a recent talk
Source Jim Devine
Date 05/04/10/12:39

This is an outline of a talk I gave last night (April 9, 2005) to the L.A. branch of the Society for Humanistic Judaism, a nice bunch.

A Sketch of the Recent U.S. "Business Cycle."

I. Introduction.

A. I am sketching the recent history U.S. economy in terms of growing indebtedness driving spending and (temporary) prosperity. It's like a relay race, where corporations first accumulate debt, driving the economy. They drop the baton, but consumers pick it up pretty quickly, so the economy does "okay" for awhile. Now it looks as if the consumers may drop the baton, but it's possible that government debt-accumulation could get it before it falls or pick it up quickly. Of course, the story is more complicated than that...

B. The story focuses on the interplay of expansionary forces pushing for economic boom and those contractionary forces encouraging recession.

II. Late 1990s: the "new economy"

A. Contractionary forces.

(1) Rising government surplus.

(2) a growing trade deficit (rising imports, falling exports).

B. Expansionary forces.

(1) High profitability & stock market bubble, encouraging private debt accumulation for consumption and fixed investment.

(2) falling oil prices.

(3) The Fed let it happen (a passive acceptance of the bubble and the boom).

C. Results: Clinton-era Economic boom, unequally-distributed but lowering unemployment.

III. 2000-2001

A. Contractionary forces.

(1) Overexpansion (excessive expansionary forces) leads to:

(2) stock market collapse,

(3) implosion of fixed investment.

B. Expansionary forces.

(1) Fed lowers interest rates dramatically to fight recession.

(2) encouraging housing price bubble

(3) and further consumer debt accumulation.

C. Results: Recession, moderated by continued high consumer spending.

IV. 2002-2004

A. Contractionary forces.

(1) Steeply growing trade deficit;

(2) the working off of excessive corporate debt delays fixed investment.

B. Expansionary forces.

(1) Fed lowers interest rates further.

(2) Housing bubble and consumer spending continue, now encouraged by:

(3) government debt accumulation (tax cuts for the rich and increased military spending).

C. Results: Jobless recovery: economic recovery not fast or strong enough to improve the job situation significantly.

V. Recent changes

A. Soaring trade deficits (and low U.S. interest rates) cause the falling dollar, especially after 2002.

B. Fearing inflation, Fed hikes interest rates starting in June 2004.

VI. The Future

A. Contractionary forces

(1) The falling dollar (encouraged by the trade deficit) encourages inflation.

(2) Oil prices hikes help cause inflation.

(3) The Fed raises interest rates even further to fight inflation, discouraging private debt accumulation and weakening the housing bubble.

(4) The housing bubble seems to be popping, so that household debt encourages consumer spending cut-backs and bankruptcies.

B. Expansionary forces

(1) Fixed investment recovers due to improved profitability, falling corporate debt.

(2) Government debt accumulation to pay for war and tax cuts for the rich.

(3) Falling dollar encourages greater demand for U.S.-made goods (except due to the China trade and rising input prices).

C. Possible Results

(1) "Japan" scenario: wave of household bankruptcies, recession, rising unemployment. Private investment falls again. Prolonged stagnation.

(2) "Rosy" Scenario: Government debt accumulation and corporate expansion encourage recovery, based on consumer debt peonage (debts accumulated from the past, stricter bankruptcy laws).

James G. Devine
Professor of Economics,
Loyola Marymount University

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