March Richebacher snippet

BEST OF KURT RICHEBACHER

March 7, 2005

What, first of all, is the key characteristic of an asset bubble? It implies that a sharp rise in asset prices derives from highly leveraged purchases financed by borrowing at low short-term rates. The decisive distinction is between credit-driven and savings-driven asset appreciation. In a country without savings of its own, like the United States, asset markets as a whole qualify as bubbles virtually by definition.
And what are the key features of a bubble economy? There are actually two of them. It implies, first, that asset owners, to a large extent, convert appreciating asset prices into a borrowing-and-spending binge; and second, that the credit excess enacts a major structural change in the economy’s pattern of demand and output growth. In the U.S. case, it has overwhelmingly boosted consumption at the expense of business investment and the trade balance.
There is understandably a general reluctance to speak of the U.S. economy as a bubble economy, because it would flatly disavow all the talk about its superior efficiency. For many, it is tantamount to blasphemy. The unspoken truth is that it is the biggest bubble economy in history, lasting already much longer than Japan’s bubble economy of the late 1980s.
An economy must decline in its entirety so long as more is consumed than produced, as Mr. Hayek says in the introductory quote. But this has become the U.S. economy’s long-term growth pattern. Recognizing this fact is basic for our critical assessment of the economy’s recent development. The dismal reality is deceptive wealth creation through asset bubbles on one hand and accelerating erosion of the economy’s productive base on the other.
Never before has an economy in recession been treated with such massive monetary and fiscal stimulus as the United States this time. Yet what has resulted has been a recovery that is the single worst on record in terms of generating the real (inflation-adjusted) growth in wage and salary income that determines most people’s living standard.