Why War Won't End Our Jitters

NEWSWEEK INTERNATIONAL ^ | Feb. 10 issue | Robert J. Samuelson

[hripka]

We prefer temporary explanations to a grimmer possibility. Let's call it the "excuse du jour." For three years, we've heard serial explanations for the economy's weakness. The latest is a looming war with Iraq. Aside from increasing oil prices, the war specter (it's said) has created huge uncertainty that's causing companies and consumers to postpone big spending decisions. Once the uncertainty lifts, we'll get a decisive recovery. Don't count on it.

SINCE MID-2000, the U.S. economy has grown at an annual rate of 1.3 percent. Some quarters have been up, some down and some nearly stagnant (the growth rate for the last quarter of 2002 was a mere 0.7 percent). Every economic sputter inspires a new theory. The dot-com collapse. The "popping" of the stock "bubble." The trauma of September 11. Corporate scandals and shattered investor confidence. And always: a strong recovery lies just ahead. There's a pattern here. It involves psychology more than economics. We prefer temporary explanations to a grimmer possibility: that the U.S. economy faces prolonged slow growth-or stagnation. Better to believe that, once "temporary" problems are settled, the economy will spring back. After the dot-com funerals, things will be fine. If investor confidence is shot, then we'll throw corporate crooks in jail and "reform" accounting.

The war-with-Iraq theory fits the pattern and reigns in high places. Last week, the Federal Reserve endorsed it. -SNIP- But there are two problems. First: temporary problems often aren't temporary. Accounting scandals didn't kill investor confidence. -SNIP- Second: temporary explanations downplay the damage from the 1990s boom. -SNIP-

[Larry Lucido]

Why War Won't End Our Jitters

I don't remember anything in the SOTU speech about going to war to end "jitters." So, other than that, does the article have a point that makes it worth reading?

[rface]

Second: temporary explanations downplay the damage from the 1990s boom. It wasn’t just a stock-market bubble. Companies invested lavishly, expecting strong demand forever; now there’s surplus capacity almost everywhere. (The Fed’s industrial capacity utilization index is 75.4 compared with a 1972-2001 average of 81.5.) Consumers spent lavishly, enjoying new stock wealth. Both companies and consumers borrowed heavily.

All this suggests a period of retrenchment. Companies cut investment and jobs. Gradually, surplus production capacity dwindles and profits revive. Consumers respond to falling stock prices and rising job insecurity by spending more cautiously. Both try to reduce debt. To some extent, this adverse logic has been muted: the Fed cut interest rates; Congress cut taxes; automakers offered cheap car loans; homeowners refinanced mortgages at lower interest rates. Still, the logic remains.

It wouldn’t matter much if the rest of the world economy were robust. The United States would then export its way out of trouble. Unfortunately, Europe and Japan are both economically moribund. One lesson of the 1990s boom is that other countries became overdependent on America’s appetite for their exports. Global trade is now sputtering, too. The great danger is that simultaneous economic weaknesses in Europe, Japan and the United States feed on each other, intensifying pessimism and creating a new wave of financial crises.

There’s no doubt the prospect of war with Iraq has deepened economic anxiety. Companies that say they’ve postponed projects are probably telling part of the truth. What they don’t say is that many of these projects were likely doomed anyway, given the weak underlying economy. The big picture matters most, and it’s dark, Iraq or not. It’s understandable that people favor a diagnosis that offers greater hope for a strong recovery. And a strong recovery may even come. It’s just that the odds in its favor aren’t especially good.

[onedoug]

If this war is moral, which I believe its purpose to be, let the handwringers do just that.

[hripka]

This article is about people blaming the economy/stock market on the Iraqi situation, or as the article starts out with, "Let's call it the "excuse du jour." For three years, we've heard serial explanations for the economy's weakness. The latest is a looming war with Iraq."

[hripka]

This article is NOT about the pros/cons of a war with Iraq.

It is about what people will grasp at in blaming whats wrong with the economy.

[ThePythonicCow]

I don't remember anything in your reply about the SOTU speech, Larry. So other than that, does your reply have a point that makes it worth reading? ... LOL

More seriously, yes, this article is pointing out the low state of denial that is accompanying this prolonged weakening of the economy, as is typically the case. People will be denying that we are in a prolonged depression all the way down. We have an enormous overhang of financial paper (debt, mortgages, inflated stock prices, inflated real estate prices, corporate and government bonds, derivatives, options, insurance, pensions, social security and other government future commitments, ...) to work off.

