CANNES, France - What is the issue of central importance for a nation's economic future? It is, quite simply, wealth creation.
In America today, Narrow-minded"micro" thinking fails to recognize the gross macroeconomic fallacies in the Wall Street-inspired growth model. Never before have we read so much about wealth creation than in the past few years.
Trillions of dollars accrued to the American public within an unbelievably short time from the rapid gains in stock prices. It was new wealth, yes, but saying this, it is necessary to clarify what we are talking about.
The boom in stock prices created wealth for the stock owners, but for them only, not for the economy as a whole. Generations of economists would never have thought of rising stock and house prices as"wealth creation." They would have derided it as pseudo or paper prosperity.
For them, it was a truism that true wealth and prosperity could only accrue from saving and capital investment, increasing the stock of factories, machines and buildings, providing for more productive production in the future. Saving's indispensable function in this process is to release resources from consumption that are necessary to add, to improve and to enlarge the existing stock of productive capacity.
What, exactly, makes nations prosper? Just think of the past. Our ancestors took great efforts to build roads, houses, factories and so on. These tangible assets, adding to the economies' productive capacity, were the national macro wealth they created, tending to enrich everybody. At the same time, the production of these capital goods created a large and growing part of the consumer incomes that buy the growing supply of consumer goods.
It was the extraordinary burst of capital spending in tangible productive assets that led to the extraordinary burst in prosperity in the wake of the Industrial Revolution.
These economists knew the crucial difference between increases in the stock of tangible assets adding to the economy's capacity to produce goods and incomes, and increases in their market value, inherently adding nothing to the economy's productive capacity. For them, the key question would have been how this increase in paper wealth would impact the utilization of existing resources in the economy.
In case it gives a major boost to consumer borrowing and spending, as it did in the United States, they would have vehemently decried this as calamitous"capital consumption," essentially diminishing potential future economic and income growth.
It cannot be said, of course, that the new information technology is principally detrimental to economic growth and stability. Yet two things turned this technology into a looming economic and financial disaster for the U.S. economy: the absurd, euphoric stories about implicit miraculous economic effects of this technology stoking the stock speculation, primarily propagated by Wall Street; and the most inordinate money and credit creation that the world has ever seen, for which, of course, Mr. Greenspan is primarily responsible.
Together, the euphoria and the credit excesses propelled the fantastic burst of paper wealth that, in its wake, generated the unsustainable, huge imbalances and maladjustments in the economy and the financial system, and whose predetermined fate is a sudden, violent reversal.
But these macro follies were topped by the corporate micro follies guided by the preposterous shareholder value cult. A closer look at balance sheets and profit-and-loss accounts reveals them.
Respected International Banker, Economist and Author
Dr. Kurt Richebächer's articles appear regularly in The Wall Street Journal, Barron's, The Fleet Street Letter and other respected financial publications. France's Le Figaro magazine did a feature story on him as 'the man who predicted the Asian crisis.' Dr. Richebächer is currently warning readers to be cautious in the face of The Crisis Almost No One Sees Coming.
<center>
<HR>
</center> |