a beat. This argument bears serious consideration, but I am convinced it is wrong. For starters, it makes the critical presumption that asset appreciation is permanent. When I pressed this point with my adversary, he bristled in response, claiming that permanently rapid rates of financial asset appreciation were entirely justified by the productivity breakthroughs of recent years. He went on to add that property cycles had all but been abolished - that the American home was a lasting store of ever-rising value. Needless to say, if that's the case, then I'm the one who's dead wrong. Ever-rising asset values would then qualify as permanent sources of saving - obviating the need for consumers to rely on traditional income-based saving strategies. Quite frankly, I couldn't believe what I was hearing.[snip]
