 Apocalypse Later
Dr. Kurt Richebächer
The
Daily Reckoning
January 10, 2005
The Daily Reckoning PRESENTS
: Although economic growth isn't looking
so good for Japan and Euroland, forecasts for the United States
remain upbeat. The Good Doctor explores...
Despite all
the worried talk about the sliding dollar, both the financial
markets and economic forecasters are taking it in stride. Conspicuously,
nobody speaks of a dollar crisis at present or in the future.
High-riding expectations of a strong year-end rally in the stock
markets have been somewhat disappointed. Yet there have been
two pleasant major surprises. One is the sharp fall of oil prices,
and the other is the resilience of the U.S. bond market, defying
not only the dollar's weakness, but also the four rate hikes
by the Federal Reserve.
It appears
to be a common view that economic growth in the eurozone and
Japan is badly faltering again, with both countries flirting
with new recessions. In contrast, the forecasts for the U.S.
economy remain rather upbeat, hailing the plunges in oil prices
and the dollar.
We stick to
our diametrically opposite view that the U.S. economy is prone
to sharply slower growth. It is the profligate consumer who has
kept the economy afloat since 2000. What kept the consumer afloat
is also no secret. It was mainly two events: First, inordinate
tax cuts; and second, exploding ultra-cheap borrowing facilities,
made available through the Fed's creative bubble strategy and
implemented by ultra-low short-term interest rates.
Together, the
two have unquestionably contained the fallout from the bursting
stock market bubble. They also had respectable effects in terms
of U.S. real GDP growth during the second half of 2003 and the
first half of 2004. Yet the most important aim of all the monetary
and fiscal stimulus - to set in motion a self-sustaining economic
recovery - has been flatly missed.
A "self-sustaining"
U.S. economic recovery urgently needs accelerating employment
and income growth. Just the opposite is happening. During the
six months up to last November, real disposable personal income
grew just 1%, or 2% annualized. This is down from 3% in the first
half of 2004 and 4.8% in the second half of 2003. Taxes and higher
inflation rates are taking their toll. Debt-financed spending
went to new records. During the third quarter, private households
increased their spending by $139.4 billion, while their earnings
increased only $81.6 billion.
Employment
and income growth are the key fundamentals of household finance.
According to the reports of the Bureau of Labor Statistics (BLS),
they have significantly improved in 2004. But no less than two-thirds
of these gains owe their creation to the ominous "net birth/death"
computer model of the BLS, designed to estimate employment growth
by new business formations.
All that is
needed to activate this job creation is a unilateral decision
by the BLS that the U.S. economy is in a recovery. Implicitly,
the Bureau of Economic Analysis translates these computer-generated
additions to employment into corresponding additions to wages
and salaries. Considering the persistent, unusual weakness in
employment, as documented by the actual surveys, it requires
a lot of heroism to assume an employment boom from new business
formations.
For November,
the BLS reported 112,000 new jobs, as against an expected 200,000.
As bad as the report appeared, the reality was even worse. No
less than 54,000 of the new jobs had come from the net birth/death
computer model, compared to 30,000 jobs in November last year.
In the third
quarter of 2004, consumer spending accounted for 89.2% of real
GDP. It is the familiar ruinous growth pattern. A viable economic
recovery would require a strong contribution through sharply
higher business investment and hiring. Both remain missing, although
the recovery is entering its fourth year.
Euroland's
Secret Success Story:
"The United
States is richer and grows faster than euroland because productivity
levels are higher and productivity growth stronger - right? Actually,
no. Euroland's inferior GDP performance is attributable to a
slower- growing labor force that works shorter hours.
"Euroland's
underlying economic performance is better than many commentators
portray. Over the past decade, GDP per head has risen virtually
at the same rate in euroland as the United States; euroland productivity
growth (output per hour) and the rise in the employment rates
were slightly faster than in the United States; and to maintain
the same growth in GDP per head, U.S. workers have had to work
much longer hours than their euroland counterparts."
This subtitle
and the above two paragraphs are not ours. They are the introductory
remarks to a study about the eurozone economy, written by Kevin
Daly and published by Goldman Sachs in January 2004.
Gloomy reports
about the eurozone economy always abound. To quote a leading
article that appeared in The Financial Times under the headline
Two Broken Motors: "The latest economic data leave the eurozone
and Japan looking more than ever like two enfeebled old men unable
to progress at more than a stagger."
With utter
amazement, at the same time, we keep reading that the U.S. expansion
remains firmly on track, particularly with sharply improving
jobs data. Third-quarter real GDP growth was revised upward to
4% at annual rate, compared with an annualized growth rate of
1.2% for the eurozone. Since the end of 2000, America's output,
as measured by real GDP, has grown more than twice as fast as
the euro areas.
Quoting the
London Economist: "Euro-pessimists see this as further evidence
that arthritic economies are being held back by lazy workers
and by governments unwilling or unable to carry out reforms.
In contrast, America's more robust recovery, it is often said,
reflects its amazing flexibility."
Our view, in
contrast, is that the U.S. economy's recovery since 2001 peaked
in the first quarter of 2004. This assumption is primarily based
on four observations: First, it is the overwhelming message of
recent economic data and early indicators; second, the power
of egregious fiscal and monetary stimulus has been spent; third,
continuous rate hikes by the Fed will prick both the carry trade
and the housing bubbles; and fourth, the U.S. economic recovery
is of a flatly unsustainable pattern.
To prevent
a more painful fallout from the bursting equity bubble in 2000-01,
Fed Chairman Alan Greenspan systematically blew three intertwined
new credit bubbles: the carry trade bubble in bonds, house price
inflation and the mortgage refinancing bubble.
It was the
policy of a desperado who did not care at all about adverse consequences
in the longer run. In actual fact, the very imbalances that provoked
the preceding recession have grossly worsened under the impact
of the new asset and credit bubbles.
Regards,
Kurt Richebächer
for The
Daily Reckoning
Editor's note:
Former Fed Chairman Paul Volcker once said: "Sometimes I
think that the job of central bankers is to prove Kurt Richebächer
wrong." A regular contributor to The Wall Street Journal,
Strategic Investment and several other respected financial publications,
Dr. Richebächer's insightful analysis stems from the Austrian
School of economics. France's Le Figaro magazine has done a feature
story on him as "the man who predicted the Asian crisis."
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Inc Miami USA
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