Economics: Chronic Pessimists
Wesbury, Brian S.
"Economics: Chronic Pessimists" BRIAN S. WESBURY Chronic Pessimists T A DINNER PARTY NOT LONG AGO, a friend who stays current with the news, but is not an investment professional or academic, was...
...growth rate, journalists reported this growth as "less than forecast" and "slower than the 3.8 percent rate of the first quarter...
...economy in the face of higher energy prices and massive storms is a testament to the power of technologically driven productivity growth...
...New start-up companies, using state of the art machinery and far fewer employees, are driving profit margins down sharply for old-line firms...
...They often assume that what is true for one person is also true for the economy as a whole...
...History shows that government mistakes, not irrational consumer behavior, cause recessions...
...NOVEMBER 2005 THE AMERICAN SPECTATOR 39 ECONOMICS Aggregation and Economics H W ILE THERE ARE REAL PROBLEMS—an evacuated major US...
...However, disposable personal income is up by $1.5 trillion over that same time period...
...if the B R I A N S . W E S B U R Y news is bad, it is reported as catastrophic...
...It is also true that bad news is deemed to sell better than good news...
...Even the best shopping malls in the country have shuttered stores because online retail sales are growing rapidly...
...The U.S...
...The Institute of Supply Management reported that both the manufacturing and non-manufacturing sectors expanded nicely in September, despite the impact of Hurricane Katrina...
...has increased by roughly $180 billion since 2001...
...Even clearly positive data comes with a caveat—strong economic data mean more Fed rate hikes...
...The Housing ATM ONETHELESS, MANY STILL BELIEVE that the only prop holding the economy up is the so-called housing ATM...
...What is true for one person, the ability to borrow against an asset, cannot be true for the economy in aggregate...
...Technology has created such a flexible and dynamic economy that banks and other service-based companies were already operating in other cities within days of Katrina...
...At the same time, an investor class that has rolled with the punches, accepted the opportunistic side of change, and become more entrepreneurial is an op-posing force...
...The resilience of the U.S...
...As cash-out loans are repaid, savers will receive their money back, and that money will then be lent or spent again...
...It is no wonder people think the U.S...
...Like most people, she probably absorbs much of her information through headlines and quick two-minute stories on TV...
...The 2003 tax cuts are still the dominant force in fiscal policy...
...The 2003 tax cuts are still the dominant force in fiscal policy, and despite Fed rate hikes, monetary policy is still accommodative...
...Corporate profits, business investment, industrial production, employment, wages and salaries, retail sales, household wealth, and housing activity are all at record highs...
...This will keep inflation from getting out of control...
...Productivity is also increasing wealth...
...These two forces are battling every day...
...Productivity is still booming and technological progress is accelerating...
...Hurricanes have devastated the economy...
...The answer is somewhat complicated, but it appears to boil down to two main factors...
...to over $60/bbl...
...Why has journalism slipped into a bad news mentality...
...Though this is roughly equal to the long-term average U.S...
...Some evidence of this was shown in the Chicago purchasing managers survey, which boomed in September, suggesting that the Midwest was picking up some of the slack...
...So what gives...
...His decisions are much more rational than the pessimists want us to believe...
...While the economy is a clear winner in all of thiscreative destruction, it has disrupted the lives of many...
...But the truth is that CNBC ratings were higher in the late 1990s, when the economic news was so good people now call it a bubble...
...With expectations so low, and so many people fearing the worst, it is highly likely that the real surprises of the future are going to reward the optimists, not the pessimists...
...economy is a massive enter-prise...
...These people are a political force, waiting for a populist message that assures them of reduced risk from the destruction brought by new technology...
...Oil prices are headed to $100 a barrel...
...who have spent more than they have earned, borrowed more than 100 percent of their home's value using an interest-only loan, invested whatever they have left in highly risky stocks, and have a high probability of bankruptcy in their future...
...The unemployment rate is 5.1 percent—very, very low in a historical context...
...Rising energy prices are also a red herring...
...Optimism Will Win THE PESSIMISM AND ANGST we are witnessing today is some of the worst I have seen in my career...
...Even Alan Greenspan makes this mistake...
...But the average American is not stupid...
...In the second quarter, the net worth of U.S...
...But these fears are based on a myopic view, models which do not reflect the way the world really works and a thought process that describes progress and change as a negative...
...ECONOMICS B R I A N S . W E S B U R Y Chronic Pessimists T A DINNER PARTY NOT LONG AGO, a friend who stays current with the news, but is not an investment professional or academic, was surprised to learn L that the unemployment rate in France was 10 percent, more than double that of the U.S...
...Second, most people have a very weak under-standing of economics...
...In the end, we live in an extraordinary time of rapid advances in technology, massive gains in productivity and wealth, and upheaval in the status quo...
