Joined: 28 Dec 2005
|Posted: Sun Oct 21, 2007 6:44 am Post subject: The U.S. Economy of the 2000s
|It's important to note that U.S. actual output has generally been below U.S. potential output throughout the 2000s. Export-led economies have been absorbing U.S. dollars to maintain acceptable levels of employment and output. Just like the volume of output in itself will cause declining prices and induce demand, the volume of capital will in itself cause interest rates to fall and induce demand. The gains of U.S. assets increased faster than the gains of U.S. liabilities. Similarly, the increases in U.S. output exceeded the rises in U.S. inflation, which induced demand and raised living standards. Export-led economies needed to accept small gains of trade to spur export growth (which imply the U.S accepts large gains of trade). Also, while the U.S. dollar depreciated, export-led economies were required to accept even smaller gains of trade to maintain export-led growth. The U.S. had abundant capital from foreign capital inflows and capital creation of U.S. firms. Much of that capital flowed into the U.S. housing market creating an oversupply of houses and causing a crisis, i.e. Americans who couldn't really afford to buy houses were able to buy them, and Americans who couldn't really afford to buy more expensive houses were able to buy them. The U.S. economy can be viewed as a Black Hole attracting imports and capital. Now, the U.S. is also attracting foreigners who own that capital, e.g. through the depreciated dollar, relatively low prices, low interest rates, etc.
Posted by: Arthur Eckart | Thursday, October 18, 2007 at 08:58 AM
I agree more with the study that concluded: "From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25 percentage points, yet long-maturity yields and forward rates fell. We consider several possible explanations for this "conundrum." The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic uncertainty and financial market volatility, more predictable monetary policy, and the state of the business cycle."
From 2004-06, U.S. real GDP expanded about 4% a year, which was above trend growth, although it remained below the 10-year moving average. There were diminished economic uncertainty and less financial market volatility, while U.S. monetary policy was consistent, which lowered risk premiums. However, the "state of the business cycle" may be the key point. The expectation was U.S. real growth would slow, because of the restrictive stance (i.e. domestically), which inverted the yield curve, while the U.S. current account deficit and U.S. capital account surplus both increased substantially, which kept U.S. long-term yields low.
It should also be noted the U.S. economy moved closer towards "optimization," on both the production and consumption sides, which lowered risk. The efficiencies of U.S. firms, gains in U.S. consumer surplus, and improvements in U.S. government financing increased substantially, throughout the 2000s, which raised U.S. living standards and strengthened the U.S. economy.
Also, I may add, below is BLS data on U.S. consumption and living standards. Some interesting 2003 findings are about 40% of U.S. homeowners didn't have a mortgage, 3.2% of income went into gasoline and motor oil, 5.9% of income was allotted for health care, and 5.1% of income was allotted for entertainment. The data show U.S. purchasing power increased three-fold from 1901 to 2003. However, the rise in U.S. living standards is understated, because quality isn't taken into account. For example, the median house today is newer, bigger, and better than the median house in 1901 (also, median household size has shrunk from 4.9 in 1901 to 2.5 today, while the homeownership rate rose from 19% to about 70%, which increased the number of houses). Moreover, there's no comparison in median automobile quality (few autos existed in 1901), etc. Furthermore, there are many products that exist today that didn't exist in 1901, which raised living standards.
Posted by: Arthur Eckart | Saturday, October 20, 2007 at 02:38 AM
Moreover, I may add, the U.S. had a mild economic boom/bust cycle, where actual output generally exceeded potential output in the mid and late '90s (i.e. real GDP growth slightly above 3% per year), and potential output generally exceeded actual output throughout the '00s (i.e. real GDP growth slightly below 3% per year). From 1993-98, 17.6 million U.S. jobs were created, and from 2001-06, only 3.7 million U.S. jobs were created. So, much fewer inputs were needed for a given level of output in the '00s compared to the '90s.
