Re: It does not seem US recession is over

["Fred B. Moseley" <fmoseley@xxxxxxxxxxxxx>]

Rakesh, thanks for your comments on my article.  A few brief responses:


On Sat, 4 May 2002, Rakesh Bhandari wrote:

> PEN-L'ers may be interested in Fred M's recent analysis.
>
> http://monthlyreview.org/0402moseley.htm
>
> Fred writes
>
> >The profit share of total income depends on the relative rates of
> >increase of prices and costs, especially labor costs. In recent
> >years, the profit share declined because labor costs have increased
> >faster than prices
>
> Does Fred now subscribe to a wage squeeze theory of crisis?

This is a simplified explanation.  In a more complete explanation, I would
argue that the reason why labor costs have increased faster than
productivity is the continuing increase of unproductive labor.


> Fred writes:
>
> >However, this huge inflow of foreign capital also has its
> >disadvantages for the U.S. economy in the longer run. In the first
> >place, interest and dividends will have to be paid on this foreign
> >capital in future years; that is, a part of the income produced in
> >the U.S. economy every year will have to be used to pay interest and
> >dividends to foreign investors, thereby draining income from the
> >U.S. economy.
>
> I don't think this drain of income is imminent: there seems to be
> little evidence (?) that central banks are diversifying out of the
> dollar and much of the foreign debt which the US seems to owe could
> be to Americans who only appear as foreigners because they are
> operating out of offshore hedge funds.
>
> Of course one can never be sure given the massive differential
> between US and EU P/E ratios.
>
> At any rate, even if there is a slow down in the inflow of capital to
> the US, won't it  be primarily due to the strengthening of foreign
> economies which will boost US exports especially since the dollar
> will fall with a drop off in the inflow of capital. So I don't see
> why a slow down in the inflow of capital has to be an important
> signal of a crisis in the real economy of the US.

Not necessarily.  It might be due to a weakening of the US eonomy, in
which case the reduction of capital inflows could lead to more serious
consequences, as outlned in my article.


> However, if capital flows out for the reason:
>
> >Or the exodus of foreign capital could be triggered by external
> >events, like the Japanese banking crisis, which could force Japanese
> >banks to sell their U.S. assets in order to offset losses at home
> >(Japanese banks own approximately 10 percent of all U.S. Treasury
> >bonds). If such a capital flight were to occur, then the U.S.
> >economy would be in serious trouble.
> >
> I find myself agreeing with Fred. After having read Susan Strange's
> Mad Money, I have thought that a Japanese repatriation of capital
> from the US market is a very likely trigger for global depression.

Thanks for the reference.  I have not read the Strange book, but I will
now, based on your recommendation.

Comradely,
Fred