The Pulse of Capitalism, Issue 05-2, July 2005. Where Did All the Money Come From?.

The Pulse of Capitalism, Issue 05-1, April 2005. The US Economy In 2004.

The Pulse of Capitalism, Issue 04-4, January 2005. The External Debt: Global Reserve Growth. Since 1999 the external debt of the U.S. has grown exceptionally fast, increasing 213.4 percent. Historically, economies such as Mexico, Brazil, South Korea, or Indonesia prospered during periods of capital inflow but faced crises when those flows slowed or stopped. One of our great unanswered questions is what would happen if the U.S. experienced such a slowing or reversal.

The Pulse of Capitalism, Issue 04-3, October 2004. Employment and Consumption. Increasing employment depends on rising consumption. Rising consumption depends on increase in income and debt. But increases in debt (or interest rates) reduce the amount of income available for consumption, which, in turn, limits the growth of employment. The result is something very close to our current economy.

The Pulse of Capitalism, Issue 04-2, July 2004. The Present Economy. Policy makers are attempting to revive the boom with unprecedented fiscal and monetary stimuli - tax rebates, tax cuts, investment subsidies, and historically low interest rates. These policies are creating massive levels of indebtedness which the policy gamblers hope can be met through ever rising income growth. The strange thing about all this is that even though we have productive capability undreamed of through the ages, we have come to the point that we must risk everything on one desperate throw of the dice.

The Pulse of Capitalism, Issue 04-1, April 2004. United States International Investment Position. The U.S. net investment position has trended downward since 1985. The decline accelerated since 1995 when the net position reached $-.5 trillion. By 1999 we had reached $-.8 trillion, and since then we have been in freefall.

The Pulse of Capitalism, Issue 03-4, January 2004. Job Gains and Job Losses. Free-trade proponents have [asserted] that only the lower-skilled jobs will migrate while the U.S. will continue to develop more advanced technologies that can only be produced here. In reality, the Asian countries are rapidly moving into the advanced technologies, leaving the U.S. with a clear lead only in military and possibly aerospace technologies.

The Pulse of Capitalism, Issue 03-3, October 2003. Income Disparity: Another Piece of the Puzzle. All income must be recycled into either consumption or saving/investment. As affluence increases, a larger share of income tends to be directed to saving over consumption. Thus, we have a situation where opportunity for profitable investment of saving is shrinking while savings seeking such opportunities are growing. These twin developments have profound implications for public policy and the future of the economy. The proposals now being considered to revive economic growth are aimed at maintaining consumption through growth of government and household debt. They do nothing to address the problem of inadequate investment demand combined with an excess of income seeking investment. These conditions led to the historic inflation of stock and bond prices of the past decade and are today still inflating real estate prices. We need to recycle the excess income now flowing to the top income recipients into sound public investment and into some of the low income groups who are now stressed.

The Pulse of Capitalism, Issue 03-2, July 2003. The Japanese Experience. In Japan the stock market and the property market collapsed at about the same time whereas in the U.S. the stock market collapsed, but the property market has continued to boom. If job growth continues to falter, however, this may not continue. [Nevertheless] there are many dissimilarities in the functioning of the two financial systems and in the role of government. One great similarity is the role that debt played, first in underwriting the boom and then hampering any recovery. In Japan "A new classification system for bank loans ----- resulted in a more than fourfold increase in the estimate of nonperforming loans to...the equivalent of 8% of GDP." The U.S. has not experienced such a massive financial collapse, but the ingredients are there. During the past five years, total credit market debt has grown an amazing $10,452 billion or 49% whereas GDP has increased $2,127.2 billion or 26%. These disparate rates of growth cannot continue, yet the economy cannot thrive without continued debt growth. Eventually we may well face debt default problems just as severe as Japan's.

The Pulse of Capitalism, Issue 03-1, April 2003. Of Demand and Investment Cycles. During the nineties, billions of dollars were invested in the telecom-internet-computer sector in a classical investment type development of new technology. But the scope and speed of development for this technology were greatly misjudged. The market failed expectations leading to a collapse in market valuations generally. Unfortunately, this sector was the only game in town for investment capital as excess capacity had become rampant. A new situation emerged - excess capital along with excess productive capacity. What resulted was quite dramatic - a drastic drop in gross investment and a stagnating economy. Tax cuts are proposed in order to stimulate investment and consumption, but today we don't need more consumption - the affluent classes already consume too much; and today we already have a huge pool of saving but no profitable place to invest it. The recycling of excess income (saving) has reached an impasse, but we are not yet ready to face it. Yet we can't find solutions until we do.

