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Fire and Ice
Some say the world will end in fire,
Some say in iceÉ
The great Satan of economics, the nemesis bringing the end to all good times, is an "overheating" economy. Too-hot-is-bad-news goes back decades to the standard, grim joke about the end of business cycles: "Just when a good party really gets going, the Fed's supposed to take away the punch bowl."
If the Fed pulls the hooch in time, we have a "soft landing", or at worst a minor, dish-shaped, two-quarter contraction. If the Fed misses its cue, and acts too late, the price is a deep, long, painful recession. Therefore, we must maintain eternal vigilance against times that are too good.
The recent past, all the way back to the war (the big one, Dad's war), supports the fear of overheating. Every one of a dozen recessions was precipitated by the fact or threat of inflation caused by an overheating economy.
I hold with those who favor fire,
The worst overheating experience of all was the horrifying, percent-and-a-half-a-month inflation of the late 70's, followed by 20% interest rates into the early '80's. I spent my first five years in real estate under those conditions, and I'll never get over it.
Fifty years of persistently excessive consumer demand and spending, and at least as excessive government borrowing and spending, not just here but worldwide, has distorted everybody's view of the end of business cycles.
Cycles can end just as easily the other way: the economy begins to cool for any of several reasons, or no reason at all, and then just peters out altogether, defying efforts by the Fed to revive it.
The best example in American history is the 1930's. The bottom of the Great Depression did not coincide with the Crash of '29; the worst was a double bottom, first 1932-33, and then another slide in 1937. The New Deal safety nets and the first big social spending in our history failed to revive the economy, which didn't get going until 1940, propelled by the draft and massive wartime deficit spending.
But, you say, this is the modern era? Now, we are masters of our economic affairs? The Fed would never let a depression happen?
Consider Japan. No growth at all this year. For that matter, barely positive growth for the last five years in a row. Three years ago, the Bank of Japan fired its weapon of last resort, and reduced the cost of money to essentially nothing -- one-half percent -- to no effect. Loans may be free, but if you can't think of anything useful to do with the money, why borrow?
Or Germany. Unemployment has been in double digits this entire decade, yet the Bundesbank may have to raise rates to head off inflation. Inflation from where, with unemployment so high? A huge budget deficit and suicidal labor costs.
The big break in the Dow this August (the worst month in seven years) was triggered by a poor earnings forecast by one of the darlings of the market: Gillette. Its trouble? Lousy prospects for sales in Japan and Germany.
Or, for sheer overconfidence (if not overheating), have a look a several of the Asian tigers: Thailand, Malaysia, Philippines, Indonesia, South Korea, and Singapore. Too exuberant with imported capital, each is suffering its own version of Mexico '94: their stock markets and currencies are down by an average of one-third this summer, and still falling. Their prospects for growth next year are zilch, and a half a billion consumers of American products are suddenly non-consumers.
I mean no gloomy forecast, but all the gloating about the American economy and claims of a New Paradigm make me nervous. Gives me chills, sometimes.
But if it had to perish twice,
É for destruction ice
Is also great
And would suffice.
(With apologies to Robert Frost)
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