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Danger time?

Posted By Barry Ritholtz On January 13, 2006 @ 6:03 am In Economy,Federal Reserve,Real Estate | Comments Disabled

20060114issuecovus400 [1]This week’s Economist pulls the gloves off and laces into Mr. G pretty good. In a pair of articles, they diussect the US economy, analyze it shortcomings, and hold Greenie largely responsible for a significant percentage of these economic problems:

"Mr Greenspan’s departure could well mark a high point for America’s economy, with a period of sluggish growth ahead. This is not so much because he is leaving, but because of what he is leaving behind: the biggest economic imbalances in American history."

And they’re just getting started. They note that "the Fed’s policies of the past decade look like they are having painful long-term costs." 

Further, the issue is not a housing bubble; rather, its the over reliance on mortgage equity extraction as the key source of GDP growth:

"The problem is not the rising asset prices themselves but rather their effect on the economy. By borrowing against capital gains on their homes, households have been able to consume more than they earn. Robust consumer spending has boosted GDP growth, but at the cost of a negative personal saving rate, a growing burden of household debt and a huge current-account deficit… Part of America’s current prosperity is based not on genuine gains in income, nor on high productivity growth, but on borrowing from the future."

Csf117 Next up:  weaker than usual job creation and sluggish real wage growth: 

"American incomes have increased much more slowly than in previous recoveries. According to Morgan Stanley, over the past four years total private-sector labour compensation has risen by only 12% in real terms, compared with an average gain of 20% over the comparable period of the previous five expansions. Without strong gains in incomes, the growth in consumer spending has to a large extent been based on increases in house prices and credit."

Hardly the robust economic scenario made out by so many cheerleaders in the U.S.

The Economist reserves their harshest criticism for the man himself, noting "The accolades bestowed upon Alan Greenspan ahead of his retirement on January 31st have a strong whiff of irrational exuberance."

The rest of the articles details the shortcomings and failures of Mr. Greenspan and his policies. It is must reading for anyone even remotely curious how we got into the situation we currently find ourselves: The current belief by many that the economy is robustm inflationis contained, and the structural economic imbalances are merely bothersome, not outright dangerous.

In the words of Austrian economist Ludwig von Mises: “It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises.”

Danger time indeed, on this Friday the 13th . . .

Sources:
Danger time for America [2]
Jan 12th 2006
From The Economist print edition
http://www.economist.com/opinion/displaystory.cfm?story_id=5385434

Monetary myopia [3]
Jan 12th 2006
From The Economist print edition
http://www.economist.com/finance/PrinterFriendly.cfm?story_id=5381959


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/01/danger-time/

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[1] Image: http://bigpicture.typepad.com/photos/uncategorized/20060114issuecovus400.jpg

[2] Danger time for America: http://www.economist.com/opinion/displaystory.cfm?story_id=5385434

[3] Monetary myopia: http://www.economist.com/finance/PrinterFriendly.cfm?story_id=5381959

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