global growth is at the top of everyone’s list. Or it should be. With that fact in tow, consider the following remarks:
Remarks from David A. Rosenberg, North American economist at Merrill Lynch, in his October 10, 2005, conference call to clients, dis- cussing the current state of consumer spending:
Consumer spending momentum is slowing down visibly. Growth has gone from 4 percent in 2004 to 3.5 percent in 2005, and if our forecast is right, 2.5 percent in 2006 as the negative savings rate gets rebuilt.
Remarks by Federal Reserve Bank Governor Donald L. Kohn at the 2006 Global Economic and Investment Outlook Conference, Carnegie- Mellon University, Pittsburgh, Pennsylvania, on October 19, 2005, dis- cussing the housing market and the wealth effect on consumer spending:
Another source of uncertainty is the housing market. It is possible that the rapid increases in house prices could simply be a reflection of fundamental forces such as an increase in land use restrictions and other legal restraints on building, innovations in mortgage fi- nance, changes in tax laws, and low interest rates. But it could also be the case that much of the very rapid increase in prices very recently has been based on the expectation that the pace of past in- creases will extend into the future. Or perhaps the increases also have been fueled by eased lending standards that could well be tightened in response to slower price appreciation. If expectations have been realistic and lending practices only marginally impor- tant, a slowdown in house-price appreciation could be gradual and the consequences for consumption growth could be modest;
indeed, as signs of a slowdown are still quite tentative, continued strength in house prices are an upside risk to any easing of demand going forward. But if disappointed expectations or considerably tighter credit foster more severe or more abrupt price adjustments in enough local housing markets, psychology could amplify the ef- fects of diminished wealth to restrain consumer spending. Econo- mists, including those at central banks, simply are not very good at understanding, much less predicting, the dynamics of asset price adjustments; and I would guess that our ignorance is especially profound when those dynamics may be in the process of shifting.
Vintage “on the one hand, and on the other” remarks by Fed Chair- man Alan Greenspan, discussing the mortgage market and consumer debt
at America’s Community Bankers Annual Convention, Washington, D.C., on October 19, 2004:
Although I scarcely wish to downplay the threats to the U.S. econ- omy from increased debt leverage of any type, ratios of household debt to income appear to imply somewhat more stress than is likely to be the case. For at least a half century, household debt has been rising faster than income, as ever-higher levels of discre- tionary income have increased the proportion of income spent on assets partially financed with debt.
The pace has been especially brisk in the past two years as exist- ing home turnover and home price increase, the key determinants of home mortgage debt growth, have been particularly elevated. Most analysts, even those who do not foresee a mounting bubble, antici- pate a slowdown in both home sales and the rate of price increase.
To be sure, some households are stretched to their limits. The persistently elevated bankruptcy rate remains a concern, as it indi- cates pockets of distress in the household sector. But the vast ma- jority appear able to calibrate their borrowing and spending to minimize financial difficulties. Thus, short of a significant fall in overall household income or in home prices, debt servicing is un- likely to become destabilizing.
There’s more. Lots more. And I leave to you to explore this subject in great detail. It is without doubt an extremely important topic to understand.
The issue of appreciating the changed economic picture from a closed domestic economy to the globalized one emphasized in this chapter is a subject that I addressed in a report produced several months ago, at a time when the U.S. economy was slumping and many were wondering whether it was merely going through a midcycle correction or was on the verge of a serious decline.
Old School Economic Thinking:
Quicksand for the Twenty-First-Century Investor When does a soft patch become quicksand?
Of late, there appears to be a rising chorus of concern ex- pressed by an increasingly number of traditional economists over yet another soft patch in the economy. However, what underlies the soft patch scenario is not concern over the seriously unsustain- able global structural imbalances or that so much of the world works in a hidden, new, and therefore unknown manner. Rather, their view is that soft patches are followed by strong upturns. In
other words, “Don’t worry. Be happy.” However, I am both wor- ried and of the strong belief that there is reason to be unhappy.
In the globalized world of today, soft patches can easily be- come quicksand far more rapidly than the traditionalists think, be- cause the global economic and financial environment is far more unpredictable, uncertain, and unknown than the traditionalists re- alize. Consider the comments by John Plender in the Financial Times on hedge funds and the banking system: “We have a para- dox. More risk is being priced in markets today than ever before, which should make for a more efficient financial system. Yet much of this market activity is untransparent, which is worrying for fi- nancial stability.”
From my experience in both moderating numerous events in- volving economists of all stripes and reading their research, I have found that, for the most part, your classically trained economist tends not to be an out-of-the-box thinker. As a result, he/she tends to frame the world in the classical industrial era sense, not in the more dynamic interdependent, technologically driven global sense.
And this old school approach to the twenty-first-century world tends to neglect or minimize the new and hard-to-quantify factors such as those that John Plender (and others) have written about.
Moreover, there is the question of speed and the importance of confidence and the role they play in our brave new world. In such a world, soft patches can become quicksand faster than you can say “old school economics doctorate.”