[OPE-L:7118] It does not seem US recession is over

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Sun May 05 2002 - 01:04:13 EDT

OPE-L'ers may be interested in Fred M's recent analysis.


Fred writes

>The profit share of total income depends on the relative rates of 
>increase of prices and costs, especially labor costs. In recent 
>years, the profit share declined because labor costs have increased 
>faster than prices

Does Fred now subscribe to a wage squeeze theory of crisis?

Fred documents in very helpful detail the rising indebtedness of US 
corporations but since capital has been cheap for US corporations, 
will interest payments prove to be very onerous if there is some pick 
up in profits and revenue flow?

Fred realizes that the debt has been cheap:

>This huge inflow of foreign capital contributed significantly to the 
>"boom" in the U.S. economy in the late 1990s, in a number of ways: 
>by reducing interest rates, which in turn increased investment 
>spending and also lowered the debt burdens of U.S. corporations and 

Fred notes the repurchase of shares:

>Astonishingly, about 50 percent of the money borrowed by 
>corporations in the late 1990s was used, not to build new plants and 
>equipment, but rather to repurchase the companies' own stock!

There was an insightful analysis by Medoff and Harless about how tax 
advantageous such buy backs are.

What seems to me a  looming threat--to which Paul Krugman has been 
paying attention in the NYT--is a grave fiscal crisis of the US state 
and the effect on capital markets from the massive issuance of new 
govt debt (aka fictitious capital), though of course Bush's 
pornographically regressive tax cuts may well bolster the real 
profitability of US corporations and stimulate investment even if the 
US govt's big reentry into the capital markets puts upward pressure 
on interest rates.

I do think however one can safely make this confident prediction: 
there will be an accentuation of Social Darwinist social policy. That 
is, the US capitalist state will act in the exact opposite manner 
which Fred has recommended.

Fred writes:

>However, this huge inflow of foreign capital also has its 
>disadvantages for the U.S. economy in the longer run. In the first 
>place, interest and dividends will have to be paid on this foreign 
>capital in future years; that is, a part of the income produced in 
>the U.S. economy every year will have to be used to pay interest and 
>dividends to foreign investors, thereby draining income from the 
>U.S. economy.

I don't think this drain of income is imminent: there seems to be 
little evidence (?) that central banks are diversifying out of the 
dollar and much of the foreign debt which the US seems to owe could 
be to Americans who only appear as foreigners because they are 
operating out of offshore hedge funds.

Of course one can never be sure given the massive differential 
between US and EU P/E ratios.

At any rate, even if there is a slow down in the inflow of capital to 
the US, won't it  be primarily due to the strengthening of foreign 
economies which will boost US exports especially since the dollar 
will fall with a drop off in the inflow of capital. So I don't see 
why a slow down in the inflow of capital has to be an important 
signal of a crisis in the real economy of the US.

However, if capital flows out for the reason:

>Or the exodus of foreign capital could be triggered by external 
>events, like the Japanese banking crisis, which could force Japanese 
>banks to sell their U.S. assets in order to offset losses at home 
>(Japanese banks own approximately 10 percent of all U.S. Treasury 
>bonds). If such a capital flight were to occur, then the U.S. 
>economy would be in serious trouble.

I find myself agreeing with Fred. After having read Susan Strange's 
Mad Money, I have thought that a Japanese repatriation of capital 
from the US market is a very likely trigger for global depression.


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