The quick and massive U.S. Creative-Destruction process, generally between 2000-02, freed-up resources, particularly capital (e.g. some tech stocks losing 99% of their market capitalizations). The freed-up capital was redeployed into firms that generated even more capital, i.e. U.S. Agricultural and Industrial Revolution firms, e.g. Boeing, Caterpillar, Gillette, Coca Cola, Pepsi, Johnson & Johnson, GE, McDonalds, Disney, DuPont, Hilton, Harley Davidson, Paccar, Heinz, Hersheys, Ingersoll Rand, International Paper, Kellogg, 3M, Alcoa, etc. They now have greater market power, since they focused on higher quality "core" products, while offshoring less profitable goods to Third World countries for larger profits (rather than discontinue operations of those products). Consequently, U.S. corporations generated double-digit profit growth for a record 18 consecutive quarters in the 2000s, which resulted in strong balance sheets. Also, the efficiencies of U.S. retail and finance became the envy of the world. Moreover, U.S. oil firms (energy firms are roughly 15% of the S&P 500) made more money refining oil than oil producers made selling oil (at least when oil was $50 a barrel, although profits continued to soar), while U.S. gold, copper, steel, etc. firms, also made huge profits, along with homebuilders, etc. Furthermore, much of the redeployed capital flowed into business start-ups, which helped keep the U.S. unemployment rate low. U.S. Information and Biotech Revolution firms continued to lead the rest of the world combined (in revenues and profits) after the Creative-Destruction process. The only way to move from one economic revolution into the next is through efficiencies, which free-up limited resources. It's all interrelated, and inevitable, which is why the U.S. leads the world in the Agricultural, Industrial, Information, and Biotech Revolutions.
The U.S. government was able to sell Treasury bonds at lower rates, which helped shrink the U.S. budget deficit to $150 billion in 2007 (or slightly more than 1% of 2007 U.S. GDP). Most of the increases in debt were by U.S. households, which were able to consume more than produce (e.g. reflected in the U.S. trade deficit, which reached over $800 billion in 2006). Rising incomes, low prices, and low interest rates induced demand, which raised living standards, on both the production and consumption sides. Consequently, U.S. household assets increased more than U.S. household liabilities, and U.S. consumer surplus increased. U.S. households will work longer to pay-down debt and build-up saving, which will add to future U.S. economic growth. Also, U.S. exports will accelerate faster than U.S. imports, which will add even more to U.S. growth. Moreover, less slack in the U.S. economy (to close the output gap) will cause wage growth to accelerate and profit growth to slow.
Posted by: Arthur Eckart | Saturday, October 20, 2007 at 10:45 PM
Furthermore, I may add, the rise in energy and raw material prices harm many U.S. trading partners more than the U.S., since U.S. corporations offshored less profitable goods, including heavier goods, while shifting more resources into lighter goods (e.g. products of Microsoft, Google, Amgen, etc.). However, U.S. households used more energy, because of larger houses, cars, etc. Nonetheless, the net gain in U.S. living standards (which include both the production and consumption sides) were much larger than its trading partners. Perhaps, the biggest threat to the U.S. economy is if one or more export-led economies fall into recession or collapse, to where they can't afford U.S. goods. Consequently, the U.S. economy will continue to underproduce, although the U.S. will lose less than export-led countries. There's evidence to suggest many export-led countries cannot afford U.S. products, although they've outproduced the U.S. For example, most of China's imports from the U.S. are inputs for exports to the U.S. China's consumers, in general, cannot afford the world prices of U.S. goods. Consequently, large trade imbalances persist. A danger is the U.S. will kill China's economy, which is the goose that lays the golden eggs. For example, less restrictive U.S. monetary policy may narrow the U.S. output gap (i.e. raise actual output), while China's output gap may shift further away from equilibrium (i.e. also raise actual output). Nonetheless, global imbalances were basically created by export-led countries, and changing their policies can begin to correct them.
Posted by: Arthur Eckart | Sunday, October 21, 2007 at 07:21 PM