Re: [A-List] New economy bull

["Xxxx Xxxxxx" <xxxx.xxxxxx@xxxxxxxxxxx>]

where is this from?

thanks.

---
Xxxx A. Xxxxxx
Ph.D Candidate, ABD
SUNY at Albany
Nelson A. Rockefeller College
Department of Political Science
135 Western Avenue, Milne 102
Albany, NY 12222

----- Original Message -----
From: "Annewilliamson" <Annewilliamson@xxxxxxx>
To: <a-list@xxxxxxxxxxxxxxxxxxx>
Sent: Wednesday, December 04, 2002 10:33 AM
Subject: [A-List] New economy bull


>
> POMPOUS CLAIMS V. POOR REALITY
> By Kurt Richebächer
>
> Considering the horrible backdrop of accounting scandals,
> crashing stock prices, plunging profits, a yawning budget
> deficit and even an unprecedented negative interest-rate
> differential against the euro, the dollar has certainly
> been performing astoundingly well. Yet let's not overlook
> that against the euro, it is down almost 20%.
>
> Inertia of exchange rate expectations is a familiar
> experience. Basic to the dollar's relative strength is
> obviously a general perception that the U.S. economy will
> continue to outperform the economies in Europe and Asia.
>
> Somehow in the past few years a perception has taken hold
> in the currency markets that exchange rates are mainly
> determined by differences in economic growth. There have,
> indeed, been striking examples of this kind, but more often
> it has not been vindicated. All the lessons of history say
> that in the long run, it is the state of the balance of
> payments that determines the strength of a currency.
>
> Recent 90s history in the U.S. is reminiscent of the 1980s
> 'Reagan' era. Then, too, the dollar astounded the world by
> soaring against the European currencies in flat defiance of
> an exploding U.S. trade deficit. It was a completely new
> experience for the currency markets.
>
> While the U.S. current account between 1981-85 went from a
> small surplus of $5,000 billion to a deficit of $121
> billion, the dollar skyrocketed against the D-Mark from DM
> 1.74 to DM 3.42. From then on, however, the dollar fell
> sharply, although the growth of the deficit slowed sharply
> as well. The dollar's slump ended in 1995 at DM 1.25.
>
> Let us peruse the figures of the recent past for
> comparison: since 1997, the rise in the U.S. current-
> account deficit has grown exponentially from $128 billion
> to almost $500 billion. But this time, in addition to the
> mammoth deficit, there looms a negative interest rate
> differential of 2% against the dollar at the short end.
> During its bull run in the first half of the 1980s, the
> dollar enjoyed a big interest advantage against the other
> major currencies.
>
> Currency strength under such extremely negative conditions
> is definitely unprecedented in history. There is only one
> possible explanation for this extraordinary experience, and
> that is phenomenal faith in the U.S. economy's inherent
> strength and health.
>
> Apparently, it was mainly two influences that drove the
> dollar's bull run of 1981-85. Probably the most important
> one was worldwide admiration for America's new "supply-
> side" Reaganomics, against pronounced pessimism about the
> European economies. (Eurosclerosis became the catchword of
> the time.) A big interest-rate advantage for the dollar was
> the other influence. The dollar's long decline began in
> 1985 when, in the face of a weakening economy, the Fed
> accelerated its interest rate cuts.
>
> It is still widely believed that Reagan's supply-side
> strategies worked, although nothing could be further from
> the truth.
>
> Looking only at the increases in aggregate real GDP and
> employment, they were indeed a great success. Economic
> growth, which had stumbled in the early 1980s, began to
> surge in 1983, compiling a more durable recovery than at
> any time since the 1960s. For more than five years, real
> GDP kept growing at an annual rate of more than 3%.
> America's unemployment rate fell from 11% to 6%.
>
> But looking at the pattern of economic growth and the
> changes in the allocation of resources, Reaganomics has
> been a total flop. The crux of economic policy is always
> its impact on capital formation and profits. What happened
> to the U.S. economy in the 1980s, in actual fact, was the
> precise opposite of what the supply-siders had expected and
> predicted. Soaring government and consumer borrowing
> ravaged capital formation to unprecedented lows, and
> business profits showed no improvement as a share of
> national income or GDP.
>
> The net national savings rate - the average rate of
> business and consumer saving minus the government deficit -
> virtually collapsed from about 6.5% from 1968-82 to 2% of
> GDP, due both to sharply higher government and consumer
> borrowing. Net capital investment as a ratio of GDP fell to
> 5% of GDP, nearly two percentage points below the post-war
> average. Manufacturing net investment was flat for years.
>
> Ultimately, "supply-side" Reaganomics grossly failed by all
> accounts. Three bull years for the dollar were followed by
> 10 bear years.
>
> We have recalled this experience of the 1980s because of
> its stunning resemblance in virtually every detail to what
> has happened in the past few years.
>
> It begins with the bogus New Era. In the 1980s, it was
> newly fashioned supply-side policies that would work
> miracles for the economy. In the 1990s, it was a new
> paradigm economy with miraculous efficiency gains through
> massive investments in the new information technology and a
> revolutionary improvement in corporate governance, guided
> by the goal of increasing shareholder value.
>
> What's more, in both periods, there was exactly the same
> American derision of Europe's inflexible economies, and on
> the part of the Europeans, there was exactly the same
> inferiority complex. Even more stunning are the parallels
> on the domestic side. In both periods, the pompous claims
> of superior, new government and corporate strategies
> contrasted grotesquely with the miserable economic reality.
>
> Looking at what effectively happened to resource allocation
> between capital formation and consumption, as well as to
> profits - the policies in both periods were an outright
> disaster. However, the macroeconomic damages of the 1990s
> are worse...and have yet to be reckoned with.
>
>
>
>
>
>