The Great Debate

A tongue and cheek look at the future of the US economy

                        By James Mound

          As we begin 2003 in a state of relative chaos, between potential war in the Middle East, terrorism in our homeland, economic frailty on a worldwide level, declining stock prices, worsening economic functions, and so on, we find ourselves in the midst of the great debate of our time:  The Future of the US Economy.  And who better to debate such a gray area as my friends, and mortal opposites, Black and White?

White        

            White woke up this morning and came to the overwhelming conclusion that the economy is in fact at a bottom and clearer skies are ahead.  This was no minor conclusion, as it was based on numerous facts that support it.  Here are the highlights:

*The weaker dollar:  A weak dollar policy is just what the economy needed to boost exports and sustain corporate growth on a worldwide level.  A weaker dollar creates greater buying demand for US goods abroad, which in turn allows for greater profit margins and trickle down economics in our major corporations.

**Greenspan is God:  With an undying blind faith in The Man, our economy should be lifted to a higher plateau of economic theory and application through the unfloundering arms of one Alan Greenspan.  His marksman–like ability to time economic shifts in our marketplace, and implement appropriate economic policy to sustain prosperity has been proven time after time.  He will continue to make the right moves to quickly reverse our economic hardships.

***War to the rescue:  War creates economic prosperity.  This has been proven throughout history, with the most recent being the Gulf War.  The Gulf War achieved an economic turnaround in only a matter of months, as Clinton walked into an economic prosperity that was only supported by the post-wartime economy creating better resource usage, low unemployment rates, increased productivity and improved worldwide demand.  Granted, our trade deficit took a beating, but all is fair in economic survival.

****Propensity to spend:  Our economy and people have evolved into spenders, not savers.  This practice has allowed us to sustain our recent prosperity because of our economy’s ability to spend through tough times.  While this has not existed in our history, we are in a new era that has spending at the forefront of our citizens’ minds.  This spending will be the catalyst to maintain corporate profits and growth.

Black

          Black woke up on the wrong side of the bed this morning.  He woke up feeling like this was the beginning of the biggest worldwide depression in the history of mankind.  Black just has too much to support his thinking; too many historical references to suggest it will be different this time around.  Black is not sure what White was thinking.  Black backs up his thinking with these points:

*Black’s dog owns three credit cards:  There is too much credit.  With the highest per capita credit deficit in the history of mankind, the US credit defaults are growing at a rate never seen before.  This will have a profound affect on three key economic issues.  First, banks will lose the ability to extend credit as more and more defaults create havoc on the banking industry (reference Japan).  Then individuals will claim bankruptcy and small businesses will default, which will cause personal spending to be reduced at a rapid pace. 

**Greenspan is powerless:  It is rumored that on Greenspan’s desk there is plaque that says: “The buck stops here”.  Well, the buck is about to run Alan over, because there is no stopping the economic turmoil that lies ahead.  Greenspan can mess with the economic fiscal policy all he wants, and it will not prevent the failures of every major economic base in the world.  Japan led us here, now South America, Europe and Asia will bring our economic recovery to a sudden halt.  The dollar may be cheaper, but who is in a position to buy goods?  Do some traveling abroad and you tell me which economy is in worse shape. 

***Housing cycles:  It always impresses me how real estate cycles are ignored in this country.  It has been proven, time after time, that the longer the bull real estate cycle, the longer and worse the bear cycle that follows it will be.  When interest rates rise, housing values will tumble, sparking the worst real estate plunge in recent history.  If only out of fear of mimicking Japan’s mistakes, Greenspan will be forced to raise rates rather than lower them as time goes on.  He will not risk placing the US into a deflationary economy. 

****Productivity levels in the corporate world have flat lined.  What was once the support system for our sustained economic prosperity, has become the reason for its failure.  In an effort to regain this corporate efficiency, more and more money is being spent on R&D (not much trickling down there), and less money spent on new company development and overall investments in our economic foundation (corporate expansion).  Corporate downsizing should be your first tip-off to decreased productivity, but it won’t be your last.  Decreasing profit margins, increased debt to income ratios, and corporate failures will follow.

*****We are an economy that is service based, not product/goods based:  The weaker dollar will create a short term boost in demand, but ultimately (as proven through our trade deficit) will create hardships on the import end more so than the benefits on the export end.  This will improve corporate demand within the US, but did everyone forget that our major corporations are worldwide?  How many of the S&P 500 companies import their own products into the US that are made in foreign nations?  How many have properly hedged themselves against the currency risk that has existed and will exist for some time?

           Black and White can’t duke it out much longer.  Only time will tell who will win this epic battle.  The gray area that fogs so many investors’ vision will dissipate as this year unfolds the future of our economy.  So keep your eyes open, and be observant of the trends that will develop in the near future.

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