Google+
Close

The Corner

The one and only.

Whistling Past the Graveyard



Text  



Some good news from Wall Street:

The improvement in sentiment in Wall Street may be traced almost directly to the encouraging reports which the financial community is receiving from the leading industries of the country, according to investment trust executives.  They say that the current rise in security prices is firmly grounded on the improvement in business conditions that began in December.

New York Times

February 14, 1930

Two months later the Dow hit a level it would not see again for about 25 years. Happy Valentine’s Day, pal.

In the Crash of 1929, the Dow lost 48% of its value. Six months later it rallied back 48% (because this was from a starting point half as high, this meant it got back 52% of the loss from the Crash). In 2007–2009, the Dow lost 54% of its value. It has now rallied back 54%, or in other words, it has regained 45% of this loss in value.

Japan has gone through a similar process of dealing with an exploded real-estate bubble. The Nikkei hit a peak of about 39,000 in 1989. It has moved downwards in a sawtooth pattern for the past 20 years, with big rallies in 95–96, 98–99, and 03–07. Today, 20 years after its peak, the Nikkei is at about 10,000. 

The current Wall Street rally is not being driven by mass delusion, but is being driven in large part by forward corporate earnings projections. Suppose these projections turn out to be correct — where is the money going to come from to generate them? The U.S. government (like others) is substituting public debt for private debt. The reason we’re running a $1.4 trillion deficit this year (about 10% of total economic output) is to prop up aggregate demand while individuals try to “de-leverage” (Wall Street speak for pay down credit card bills by eating out less and not buying that big-screen TV ). The so-called “stimulus bill” is nothing but a reorientation and massive increase in long-term spending. The real stimulus is current spending on all parts of government grossly in excess of current tax receipts. This can go on for a while, but even the balance sheet of the United States is finite. There is a desperate race on right now between the borrowing capacity of the U.S. government on one hand, and the ability of the private economy to work off enough debt to start growing again organically (and ultimately pay off all of this public debt) on the other.

I don’t know who is going to win this race. But then again, neither do you. Any prudent company or individual is planning for a 2010 that could fall anywhere from “Well, we got through that crisis, and now we’re back to growth” to “It’s 1931.”

It therefore seems slightly surreal to me to read newspaper trend stores about people getting bored with the incredible austerity of the past, oh, ten months. Similarly, political debates around cap-and-trade, health care, entitlements, the $100 billion of new schools spending in the stimulus bill with no obvious prospects for improving reading or math skills, and so on that causally describe reducing U.S. economic output or efficiency in support of some lofty goal strike me as entirely detached from the reality of how harsh the real choices in front of us are likely to be.



Text  


Sign up for free NRO e-mails today:

Subscribe to National Review