Coded gray.

Friday 19 December 2003

Screenshot The Sims

Pic of the day: On Wall Street, the expression "bear market" refers to a falling market, while a rising market is called a "bull market". The bear markets have a tendency to sneak up on us... (Illustration picture from The Sims.)

OK, so I was wrong

Two years ago, in December 2001, I challenged the claims by Milton Friedman that the recession would end in the second quarter 2002. So perhaps he was slightly optimistic, but he still hit a lot better than I did. I believed the recession would last -- with some ups and downs -- until the stock market was back to a realistic price and the American economy was once again in balance. I think it is safe to say that I was wrong.

***

I don't base these predictions on divine revelation; I just watch and see the large patterns. But in this case I underestimated the power and dedication of the US president. I had assumed that he would by and large leave economic policy to the central bank, where Alan Greenspan has demonstrated his superiority time and again. I expected some Republican gestures, but I did not expect the Bush administration to gamble the economic future of the USA in an all-out assault. But this was pretty much what happened. Taxes have been cut drastically, but the spending has not been cut... not if you include military spending at least. The government is borrowing and spending like mad; at the same time citizens are encouraged to borrow and spend like mad too. Of course this has effects on the economy!

This policy is not quite as insane as it may sound. (Admittedly that would take a lot...) Normally the economy moves in waves, or cycles as we economists like to call them. After a downturn there will come an upturn, and the other way around. Since we were now facing a valley in the economy, it makes some sense to cut across to the next hill. Why go all the way down? Instead, we can borrow from the future boom when there will be more than enough money sloshing around. We could use that money better here and now.

This has indeed been tried by many governments for the last 50 years or so. It has met with some success, and it is certainly preferable to the panic the world saw during the Great Depression. That panic was largely caused by governments that made things worse by drawing in money when money was scarce. In modern societies there is a natural tendency to smooth the economic cycles: When the economy falters, tax revenue is lower and welfare costs are higher. Conversely during a boom, tax revenue is higher and there are less unemployed people to feed. Of course, it is either dumb luck or divine intervention that W. Bush is president right now: He would have given enormous tax breaks and expanded the military anyway, no matter the state of the economy. That's just the kind of guy he is.

So all is well then? Not exactly. As some of you have already noticed, borrowing comes at a cost. This is also true when you borrow from a future economic upturn. The deeper the country sinks into debt, the longer it will take to dig itself out. And exactly as with any other person, it is possible to sink so deeply into debt that the good times never come. I am not saying this is going to happen to the USA. But it is possible to destroy the economy. The moment doubt arises about whether the US government will pay its bills, there will be no more cheap imports. In fact, there will hardly be imports at all. If you think this is a good thing, perhaps you should take a walk around in your house, checking every single item to see its country of origin. And it is a safe bet those things were not forced on the American public at gunpoint... actually, the guns usually point the other way. Things are imported because they are either better or cheaper or both of the above, or sometimes because there is no domestic alternative at all.

Since it seems decided already that the poor country will have to live with the Bush administration for another four years, I won't even try to guess when the real recession comes. But it's a safe bet that it will be a bitch: Payback usually is.

Then again, I could be wrong again. You better pray that I am, because the world needs a healthy USA (and the other way around).


Yesterday <-- This month --> Tomorrow?
One year ago: Dark Dog day
Two years ago: Milton Friedman vs. me
Three years ago: All the good music
Four years ago: Pussyfooting
Five years ago: Meat is disgusting

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