Once a week I like to call the South-of-France and talk with the economist, Kurt Richebacher. We have been friends for years. In 1997, he came to visit us and stayed at my home. He gave a talk to our broker staff and the two of us had many interesting discussions. What stands out is the accuracy of what he had to say about future economic events. He predicted the 1998 Asian crisis, the faltering U.S. economy, the stock crash and today’s lack of a meaningful recovery. Compare that to the community of U.S. economists who have been repeatedly wrong. (Not that they’ve learned from it.) Mr. Richebacher is the only economist on earth to be so right so early.
I think it’s a symptom of the times that the guy who has been right gets ignored, but those who have been wrong get wide currency. The equity culture has mesmerized America. There’s no listening to reason among investors. You might as well tell the sorry characters who blow their entire paycheck at the quarter slot machines to stop gambling. The growth in speculation, and the derivatives that facilitate it, is a measure of our dysfunction. Prompted by the greatest credit excesses in history, the nation has become a great casino, crowded with speculators, runaway consumers and subsidized pleasure seekers.
Lately the histrionics about an imminent recovery have become delusional. The worse it looks, the higher the decibels emanating from Wall Street. Mr. Richebacher explains, "Reading mostly bullish reports about the U.S. economy, it strikes us that they are all rich in optimistic assumptions and predictions, but very short on critical analysis of facts and causes. It is simply their foregone conclusion that the U.S. economy and its financial system are fundamentally sound…..
"Looking at the levels from where stock prices have come since the spring of 2000, the excitement about the rebound of the stock markets since March appears to us as too much ado about nothing. The truly decisive question is and remains, of course, the economy’s further performance.
"The actual economic data do not give the slightest reasons for expecting or predicting an imminent, strong recovery of the U.S. economy. At the bottom of these optimistic forecasts is little more than the hope that the unusually aggressive measures undertaken by the government and the Federal Reserve will be effective in stimulating the economy.
"For sure, America’s economy is at its most critical juncture. Hopes are riding high that the aggressive stimulative measures, implemented by the government and Federal Reserve, will not fail to revitalize it. Monetary and fiscal policies are operating with wide open spigots. Much smaller doses of both have always helped in the past. Why should these much bigger doses fail this time?
"There is a simple answer: Past recessions were all chiefly caused by monetary tightening imposing a credit crunch on consumers and businesses. By easing credit, the central banks removed the recession's cause, and basically healthy economies took off again.
"For the first time ever in the postwar period, many countries around the world, not only America, are experiencing a prolonged economic downturn in the absence of any monetary tightening. In essence, there must be causes other than a credit crunch.
"Nobody questions the need for action. But it should be clear that easy money can only be the cure for tight money, not for any other causes depressing the economy. For us, the real and disturbing story about the U.S. economy is that, with all its imbalances, it has reached the stage where it requires permanent, massive monetary and fiscal stimulus to garner just a tepid economic response – and to prevent the various bubbles from deflating. All this is definitely not prone to create a healthy economy capable of self-sustaining growth.
"The fundamental dilemma today is that the Greenspan Fed and Wall Street are making desperate efforts to sustain unsustainable bubbles. In the end, all bubbles are unsustainable because in order to stay afloat they have to inflate endlessly. Our greatest fear is now the bond bubble. Its influences are pervading the whole economy and the whole financial system, and its bursting may have apocalyptic consequences…..
"Once more, America’s numerous consensus economists have convinced themselves that the U.S. economy is on the verge of the desired revival they are persistently forecasting. They enumerate two main reasons: first, better economic data, and second, stimulation of unprecedented magnitude – record-low interest rates, huge tax cuts and the falling dollar.
"Just in early June, Mr. Greenspan told a banking conference in Berlin via satellite that there was still no evidence of a postwar acceleration in the U.S. economy. Most American economic data, labor market data in particular, leave no doubt as to the direction of the economy’s next major move – down, not up."
-- Posted Wednesday, 23 July 2003