When all the headlines are screaming that we are in a never ending depression and deflation, that there is no hope, ... then we will turn the corner and begin climbing out of this hole. That will be quite a few years from now.

That's how I see it. This article isn't making that big a claim, but it is noticing that the excuses for the economic weakness are based in false hopes.

[Larry Lucido]

Why War Won't End Our Jitters

Well, it's his title, not mine. The purpose of the showdown with Iraq isn't to address economic jitters. So, I can concede his point and still ask of what import it is.

[Larry Lucido]

Lower taxes on the productive and reduce regulations restricting productivity in general, and the economy will take care of itself.

I'll grant the author's point, though - a war won't turn the economy around. But then, that's not the purpose of the mobilization.

[hripka]

I thought Freepers could read beyond the title, and this one is appropriate for the subject. But then there are always 10% that . . . .

[tet68]

: temporary explanations downplay the damage from the 1990s boom.


Damage?

[ThePythonicCow]

He's not saying that the purpose of the war is to calm investor jitters, just as he didn't say that this had anything to do with the SUTO speach.

He's throwing cold water on (unquoted, but commonly available) comments by others that the reason for current market weakness is the pending war.

As others have noticed above, you seem to be having trouble with reading comprehension today. Better luck tomorrow.

[Nick Danger]

So what's wrong? Samuelson is probably correct that the "excuses du jour" we've been hearing don't explain much. Or maybe they do; perhaps we are just not looking deeply enough into them.

'rface' in Note #3 offers up surplus capacity and debt overhang as possible reasons for the seeming stagnation. Surplus capacity, built in anticipation of ever-brighter tomorrows, is certainly a factor. The debt is, I think, more a symptom than the disease.

I think the disease is that we burned up a whole bunch of human and financial capital on dumb ideas, in a frantic quest to find out how to make money with the Internet. Now we have neither the cash invested, nor going concerns that have a prayer of ever returning that cash.

I hesitate to guess how much investors' cash was put into AOL to get it to the size it is. It has in the past shown accounting profits, but I'll bet it has never thrown off one-fiftieth of the cash-in. It may well fall over and die at this point, swallowing billions in cash that it will take us a long time to replace. The AOL story has already been preceded by hundreds like it: Salon, DrKoop, Pets.com... the list goes on of places where humans invested huge amounts of time and effort to produce... nothing. Whatever they did was just thrown away. And the investment cash used to pay them is gone forever, consumed by their rent and utility bills while they worked on bad ideas that went nowhere; that will never return a dime of the cash put in.

We are like a tribe of Indians that took our seed corn and threw a good percentage of it into the sea, believing that shaman who said it would grow there. Now we can't even plant the acreage we've got, let alone cultivate more.

Samuelson is right that it will take years to dig out of this. The only way to make more seed corn, and get back to where we were, is with genuinely profitable enterprises. None of those high-growth things that show accounting profits but eat cash... our salvation is in those mundane, slowly-growing companies that actually throw off cash. It's gonna be a rough job market until this is over.

People wonder how we could be staring into the abyss of deflation after decades of expansionary monetary policy by the Fed. What happened to all the money? To paraphrase those old Smith Barney ads, "We got rid of money the old-fashioned way. We burned it."

[hripka]

Damage? You are looking for damage? Look about you at an economy suffering from the after-effects of a credit-induced boom. Now we have factory overcapacity, malinvestment, record percentages of debt to income, skyrocketing bankruptcies and foreclosures in an, at best, average economy, a foreign trade deficit that is unsustainable, etc. People projected trendlines into the future, and these trendlines didn't occur as they thought it would. Now, according to Samuelson, they are blaming it on a possible war with Iraq. Last year's explanation was 9/11.

We lived through a bubble, and the damage from its "popping" is here right now.

[Jason_b]

Damage?

Malinvestment, speculation, and the loss since of trillions of dollars worth of nonrealized wealth on paper. Damage to the 401Ks of countless suckers oops I mean investors, some of retirement age who get to work years past their planned age of retirement. Bankruptcy filings up, closed businesses up, foreclosures way up. Laid off but lucky enough to find new work---sorry, but at a much reduced salary. I think that is what was meant. Please correct me if I am wrong.

[tet68]

YOu guys slay me.
Thank god it wasn't a bust.