anticipates that the American economy is in for a period of slow growth
. Their arguments don't make much sense.
[Greenspan] is leaving behind the biggest economic imbalances in American history...
It is true that the economy has shown amazing resilience in the face of the bursting in 2000-01 of the biggest stockmarket bubble in history, of terrorist attacks and of a tripling of oil prices...
But the main reason why America's growth has remained strong in recent years has been a massive monetary stimulus. The Fed held real interest rates negative for several years, and even today real rates remain low. Thanks to globalisation, new technology and that vaunted flexibility, which have all helped to reduce the prices of many goods, cheap money has not spilled into traditional inflation, but into rising asset prices instead—first equities and now housing...
By borrowing against capital gains on their homes, households have been able to consume more than they earn.
What's wrong with that? Is there some immutable a priori
reason that people should consume only their wage earnings and not their capital gains? To do so would not be rational. If my assets increase in value, my lifetime resources increase, and I will smooth my consumption, and thus consume more in the present. Naturally.
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.
Americans earn high internal rates of return by buying homes. In a sense, this is
saving behavior, even if it doesn't show up in personal savings rate statistics. More household debt is offset by more valuable household assets.
As a result of weaker job creation than usual and sluggish real wage growth, American incomes have increased much more slowly than in previous recoveries.
I would attribute this to globalization, which alters the relative returns to different factors of production. Globally, labor is much more abundant, and capital scarcer, than in the United States. Accordingly, globalization, in the form of outsourcing or immigration, lowers the return to labor (here), but increases the return to capital (here-- in capital-scarce countries, the opposite). Nothing necessarily wrong with that. However, it will have negative implications for equity if, as is likely, capital is less equitably distributed than labor. That's why Social Security reform is such a brilliant idea: it would capitalize the working class. But I digress.
In recent months Mr Greenspan himself has given warnings that house prices may fall, and that this in turn could cause consumer spending to slow.
It's wise of Mr. Greenspan to give these warnings. But housing prices are more likely not
to fall, considering that, historically, they hardly ever do. More likely, they'll stagnate. That, too, might lead to slower (growth in) consumption. But this doesn't mean the economy slows. Business investment could pick up the slack. In fact, business investment is due for a recovery, having been slow lately, during a time of booming profits.
In addition, he suggests that foreigners will eventually become less eager to finance the current-account deficit. Central banks in Asia and oil-producing countries have so far been happy to buy dollar assets in order to hold down their own currencies. However, there is a limit to their willingness to keep accumulating dollar reserves.
Now the current-account deficit is not well-understood by economists. I think that it is best interpreted as a demand for dollars by foreigners to serve the traditional functions of money-- a store of value, a medium of exchange, and a unit of account. With international trade expanding, with foreign incomes rising, there's no reason to expect this demand to decline. Even if central banks shift into euros, the private sector will probably take up the slack.
But what if the dollar did slide? Why, then US exports would be more competitive abroad, and US goods would be more competitive with imports at home! We'd have an export- and import-substitution-led boom! Nothing to fear here, folks.
When house-price rises flatten off, and therefore the room for further equity withdrawal dries up, consumer spending will stumble. Given that consumer spending and residential construction have accounted for 90% of GDP growth in recent years, it is hard to see how this can occur without a sharp slowdown in the economy.
No, it's not. Other sectors
, such as business or the external sector, could accelerate. Which is likely to happen.
[Bernanke] is likely to continue the current asymmetric policy of never raising interest rates to curb rising asset prices, but always cutting rates after prices fall.
How is this "asymmetric?" It's not as if interest rates never go up. They go up when the economy starts to expand. It's "asymmetric," I suppose, in that the Fed acquiesces in the long-run upward trend of asset prices. But asset prices should trend upwards, because they are becoming more valuable. That's part of economic growth.
It's safe to say that The Economist
has persistently underestimated the American economy for a decade. In some ways, the most revealing word in this article is when they say the economy has been "amazingly" resilient. Amazing to whom? To The Economist
, of course, because of their habitual unwarranted pessimism. Maybe The Economist
should get used to the resilience of the American economy already.