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Library Home Street Smart Report Home BEING STREET SMART by Sy Harding IS THE BUSINESS CYCLE BROKEN THIS TIME? March 27, 2009. The
U.S. national debt soared in the 1980's on the record deficit spending of the
Reagan Administration to get the country out of the panic of the 1970's
recessions and stagflation. There was no way to escape the consequences.
Economists competed with each other with dire forecasts of how this time was
different and the nation was headed inevitably into bankruptcy. Remember that
huge electronic clock set up somewhere that they'd periodically show us on TV,
as it kept track of the millions that were being added to the national debt
every minute - or was it every second? However,
the laws of business and economic cycles had not been repealed, had not been
replaced with an endless trend in one direction. The economy began recovering
nicely even as the deficits grew. Then
in the 1990's, rather than government bankruptcy, the continuing strong
economy and booming stock market produced record tax revenues, and not only a
balanced Federal budget, but several years of large budget surpluses. As
usual, at that opposite extreme of the pendulum swing, in 1999, it was also
thought that this time was different, and the good
times could roll on endlessly. Not
surprisingly, Congress began making plans to spend the surpluses it expected
would continue well into the new century. Economists then predicted that not
only would the national debt be completely paid off in ten years, and Social
Security easily funded, but there would be plenty left over for tax cuts, and
for Congress to spend more on its favorite projects. But
economic and business cycles had still
not been repealed. The stock market bubble burst in 2000, and the economy soon
plunged into its next recession. The Federal budget surpluses turned to deficits
in a hurry. Unexpected events and situations took place, this time a terrorist
attack and a couple of wars, and conventional wisdom reversed again to thinking
that we could not help
but wind up in the next Great Depression. Huge government stimulus packages and record low interest rates eventually reversed the cycle again. A new bull market in stocks began in 2002, and the economy pulled out of the recession in 2003. And popular wisdom again reversed, to expectations that the good times would continue this time. However, the stimulus was overdone or left
in place too long, particularly in the area of low interest rates, and another
bubble formed, this time in housing. The bursting of that bubble brought on the
current recession, bear market in stocks, and new record high budget deficits. And
with that has come another reversal popular wisdom, again to certainty that this time is
really different. We can't get out of this
mess. The
pendulum has certainly reached extremes, not just in the economy and bear
market, but in just about any area you choose to look. Some bring smiles of
satisfaction to Main Street. Executives
previously paid tens of millions in annual salaries and bonuses to run the
nation's financial institutions, praised and favorably treated with tax cuts
for the wealthy, are now working for $1 a year salaries, being vilified as
crooks, and having their bonuses taxed at 91% (if they dare to keep them). Congress
and the White House, previously believing a hands-off, trust them to regulate
themselves approach to business and Wall Street was the way to go, have swung
far to the opposite extreme. They are now convinced government, now that
taxpayers are major investors, knows better how to run banks, auto-makers, and myriad
other businesses, and will provide instructions to managements. The
pendulum has certainly swung to an extreme for investors. The euphoria and
confidence of 1999 as the Nasdaq soared above 5,000, and the relief during the
new 2003-2007 bull market, when even their homes were increasing in value at a
record pace, has swung to the opposite extreme of shock, confusion, and despair. And
conventional wisdom is that, here's that phrase yet again - this time is
different. This time investors, the nation, and probably the world, are
stumbling down the road to ruin because this crisis has set off a massive
unwinding of leverage and shrinking of balance sheets in the private sector,
which the government is trying to get us through by winding up
its balance sheet, taking on the assets and debt the private sector is getting
rid of, to keep the system operating. There is, says conventional wisdom, no way
the government involvement can be temporary, no way the cycle can swing the
other way and return any of the taxpayers' 'investments', no way this is
just another swing of the economic cycle. This time the pendulum has broken from
its stanchion and is flinging us all over a cliff. Perhaps.
But are those glimmers of a turnaround showing up in some of the economic
reports? I
have been saying in my daily blog since the beginning, that the problems began
in the housing industry and spread to the financial sector, and then out into
the overall economy, and the eventual recovery will begin in the housing
industry. And
in the last two or three weeks have come reports that new home 'starts' rose
a big and unexpected 22% in February; permits for future starts rose 11%; 'existing home' sales rose 5.1% in February, the largest monthly gain since
2003; U.S. home prices rose 1.7% in January, the first monthly gain in 12
months; and 'new home' sales rose 4.7% in February, the first increase in 8
months. And
after two down months, and five down quarters in a row, the stock market is on
track for one its most positive months in years. It
doesn't change my forecast (accurate so far) of a significant bear market
rally, and then a resumption of the bear market. But
they are encouraging signs that the economic cycle is not broken.
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