Great Crash II? Risk Is Up, but It’s Not Likely
The American dream is over,” proclaims economist A. Gary Shilling. No longer can each new generation of citizens expect to live better than the previous one.
Shilling’s message is a simple one: We’ve been living farther beyond our means than we realize, and it could lead to disaster. He doesn’t rule out another 1930s-style depression.
Shilling thus joins some other expert voices talking of harsher times ahead, and maybe very harsh times. John Kenneth Galbraith wrote in a recent issue of Atlantic Monthly of the parallels between 1929 and today. He sees a similarity with that period in today’s stock market run-up. He also sees it in the nation’s corporate merger mania and in the amassing of huge corporate debt that has gone with it. All this, he wrote, “will eventually be regarded as no less insane than the utility and railroad pyramiding and the investment-trust explosion of the 1920s.”
Paul W. Boltz, an economist with T. Rowe Price, points out how heavily the United States has turned abroad to draw funds for domestic investment and to finance the federal deficit. At some point, and he says he can’t predict when, foreign lenders may lose interest. “South American-style booms often end with a crash because foreign lenders call in their chips. Could the same thing happen to the United States? Of course it could.”
There have always been some maverick economists for whom the next great depression looms forever on the horizon. Are some of the mainstream forecasters now joining them?
Not really. Parallels are there, all right, though in many cases the similarities with the ‘20s are overdrawn. Stock market speculation has yet to reach the frenzied disregard of real values that marked that earlier period, for instance. But what these economists are saying is that the risk of depression is increasing, that some of the ingredients are there and that we should pay attention to them now.
Grim Reading
Those ingredients make grim reading. In a new book called “The World Has Definitely Changed,” Shilling points out that American consumers have been spending what they don’t have for some time. Consumer installment debt now equals 19% of disposable income, a giant leap from 14% as recently as 1983. While the economy appears to be stronger, most people aren’t better off. In 1985, after three years of economic recovery, income per household, adjusted for inflation, was still 4% below its 1978 peak.
Perhaps more troubling than that, the increase in income normally associated with getting older and more experienced is disappearing, Shilling figures. What’s more, corporations have found that one convenient way to reduce costs is to force high-paid senior workers out of the company and rely on younger people at lower salary levels. The American dream, indeed.
Families have been able to moderate this loss of individual earning power by getting more family members into the work force. But the main portion of that trend is probably past. So is the vast increase in the use of credit cards, unless consumers want to dig themselves into an impossible financial hole.
That is just the consumer part of the problem. Add to it corporate debt. Most of the big takeover deals involve heavy borrowing, and so do many of the defensive moves by those seeking to avoid being taken over. Companies have purchased more than $100 billion of their own shares in each of the last two years, often replacing that equity with debt as a means of financing the continuation of the business.
What it all means is that the economy is skating on ice that keeps getting thinner. It probably won’t break through if there is some effort to skate a little slower. And fortunately, that is precisely what is happening. The economy is sluggish and probably will remain so. The new tax law discourages borrowing. So does the disappearance of inflation, which means borrowers no longer have the advantage of paying back their debt with cheaper dollars.
It is a different era from the one we experienced in the 1960s and 1970s, but most experts believe it won’t lead to disaster if we adjust to it.
