Wednesday 18 April 2001

Pic of the day: The economy could use a bit of cooling down too. (And yes, I am running out of vaguely sane pictures to illustrate my ramblings.)

It's the economy, stupid

So yesterday evening, I ordered my train tickets over the Internet, as is good and proper. Today I stopped by the station and fetched them, paying for the luxury. It is rather typical, that I don't know until a couple days before. If I had known a week earlier, I could have gotten those tickets at half price. But I don't plan ahead, and my friend doesn't plan ahead ... well, she probably does, but not for such a trivial matter as suddenly having me over. At least I got a couple days warning. :)

And, as luck would have it, I have the money to pay $100 suddenly without noticing. It wasn't always like that. I'm still earning little by Norwegian standards, but I've seen worse times. And at least I'm not suddenly jobbless, like some of you are, particularly you Americans out there.

It's the stupid economy. It simply refuses to defy gravity forever.

***

One can always hope that the Americans now will wake up, smell the dust, and understand that the last few years of the long boom were built on a lie. Much like a cartoon characters walks off a cliff and does not fall until he notices, so the economy continued over the top. Of course, it almost always does. That's why we have these economic cycles of boom and bust.

My how time flies. Was it really back in 1996 that Alan Greenspan warned the stock market against its irrational exuberance? Of course, the stock exchange blithely ignored him, because things were going well. And indeed they were. Unlike previous economic bubbles, this one was not heralded by consumer price inflation. Usually when there is a major bubble in shares or property, it spills over into the rest of the economy. People feel rich and they throw the money around, not caring that prices go up. This time, it did not happen. Or rather it happened so slowly and nicely that the central bank was able to contain the extra money flow.

Then along came the Asia crisis, and Greenspan was faced with the horrible dilemma: America or the world? The American economy was the only engine strong enough to pull the world back from recession. But it would overheat, doing so. On the other hand, a world recession would be an ugly one, eventually also for America. So the economy was allowed to run at high speed until the world was once again deemed safe. Then the Federal Reserve pricked the bubble by raising interest rates. The rest is history, or rather it is the present.

***

The stock markets of not only America but most western countries are still seriously overvalued. Remember, shares are nothing more than a small part of the company. Their real value is the profit of that company. If the profit of the company does not give you a greater return on your investment than a bank would have given you, then you should have stuck with your savings account. This is why price/earnings is the only true measure of shares.

In a classical economic bust, people suddenly lose faith in the stock market (and the property market). This means that collateral for loans becomes much less worth. This means the companies are squeezed for credit. This means they can no longer invest, and in many cases no longer pay their employees. As people lose their jobs, they stop spending money, and their neighbors stop spending money too, since they reason they may be next. Because of this, shops falter. Because of this, transport and production falter. Because of this, the neighbors actually do lose their jobs, eventually.

Armed with modern economic theories and an independent central bank, it should be possible to cushion this blow. Provide cheap credit to the banks before they panic. (I notice with interest, as it were, that the Federal reserve today has chosen to cut interest rates with half a percentage point again.) Or you could do what the Norwegian state did during the last recession: Wait until the shares are severely undervalued, then buy them dirt cheap. This way, the state came into possession of two of the largest banks as well as lots of other stuff. Socialism with a capitalist face. It's kind of fun to be the investor of last resort when you can print your own money.

For the sake of my American friends, I hope their economy goes to a nice, comfortable slowdown where you can get a job again if you just look hard enough and move around a bit and accept a little less pay. But if I were thinking only of my own little country, we could really use an all out panic in the USA to cool down our own economy. The labor unions are once again dreaming of wild wage hikes. The CEOs already have them. We could really need to see the stock market fall like a shot duck, companies falter and close, and hordes of confused workers find themselves without a job instead of the expected rise.

But all of this would have been avoided if the USA had taken its slowdown when it was due, which was the days when president Clinton used the economy as proof of his supreme leadership and secured himself four new years of public spending. Much as I pity the comparatively more feeble wits of his successor, I find this thought amusingly ironic. And it is going to influence our lives in many details for years to come.

Well, unless macho Mr Bush and his Chinese counterpart decide to mutually nuke each other, in which case I guess it won't be the economy, stupid.