Foldvary on economic trends, macroeconomics, forecast land price inflation money supply tax reform Henry George
|October 19, 2004||Posted by Staff under Uncategorized|
Rafting over the Economic Rapids
by Fred E. Foldvary, Senior Editor
The US stock market fell a few percentage points during the past week. Some company earnings have declined, and US exports continue to be weak. Is a recession coming soon? It’s time for a mid-year economic checkup, based on a “geo” perspective.
My main framework as a “geo-economist,” based on the theories presented by Henry George in the latter 1800s and his 20th-century followers, is that the major depressions are strongly associated with the real-estate cycle. In the US, there has been a cycle of boom and bust in real-estate prices and construction since the early 1800s, and the cycle periods have averaged around 18 years. The last bottom was around 1990, which puts the next depression around the year 2008. I think it will be a major global crash.
What complicates the analysis is that the real-estate cycle is not the only cycle. There is a very long “Kondratieff” of around 60 years, which probably coincides with the real-estate cycle, so I don’t pay much attention to it. There are also minor four-year cycles having to do with both inventories and political factors (the president being elected every four years, with government spending expanding during election years). The last four-year slowdown occurred in 1995, so we are due for another minor recession or slow-down in growth in 1999. And indeed, there was some inventory build up over the past few months which indicates less investment in the coming months, thus slower growth. This is reinforced by the lower earnings and profits being reported now.
Adding to the current reduction of growth is the severe depression in what were once the fast-growing Asian “tiger” countries. The Asian depression has reduced the demand for American exports, contributing to the recent reduction in US manufacturing. Another complication is the Y2K problem, with many computers using two-year dates and needing to be replaced or reprogrammed by the year 2000. This will divert resources from new investment and growth into repairs and increased costs, cutting further into profits. Another computer bug is the leap year in 2000, which some software may not recognize, resulting not only in a date error but even worse, the wrong day of the week.
All of this points to a reduction in growth, which could become a recession. If measured by per-capita growth instead of total growth (as I think it should be), then 1995 was a recession year, and 1999 could be as well after subtracting a one-percent population growth from economic growth. The recent decline in the stock market could thus be anticipating the next recession.
However, this will not be a great depression, unless the worst-case scenarios for Y2K bring down the economy. If we survive January and February 2000 with only minor computer trouble, then the recession of 1999 will most likely be over with, and the global economic boom of the 1990s will resume. By 2000, the Asian economies will most likely be in recovery, given the change in leadership and policy in many of these countries.
The boom of the twenty-oh years (2000 to 2007) will have one difference from that of the 1990s: inflation. The US money supply has been growing rapidly over the past year, and monetary inflation is usually followed by price inflation. The economic slowdown and cheap Asian imports will mask the price inflation for a while, except in real-estate, which has been booming. But after 2000, the dam will break and the flood of money will push up retail prices. This will turn the real-estate boom into a speculative frenzy, along with a rise in other asset prices, such as gold. The great global speculative boom will accompany the greatest global economic expansion in the history of the planet.
Then rising interest rates along with sky-high land prices will bring investment to a halt, which will then result in a great depression far worse than that of the 1930s. Because coinciding with the real-estate crash of 2008 will be the imminent retirement of the baby boomers, who will be cashing out their stock purchases. Meanwhile, social security and medicare and pension plans will face ever growing payouts, liabilities without enough assets to deliver. There are tremendous debts and unfunded liabilities which will come due. The economic crash will sorely test the fragile liberal democracies that have developed with great struggle world-wide.
Two economic remedies could prevent the catastrophe: a shift from taxing production to taxing ground rent, and free-market money and banking. But politics will prevent this, because the political reform needed to make this politically possible, namely a shift from mass democracy to small-group democracy, is not even being discussed. So while trying to educate others, we can try to at least protect ourselves with marketable skills, liquid (money) reserves, and a well-diversified porfolio of assets. What does not usually work is trying to time markets specifically. We can use theory and evidence to determine trends and cycles, but markets also follow mass psychology, while political action by governments and central bankers interact with mass psychology to create unpredictable deviations from the trends. Economic analysis can thus provide us with predictions about the economy, but it does not enable us to accurately time the ups and downs of stock and commodity markets.
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Copyright 1998 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 retrieveal system, without giving full credit to Fred Foldvary and The Progress Report.