[PEN-L:28170] RE: summary of credit bubble

["Devine, James" <jdevine@xxxxxxx>]

Title: RE: [PEN-L:28169] summary of credit bubble

This article has some good points, but it seems to totally ignore the fact that the government's "addiction to debt" is a pretty minor part of the story -- especially given the fact that the U.S. government had a _surplus_ for a couple of years. As Godley and Izurieta point out, the government surplus meant that to maintain the relatively high-employment growth of the late 1990s, the private sector had to accumulate debt, since otherwise the surplus implied immediate recession. On top of that, unlike the government (at least for the next few decades), large parts of the private sector can go bankrupt.

Also, when it says "each citizen's share of this [government] debt is $21,289.67," it's ignoring the fact that from the point of view of each of the citizens that hold T-bills, notes, and bonds, they are assets, quite liquid and safe ones at that. It's thus a mistake to add government debt in a simple way to private debt as the author does in his last graph. The better graph of "total US debt" is that to the rest of the world.

Third, the author says that in the late 1990s, "Profit growth was below normal and the product of fraudulent accounting. The miracle economic numbers were the result of manipulated government statistics." It's true that profit growth was below normal (as the rate of profit fell), but how much was due to fraudulent accounting if we look at the total. Is there any evidence that the government deliberately manipulated statistics to make businesses look more profitable?

Fourth, the boom wasn't just credit. The expansion of credit did allow more production to occur, while the unemployment rate was the lowest it had been since the 1960s.

Finally, is the author saying that the various financial crises listed at the beginning (the Peso crisis, the Asian crisis, Russia & LTCM and strangely, Y2K) should have been allowed to happen and thus to spread? Indeed, what is the author proposing? Should the Fed have allowed a recession in 1997, when profitability began to fall?

Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine

> -----Original Message-----
> From: joanna bujes [mailto:joanna.bujes@xxxxxxxxxxxx]
> Sent: Thursday, July 18, 2002 1:40 PM
> To: pen-l@xxxxxxxxxxxxxxxxxxx; lbo-talk@xxxxxxxxxxxxxxx
> Subject: [PEN-L:28169] summary of credit bubble
>
>
>  From a friend....Here's a succinct summary of the credit bubble:
>
> http://www.financialsense.com/stormwatch/update.htm
>
> Joanna
>