The Economy, Ursa Major, and 2008
During the past year, there has been much discussion in the news media about whether the US economy is going to be in a recession, and what kinds of policies are needed to prevent a slump.
by Fred E. Foldvary, Senior Editor
Officially, a recession occurs when total output, or gross domestic product, falls for two consecutive quarters, a quarter being three months. The data show continued, but slower, economic growth during the first quarter of this year, January through March. Though the US economy is not in recession, there has been a decline in manufacturing and a severe downturn in high-technology products.
Almost daily, companies announce declining profits, cut-backs, and layoffs. Unemployment has gone up a bit. There is a bear market in US stocks, with declines in the major indices. The NASDAQ market, home of many computer-related companies, has been in ursa major, a big bear market and a big dipper into personal fortunes. Many technology stocks have plunged over 90 percent.
Will there be a recession this year? It is possible but not likely. What has occurred is a decline in the rate of growth, rather than negative growth. A decline in how fast the economy is growing hurts particular industries, especially those producing capital goods, products which are used to produce more wealth rather than going to the final consumer.
There is a lot of talking and worrying about consumer confidence, but what drives the business cycle is not consumption but economic investment, which is the production of more capital goods. There has been a decline in investment for several reasons. First is the anti-trust case against Microsoft, the leading software company. This changed the psychology of the financial market, as it created uncertainty, and dampened the enthusiasm for technology. Nobody knows which other high-tech companies the government will attack.
Second is the Sovietization of the electrical industry in California, which is home to Silicon Valley, the center of high- tech investment. The State increased its intervention into the electric industry over ten years ago, when it began refusing to allow new major power plants to be built. In 1996, State intervention greatly increased as California extended its control over prices and contracts and forced the sale of power plants to outsiders. In a triumph of Orwellian propaganda, the State officials called this socialist restructuring a "deregulation."
Now the State has gone further towards the Sovietization of electricity by not letting small power producers get paid, which has even further reduced electricity supplies. The forecast this summer is for power shortages, to be dealt with by blackouts. Many businesses will lose huge amounts of revenues, and each blackout, which comes without any warning, leads to tremendous costs.
Most of the tax cut that Congress is now considering will take effect in the future, so it will have little impact on this year's economy. My forecast is California will suffer but that there will not be a recession in the US this year. The Federal Reserve System has been pumping much money into the economy, and usually a recession occurs as interest rates go up rather than down.
The high-tech stock-market bubble was the usual speculative rise leading prices to unsustainable levels, followed by the crash that always comes when prices become unrelated to profits. Many share prices are still too high relative to earnings. A decline in stocks certainly hurts those who have put their funds into these companies, but does not by itself trigger an economic downturn.
There is talk about investors having lost trillions of dollars in the market, but this by itself is not a general economic loss. Once a stock has been issued, any subsequent trading is a zero-sum system. A lower price is a loss to the owner but a gain to the next buyer and a gain to those who sold when the stock was higher.
The main thing to remember is that there are smaller and bigger cycles, and the main cycle is the real-estate cycle, which has had periods of about 18 years. The last real-estate downturn was in 1990, and the major cycle has been up since then. One-third of investment is real-estate related, and real estate has so far held up. I expect the next major recession to occur 18 years after the last one, putting the next depression in 2008.
The only thing that can stop the next major depression is a shift in public revenue to collect land rent instead of taxing labor and capital, and that policy change is not on the table. So expect the whole table to be overturned in a few years!
-- Fred Foldvary
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Copyright 2001 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.