...But these people do not define America...
...For someone to refinance, and take cash out of a home, someone else must save...
...She probably does not know that there is a weekly report detailing retail chain store sales, nor does she care...
...For those who do not want change, the world is a scary place with wolves at every door...
...It is no wonder retail trade remains strong...
...Warren Buffett is shorting the dollar be-cause the trade deficit threatens to take down the economy...
...38 THE AMERICAN SPECTATOR NOVEMBER 2005 When the number of credit card accounts in delinquency rose to a record high in the second quarter of 2005, breathless news accounts fretted about an over-burdened consumer without reporting that the actual dollar amount of delinquent credit card debt as a percentage of all credit card borrowing is at a ten-year low...
...The middle class is shrinking...
...While some think productivity and globalization are bad for job growth, the opposite is true...
...That wealth is more widely dispersed as well...
...Spending on energy (gas, home heating, and cooling, etc...
...Manufacturers were able to shift production to unaffected areas quickly...
...Real GDP has expanded for 15 consecutive quarters...
...While anything can happen, the good news is that economic fundamentals remain strong...
...economy is in bad shape...
...Alan Greenspan said in a recent speech that "cash-out" equity financing of homes has added roughly $600 billion to consumer purchasing power...
...The federal government is in deficit...
...Decades-old pension and healthcare plans are impossible to fund because of lower profit margins and a productivity-driven shrinkage in the workforce available to spread the costs...
...house-holds rose to an astounding $49.8 trillion...
...From year-to-year, the particulars have changed, but the story has always been the same—"people do stupid things, they have too much debt, and any day now all this stupidity will cause the economy to crash...
...Get ready for more announcements like this, from a wide variety of companies, in the future...
...This, however, makes the mistake of assuming what is true for one person is true for the economy...
...Layoffs are accelerating and wages are falling...
...If the news is good, it's reported as bad...
...And China will eventually steal all of our manufacturing...
...This is a real conundrum...
...city and record-high nominal energy prices—these problems are over-stated...
...After all, there is a Republican in the White House...
...Creative Destruction DIGITAL MUSIC PLAYERS (like the iPod) are putting retail music stores out of business...
...For example, Merck has just announced a new drug that has a 100 percent success rate at preventing cervical cancer in women...
...economy is huge, with unbelievable depth and flexibility, and is very hard to knock off course...
...Technology has created such a flexible and dynamic economy that banks and other service-based companies were already operating in other cities with-in days of Katrina...
...First, most people do not understand the dramatic upheaval and transformation that is taking place in our economy to-day...
...Austrian economist Joseph Schumpeter's concept of "creative destruction" is materializing at a breathtaking rate, and most people seem to focus on the destructive side of that equation, rather than the creation side...
...Fears of hurricanes, bird flu, terrorist attacks, and other assorted calamities find a fertile environment in which to fester...
...This means that consumers have increased their spending power by more than $1.3 trillion above and beyond energy costs in the past four years...
...Ever since I began my career in economics in 40 THE AMERICAN SPECTATOR NOVEMBER 20051982, I have heard the forecasts of impending doom for consumers...
...It would be tempting to blame it on politics...
...While anything can happen, the good news is that economic fundamentals remain strong...
...Why is the press so negative...
...The economy as a whole cannot spend the equity in homes...
...What she receives is a daily dose of negativity...
...v Brian S. Wesbury, The American Spectator's economics editor, is Chief Investment Strategist at Claymore Advisors, LLC...
...The economy is booming...
...Moreover, because of all the pressure on the Fed, too much tightening is unlikely...
...Even if the government spends $200 billion in the next few years to rebuild (which I believe is greatly exaggerated), this spending is swamped by the roughly $40 trillion in GDP that will accumulate over the next three years...
...An-other error comes from focusing too much on one single event (Katrina) or factor (energy prices...
...This is a real hit to consumer pocket books...
...All she wants is an overall feel for the economy's health...
...It happens in more subtle ways as well...
...My friend does not watch CNBC all day and could care less about the latest move in durable goods orders...
...She had assumed Europe was in much better economic shape than America...
...Yes, there are people in the U.S...
...The current stance of fiscal and monetary policy re-mains positive for future growth and the stock market remains undervalued...
...Since 2001, oil prices have climbed sharply from $20/bbl...
...The housing bubble is about to burst...
...Second quarter real GDP grew 3.3 percent...
...The hurricane was devastating to hundreds of thousands, but the US...
...For every dollar borrowed there must be a dollar in savings...
...Machinery that cost millions just a few years ago is now obsolete and inefficient...
...Yes, inflation is rising because the Fed was too loose for too long, but the Fed is relentlessly moving rates back toward neutral...
Vol. 38 • November 2005 • No. 9
