The Economy: There’s Almost No Hope of a Soft Landing
Company after company announces rapidly dropping sales. The stock market takes note by marking down prices. From the peak of last year, the tech-laden Nasdaq over-the-counter market has plummeted more than 60%, the Standard & Poor 500 index has crashed by 25%, and the Dow Jones industrial average has lost almost a fifth of its value.
The dreaded “r” word is everywhere.
Economists are divided about whether we already are in a recession. The Federal Reserve Board hoped that it could slow down the economy for a soft landing. But I believe the rate of our current decline will force us into a very hard landing. Here is why:
* People are feeling poor. Fed Chairman Alan Greenspan was worried when Americans were spending $3 for every $100 increase in their stock portfolios. Over the past 12 months, investors have lost more than $4 trillion in stock market value. This in turn has eroded consumer confidence, which has reduced consumption. This is important because retail purchases make up two-thirds of our $10-trillion gross domestic product. Now Greenspan is worried about the “poor” effect caused by declining stock values. Until recently, the value of all publicly traded stocks had never exceeded our GDP. It did reach 82% in 1929 and a similar peak before the 1987 market crash.
* Americans will save more. From 1995 through 1999, the personal savings rate dropped from 5% to zero as families depended on above-average stock market gains as their nest eggs. In addition, consumer debt, stock market debt and personal bankruptcies soared to record levels. Because of the stock market decline, 2000 was the first year since 1945 that the net worth of individuals did not increase from the previous year. With stock market values now evaporating, workers will return to rebuilding their emergency reserves, which will further slow consumer spending.
* The market will drop further. Over the years, the prices of stocks have sold on average for about 15 times their previous year’s earnings. By this measure, stocks are still high. The Dow Jones has a 20 price-to-earnings ratio; the S&P; 500 has a 22 ratio; and the overvalued Nasdaq stocks still sell for more than 50 times earnings.
* Venture capital will dry up. In 1990, venture capitalists funneled $3 billion into 1,300 start-up companies. In 2000, this type of investment swelled to $104 billion going into 5,458 deals. Because most of these ventures now are selling for fractions of their initial stock market offering prices, this type of stimulus to our economy will drop quickly.
* Foreign investment will decline. Because of our bear market and declining interest rates, investments by foreigners into our equity markets and into foreign direct investment will slow. In addition, the debacle of the presidential election vote count and the California energy blackouts are tarnishing the technological reputation of the U.S.
* A worldwide recession is possible. With Japan unable to recover from a 12-year recession and the U.S. possibly going into recession, the economic slowdown could spread. The collapse of the Soviet Union and communism brought a world-wide rush to free markets, capitalism and democracy. We must avoid a prolonged downturn to preserve the United States’ role as world leader.
After the roaring ‘90s, are we about to experience a repeat of the awful ‘70s, with uncontrolled inflation fueled by energy shortages causing a stagnant economy? The misery index (the rate of inflation plus the rate of unemployment) at the end of that decade hit a record. In 1979, President Carter pledged that the U.S. would never be as dependent on foreign oil as we were then. We are doubly dependent today.
The gloom and doom is spreading fast. President Bush has a tough job ahead. A big and retroactive personal income tax cut and a partial privatization of Social Security would help restore confidence.