The Pulse of Capitalism, Issue 02-4, January 2003. 'Finance' in the Nineties. The first notable aspect of debt growth in the nineties is its sheer size. In the twelve year period 1990-2002, total debt grew $16.9 trillion or 125.0 percent. Outstanding debt grew more in 12 years than in the preceding 112 years! This averaged $1.4 trillion per year of consumption financed by credit. Another notable development in the nineties is the disparity between the growth rates of nonfinancial and financial debt. Financial debt grew 283.9 percent whereas nonfinancial debt grew 86.2 percent.

The Pulse of Capitalism, Issue 02-3, October 2002. The Great Inflation: Implications. A spectre is haunting the developed world - the spectre of the Limits to Growth. All the makers of accepted opinion have combined to exorcise this spectre: market analysts, editorialists, news anchors, economists. But the spectre remains as the economy's problems grow. We are now about to enter the third year of faltering growth. Unemployment has risen one million. The information technology bubble has burst. Corporate profits have plunged. Stock prices and interest rates have declined, and prices at the producer level are stagnant or falling. Is this just another business cycle bottom or something more significant?

The Pulse of Capitalism, Issue 02-2, July 2002. The Great Inflation: Structural Factors. The relation between banker and borrower has been transformed a single lifetime. From being a grantor of credit, the banker is now a marketer of credit. Persistent lowering of credit standards has resulted in the exploitation of debt for the specific purpose of stimulating demand in excess of "normal" demand arising from current income. This process has thus become a structural factor in explaining the inflation of the past half century.

The Pulse of Capitalism, Issue 02-1, April 2002. The Great Inflation: Money Factors. The key to understanding the connection between lower required reserves and money growth is the money multiplier... The essential point is that every new deposit has a limited potential to expand the money supply. On the other hand, if there is no required reserve, the potential expansion is unlimited. In this case, the banks would determine the money supply, while the Fed would be little more than a bystander.

The Pulse of Capitalism, Issue 01-4, January 2002. The Great Inflation: Why?. Rising productivity should keep prices in general from rising. However, during the last seventy years it did not prevent an increase in the price level; it also did not prevent anaccelerating increase after 1970.

The Pulse of Capitalism, Issue 01-3, October, 2001. The Great Inflation: Some Perspective. The consumer price index based on 1982 = 100 goes back to 1958 when the index was 28.9. In April of this year it was 176.9, about a fivefold increase in 43 years. If we look at just the last ten years, it is striking that consumer durable goods, nonresidential investment, and imports actually experienced deflation rather than inflation. The steepest inflation was in residential investment and government expenditures for goods and services.

The Pulse of Capitalism, Issue 01-2, July, 2001. Of Gods and Their Followers. The modern god is the God of Growth, and his name is GDP. Like other gods, he unites us, comforts and sustains us, and gives us hope. Like other gods, too, he reflects our needs and fears. GDP, unlike earlier gods, is not a remote god but is quite close to the people. They can observe his movements and watch him closely. There are many omens to help them do this. There are weekly omens, monthly omens, quarterly omens and yearly omens. These omens must be interpreted, and this has created a new type of clergy or seers to follow the omens and predict the next movement of GDP. The Chief Seer and his Committee meet periodically to review the omens and to determine what they portend. Recently the Growth God has been observed to falter, and this has raised concern. He has faltered before,... But many of His followers had become convinced that His stride was stronger than ever, and this latest weakness has shaken their confidence. For now various bromides are being proposed to restore His lost vigor. Meanwhile, the omens must be watched with even greater attention to discern what they portend for our future.

The Pulse of Capitalism, Issue 01-1, April, 2001. The Turn of the Cycle?. It appears that the economic growth engine hasrun out of fuel -- and the fuel has been the phenomenal growth of debt sincethe 1970s. Household debt as a percent of disposable personal income hasincreased from 70% in 1980 to 103% in 2000. During the same period,personal saving as a percent of disposable personal income fell from 10%to -0.1%. This decline in saving augmented the rise in debt in raising thelevel of consumption, a dynamic that can not be sustained.

The Pulse of Capitalism, Issue 00-4, January, 2001. Capital Flows. The euro currency unit was adopted by 11 European countries in January 1999with an initial exchange rate against the U.S. dollar of $1.16. At the endof December 2000 it had declined to $1.07 or a swing of 7.8%. Thisfluctuation in the euro's value is not unusual. In essence, it is capitalflows, and not trade flows, that control day to day fluctuations. Sometimesthese flows and fluctuations have serious consequences; the most recent ofwhich were the collapse of economies in East Asia in 1997-98. Although theU.S. economy is very different than those in East Asia, in one respect, theU.S. resembles them very closely: it has been the recipient of a huge inflowof foreign capital in a very short time period. The U.S. remains vulnerableto changes in investment preferences on the part of foreign investors whichcould wreak havoc on the American economy. It is area that must be watchedwith great care.

