18 August 2005

The 2000-2004 Extreme Resuscitation Experiment in Macroeconomics

The last last five years represent an extreme experiment in US
macroeconomics. The Federal Reserve's remedy to the trillions lost in the IT
NASDAQ collapse, was a rapid lowering of fed fund rates after March 2000 to
around one per cent . LIBOR loans, ARM's, and non principle payment loans
remarkably amplified the effects of these ultra low interest rates resulting
in an echo housing bubble of greater magnitude and much greater private
citizen import than its immediate information technology predecessor.
Hundreds of thousands of construction, real estate, and mortgage processing
jobs have been created. The profound tax cuts lowered federal revenue
collections to multi-decade record percentage lows of the GDP and placed
billions of dollars back into the able spendthrift consumer hands. Wartime
borrowing and spending created hundreds of thousands of jobs for both
lucrative civilian contracting at-home and in-theater support and for
back-fill positions of reservists off to war for 12-18 months at a time. Low
cost foreign manufactured goods were imported by debt driven dollars at a
rate of 4-5 percent of the GDP per year. Emerging from all this incredible
stimulation and imbalance, the American real GDP eked out an average 2-3
percent growth over the last five years. So much debt for so little gain.

What would have happened if the variables of the grand experiment were
changed? What would have happened had fed funds rate been lowered to only
two and a half percent at the nadir or if tax cuts were only given at a rate
of 50 percent of the actual and only to those earning less than 60, 000?
What if there were intelligent and proactive regulatory guidelines requiring
15 percent down on housing and requiring payment on the principal? What
would the effect have been had 300 billion not been spent on operation Iraqi
Freedom? Finally, are the gains self sustaining? Was the debt incurred worth
the GDP gain? Will the 'investment' in the past and current year translate
to continued growth in the out years?

The common denominator for all of the growth that has occurred in the last
five years has not been substantial new self sustaining capital investment
in machines; nor in equipment; nor in R and D; nor in improved public works
improving quality of water, roads, or energy; nor in productive
entrepreneurship, nor in economic paradigm shifting breakthroughs such as
the transistor or PC. The common denominator in the last five years of
anemic resuscitation of the US GDP has been through the common end process
of maximal facilitation of federal, corporate, and private debt creation for
a one time bang. Federal deficit spending and private debt accumulation, the
latter related to unimaginable - referenced to wage income - bank, GSA,
second mortgage, and credit card borrowing for housing, leisure, and the 700
billion a year current account deficit spending, have been firing on all
eight and one half cylinders. Gasoline was poured onto the smoldering and
dying 2002 NASDAQ ashes that was undergoing fractal decay and slowly turning
into charcoal after the saturation point of the tech bubble had been reached
in March 2000.

The over-stimulated economy is now at another saturation point with regard
to housing, equity and the leading commodity entities, particularly oil -
relative to the squeezing increasing US short term interest rates and the
bank profit crushing decreasing short term-long term interest rate spreads.
Many pointing out global productivity gains fail to realize that it is
ultimately overcapacity that is driving workers out of individual areas
resulting in those productivity gains. Sited gains in productivity through
the use of information technology often discount the cost of the often
replaced hardware and software, the loss of educational time and basic
skills secondary to obsessive PC distractions, and the trillion dollar
losses in the tech collapse.

Fractal analysis of market valuations and saturation macroeconomics suggest
that the next few months will involve a phase transition of historical
magnitude. With the poignant background of current multiyear highs or near
highs in the composite equity indices, certain commodities, the housing
bubble arena and in the short term and long term debt markets - an extreme
economic disequilibrium is operative. It is represented by over saturation
in these investment areas relative to money velocity creation. It is further
manifested by global production overcapacity, historical forward consumer
consumption, record private, corporate and governmental indebtedness, US
record level null savings, and an unwarranted de javu foolish euphoric
optimism. All of these ongoing parameters suggest that the timing for such a
fractal phase transition will be not viewed retrospectively as inappropriate
or unexpected. For linear thinkers and market analysts perceiving a
continuous and ever steady progress of an infallibly expanding money supply
with its dependent recipient increasing market valuations, this might be a
time to reevaluate - and - expect the unexpected. 

 G. Lammert