Monday 18 December 2000

Pic of the day: Not what we economists usually mean by "economic cycle", but this bike had been lying by the wayside for days if not weeks when I photographed it.

Boom's end

It sucks to be a Republican president. Look at the previous one. In his time the USA laid the foundation for the long boom that followed. But the very act of doing this cost him his job. Alan Greenspan, while certainly a conservative at heart, did not in any way deviate from the long term goals of the Federal Reserve. If he had wanted to, he could have accelerated the economy a bit earlier and helped the president get re-elected. Instead, it was Clinton who got re-elected by saying "It's the economy!" Yeah, like he had done anything great for the economy, except for keeping Alan Greenspan. But then again, that's quite a bit.

And now the Americans are about to get a Republican president again. And the economy is about to dive. It must be a very strange feeling to be Alan Greenspan, chairman of the Federal Reserve, savior of the world economy.

***

Long time readers will remember that I have again and again told that the American (and Norwegian) stock markets are overpriced, that the current transactions are gambling and not business, that it's gonna fall. In particular the Internet shares, or "dot.com" as they are popularly called now. You really did not need a telescope to see that coming. The Net economy is not of such a nature that you can earn collossal income from it - it lends itself even less to a monopoly than the "old" economy. Internet users are fickle: It takes little to replace an old bookmark with a new if they feel slighted or exploited. It's hard to cash in on your monopoly without such feelings.

Take Netscape. Oh, Netscape does not exist anymore, it's part of AOL. But let's look to the past. Netscape made quite a good browser, and they gave it away for free. Everyone was happy - except those who wanted some money out of Netscape's market positition. So when they had a dominant market position, they started to charge for the browser. Remember? They really tried. You did not dream it. It did not last long. Internet Explorer grew from a little to nearly half the market. (And besides, Netscape's portion was mainly students and people who pretended to be students, or pirated the browser, or used an old free version.) Netscape the company died, though the name still lives.

Do you think anyone will be able to cash in on a near monopoly on the Net? When it only takes a few seconds to switch to a competitor? There is no way you can justify the dreams of collossal income in the future. Therefore, there is no way you can justify the wild share prices, and stock options. It had to fall. Gravity asserts itself.

***

For the last few years I have also predicted a general downturn in the economy starting in late 2000 or in 2001. I may still be making a foal of myself here, but I repeat my warning. The imbalance in the stock and property market is doomed to damage the economy. As long as money is sucked into projects that do not generate wealth, the economy is hurt. Investment in production and research can generate wealth. "Investment" in gambling cannot, even when the gambling is on the stock market.

Also the Y2K effect will slow down. In 1998 and 1999, lots of money was put into modernizing software due to the Y2K bug. Whole computer systems were replaced with new, more modern hardware and software. This has probably increased productivity, more than I had expected, but the effect won't last forever.

America is the main engine of the world's economic growth, and has been for some time. But the country is not in balance. Its imports are too high to sustain the current exchange rate of the dollar. Once it falls, the American exports will be helped, but the imports will grow expensive. Expensive imports will lead to inflation, and inflation will be met by higher interest rates. This will cool down the economy. It is possible to keep this cooling moderate, but it will not be simple. Because of credit, people may panic.

During the good years, people have borrowed and borrowed and kept borrowing. They still do. When interest rates go up, people will be forced to spend less. This will mean lower sales for retail, spreading back through the product chain to major distributors and to producers. Profit warnings all through the economy is going to send share prices tumbling. Since many (most?) Americans have their pensions in shares, this is bound to cause fear and further belt tightening.

This spiral of recession can be countered by lowering interest rates. But they can only be lowered to somewhere just over zero. You cannot have negative nominal interests. That would be to pay people for borrowing. Well, you could do that, but it would really strain common sense. I do not think it is politically possible. The outcry would be too strong. In reality, it makes perfect sense: The poor guy who borrows money runs the risk of having to pay it back when it is worth more, and so should rightly be compensated for his risk by extra money. But it looks so unnatural that I cannot believe it will ever be tried. Certainly Japan did not try it, and has been struggling for a decade now with a recession that seems to have settled like a chill in the nation's bones.

Now where did your holiday cheer go? :)