In his latest New York Times op-ed entitled "This Age of Bubbles" (http://www.nytimes.com/2013/08/23/opinion/krugman-this-age-of-bubbles.html?_r=0), Paul Krugman considers the nature of financial bubbles. Krugman concludes:
"In short, the main lesson of this age of bubbles — a lesson that India, Brazil, and others are learning once again — is that when the financial industry is set loose to do its thing, it lurches from crisis to crisis."
As anyone who reads this blog knows, I have serious issues with the greed and manipulative practices of an unfettered financial industry. One need only examine my routine diatribes aimed at restoring the "Uptick Rule" to understand how troubled I am by financial industry excesses (see, most recently: http://jgcaesarea.blogspot.co.il/2013/08/maureen-dowd-summers-of-our-discontent.html).
But is only the financial industry to blame for these crises? Could it also be that retired persons currently have no secure place to invest their savings, given that bank deposits pay so little interest today? Low rates on bank deposits do not result - at least directly - from financial industry excesses, but rather from Federal Reserve efforts to reduce interest rates to stimulate the economy.
But as long as we're talking about "bubbles," why is there no mention by Krugman of US stock markets?
Let's face it: The US economy is still rotten. As reported by Bernice Napach in an article entitled "Income Stats Suggest American Dream Is Dead" (http://finance.yahoo.com/blogs/daily-ticker/income-stats-suggest-american-dream-dead-161855152.html):
"The Great Recession officially ended in June 2009, but the U.S. economy still has not fully recovered. While existing home sales have returned to their June 2009 level and the current unemployment rate of 7.4% is far below the June 2009 rate of 9.5%, less people are participating in the work force and incomes are decisively lower.
A new report out Thursday from Sentier Research found that the median annual household income of Americans was $52,100 in June, after adjusting for inflation. That's 4.4% below the level in December 2009.
Even more dramatic, the median income is 6.1% lower than the level in December 2007, when the recession began, and 7.2% lower than January 2000. For many Americans incomes aren’t just stagnant, they’re falling along with their purchasing power and standard of living."
So why are US stock markets so high if things are so bad? The answer is simple: There is no secure place to park your money and receive a reasonable rate of return.
Yes, current US stock market prices are also a bubble, which ultimately must burst. Regrettably, they are not a reflection of an upturn in the economy.
Depressions occur after investment bubbles burst. In free-market capitalism, capital generates income for the owners of the capital which in turn is used to create additional capital. This is very good. Sometimes, it can be actually too good. As capital continues to accumulate, its owners find it more and more difficult to deploy it efficiently. The business sector generally must interact with the household sector by selling goods and services or lending to them. When capital accumulates too rapidly, the productive capacity of the business sector can outpace the ability of the household sector to absorb the increasing production.
ReplyDeleteThe capitalists, or if you prefer, job creators use their increasing wealth and income to reinvest, thus increasing the productive capacity of the business they own. They also lend their accumulated wealth to other business as well as other entities after they have exhausted opportunities within business they own. As they seek to deploy ever more capital, excess factories, housing and shopping centers are built and more and more dubious loans are made. This is overinvestment. As one banker described the events leading up to 2008 – First the banks lent all they could to those who could pay them back and then they started to lend to those could not pay them back. As cash poured into banks in ever increasing amounts, caution was thrown to the wind. For a while consumers can use credit to buy more goods and services than their incomes can sustain. Ultimately, the overinvestment results in a financial crisis that causes unemployment, reductions in factory utilization and bankruptcies all of which reduce the value of investments.
If the economy was suffering from accumulated chronic underinvestment, shifting income from the non-rich to the rich would make sense. Underinvestment would mean there was a shortage of shopping centers, hotels, housing and factories were operating at 100% of capacity but still not able to produce as many cars and other goods as people needed. It might not seem fair, but the quickest way to build up capital is to take income away from the middle class who have a high propensity to consume and give to the rich who have a propensity to save (and invest). Except for periods in the 1950s and 1960s and possibly the 1990’s when tax rates on the rich just happened to be high enough to prevent overinvestment, the economy has generally suffered from periodic overinvestment cycles.
It is not just a coincidence that tax cuts for the rich have preceded both the 1929 and 2007 depressions. The Revenue acts of 1926 and 1928 worked exactly as the Republican Congresses that pushed them through promised. The dramatic reductions in taxes on the upper income brackets and estates of the wealthy did indeed result in increases in savings and investment. However, overinvestment (by 1929 there were over 600 automobile manufacturing companies in the USA) caused the depression that made the rich, and most everyone else, ultimately much poorer.
Since 1969 there has been a tremendous shift in the tax burdens away from the rich on onto the middle class. Corporate income tax receipts, whose incidence falls entirely on the owners of corporations, were 4% of GDP then and are now less than 1%. During that same period, payroll tax rates as percent of GDP have increased dramatically. The overinvestment problem caused by the reduction in taxes on the wealthy is exacerbated by the increased tax burden on the middle class. While overinvestment creates more factories, housing and shopping centers; higher payroll taxes reduces the purchasing power of middle-class consumers...
http://seekingalpha.com/article/1543642