The Pulse of Capitalism, Issue 00-1, April, 2000. Monetary Policy. Required reserves on savings accounts were eliminated in 1990. Sweepaccounts for retail or non-business accounts began to spread in 1994. Thesetwo developments have reduced required reserves to the lowest level inhistory. The acceleration of bank credit growth beginning in 1988 resultsfrom the decline in required reserves. When required reserves decline, the"money multiplier" effect (see Pulse #98-3) loses its capacity to limit credit growth. Based on the progressive reduction in required reserves during the 1990s, the Fed's monetary policy would have to be classified as "accommodative" or expansionary, not "tight" or restrictive. This has resulted in rapid growth of the M-3 money supply. Consumerprice inflation has not risen, but securities price inflation has soared.These developments puzzle economists since they do not accord with mostmodels or theory. How they eventually play out will profoundly affect ourfuture.

The Pulse of Capitalism, Issue 99-4, February, 2000. The Personal Sector. Since the 1970s there has been marked decline in the rate of personalsavings. Some economic commentators contend that the decline in saving is anatural consequence of increasing wealth; that with their stock marketholdings rising so rapidly Americans do not feel any need to save. However,most households still do not own any corporate equities and therefore haveno incentive either to reduce saving or increase consumption simply becauseof rising stock prices. Both increases in debt and lower savings areshort-term stimuli to the economy, but the longer they go on the weakerpersonal financial positions become.

The Pulse of Capitalism, Issue 99-3, October, 1999. Reviewing the Nineties. While politicians are quick to celebrate a good economy, they seldom acknowledge the factors that have produced the results they celebrate or inquire into the question of whether the factors will continue to produce favorable outcomes. This issue reviews the monetarybackdrop of the nineties, the record of industrial production, servicesemployment growth, and financial developments to put the "good times" inperspective and context.

The Pulse of Capitalism, Issue 99-2, July, 1999. Income Inequality. Measures of income inequality are influenced not just by money income but by their composition. Compared to twenty years ago, many more familiestoday include two or more wage earners. Likewise, households today includemore individuals than was true in the past. Comparisons based on these unitsare, therefore, difficult, over time and across countries. Nevertheless, itcan be established that every fifth of families lost income share from 1970to 1996 except the top fifth. This shift in distribution has had majoreffects on American society, the long-run consequences of which areimpossible to assess.

The Pulse of Capitalism, Issue 99-1, April, 1999. Personal Income. During the past two decades the U.S. economy has had a double-barreled boost from reduced saving on the one hand and higher debt levels on the other. Like stock market valuations, no one knows how high household debt can rise relative to income, but at some point there is a ceiling. The higher the debt level rises, the more susceptible the economy becomes to a cascading downtourn if expansion falters. This issue of The Pulse of Capitalism explores the meaning of changes in personal income and savings since 1960.

The Pulse of Capitalism, Issue 98-4, January, 1999. The United States International Investment Position. The net international investment position of the U.S. declined by $1 trillion from 1990 to 1997. The U.S. essentially is doing the same thing that the East Asian and Latin American countries did - import capital while the ability to repay that capital deteriorated. The continued deterioration of the U.S. net position calls into question the viability of the presentinternational exchange rate system.

The Pulse of Capitalism, Issue 98-3, October, 1998. Where Did All the Money Come From? We are assured that the U.S. financial system is the safest in the world. In the last 27 years the money supply (M-2) has increased more than six-fold. This has created ahuge (and unprecedented) expansion of bank-created credit. This issue of the Pulse explores what this means for the economy and economic security of Americans.

The Pulse of Capitalism, Issue 98-2, July, 1998. The Japan Puzzle. In thinking about the current Japanese recession it is important to keep in mind that the collapse in stock andproperty valuations occurred in 1990-1991. The Japanese policy response has been essentially Keynesian. Interests rates have been reduced to essentially zero, while public works spending has soared. These policyinstruments have not yet succeeded. It is likely the long Japanese recession is an inevitable stage in its economic development, similar to other "crises" in capitalism.

The Pulse of Capitalism, Issue 98-1, April, 1998. The Latest Crisis explores the meaning of the end of the post-war economic boom in East Asia. This issue also includes the quarterly updates of the tabulated financial and business activity indicators that are a regular feature of the publication.

Government Saving. Excerpted article from The Pulse of Capitalism, October 1996. For years we have been told in the newspapers and on the radio and TV that government deficits are a persistent problem in America and a serious drag on our prosperity. This view has become so pervasive that nearly all politicians regularly make "getting the deficit under control" a prominent part of their platform. Could "the crisis of the deficit" be based on misinformation? New analysis of financial data indicates that government budgets have been in surplus for a number of years! This article provides an explanation of this surprising fact.