WASHINGTON, April 22 (UPI) -- At a White House press briefing Tuesday, President George W. Bush announced that Fed Chairman Alan Greenspan would have his support for another term in office in 2004. In so doing, Bush signed his political suicide note -- whoever the Democrats nominate, Bush will lose for re-election in November of that year.
Like his father in 1992, Bush will be blamed for the state of the economy on Election Day 2004. And like his father, Bush will find that the state of the economy on Election Day is unattractive -- probably much more unattractive than it was in 1992. Like his father, Bush will to some extent be an innocent victim of circumstances and timing, but he will be unable to convince voters of this because of his own egregious economic policy errors.
The U.S. stock market has lost investors $8 trillion in wealth since March 2000 (it is, of course, sharply up on the Greenspan news, but that won't last). By November 2004, it is likely that it will have lost them $3 trillion to $4 trillion more. Stock valuations remain far above historical levels, while the quality of earnings is appallingly low, as company management seeks by any means possible to prolong the era of easy looting of stockholders and employee pension funds.
This downdraft in stockholder wealth has already caused a "wealth effect" in reducing consumption, but the wealth effect has been counteracted by the housing bubble of 2001-02, in particular the tsunami of mortgage refinancing, much of which has involved "cash out" transactions, with the cash being spent on consumer goods.
This has, of course, been caused by Greenspan's force feeding of money into the economy, with M3 money supply growing at over 10 percent per annum. Long-term interest rates will shortly be pushed upward by the U.S. budget deficit, which I have forecast at close to $400 billion in the year to September 2003 and more in the year to September 2004. Hence the enormous volume of mortgage refinancing, which in any case had shown signs of exhausting itself, will slow to a trickle.
I wrote in December 2002, as has United Press International's Chief Economics Correspondent Ian Campbell, that 2003 is likely to see a sharp reduction in U.S. consumer expenditure. The latest chain store sales figures Tuesday, with combined expenditure for March and most of April (to eliminate Easter's timing effect) up only around 1 percent, less than the rate of inflation, indicates that we are still on track for this prediction to be realized. This in itself will cause a sharp "double dip" in the recession -- not the rebound that most are expecting -- in the third and fourth quarters of 2003, and on into 2004.
An additional worrying factor is the U.S. balance of payments deficit, which was caused by the huge volume of foreign portfolio investment into the United States in 1996-2001. With the euro approaching $1.10 against the dollar, this is about to narrow fairly sharply -- good for the real economy, but very bad for interest rates and the stock market, as foreign funds cease to flow so readily into U.S. investments.
As a result of a combination of these factors, with resulting higher unemployment and reduced job security and postponement of retirement plans, the U.S. electorate by November 2004 will be looking for someone to blame. And they won't have to look far.
The reality, even by November 2004, will be that the seeds of the unhappy economy of 2001 were sown in the bubble of 1995-2000. You cannot distort the entire capital allocation process of a country -- and indeed of the world as a whole -- for half a decade without suffering an appalling backlash thereafter.
Therefore the people most to be blamed for the misery that U.S. voters will feel in November 2004 are the people who inflated the bubble.
There are a number of good candidates to have rocks thrown at them in this respect:
-- Sen. Joseph Lieberman, D-Conn., who in 1995 prevented the Financial Accounting Standards Board from properly accounting for stock options. How ironic it would be if Bush were to be beaten on account of the economy by a man who was in fact more to be blamed for its state.
-- The Republican Congressmen who defenestrated Newt Gingrich in November 1998 -- and thereby subjected us to year after year of budget overruns and Congressional pork that are a primary cause of the deficit that is just beginning to cause problems.
-- Wall Street, for piling us into initial public offerings of companies that not only did not make money but had no reasonable prospect of doing so.
-- Big company management, for abandoning all pretense at their agency function for stockholders, by rewarding themselves with stock options worth more than company profits (Cisco) massaging earnings through pension fund, stock option and venture capital transactions to provide a spurious impression of continued earnings growth (GE) or outright fraudulent self-dealing (Enron).
-- Fisher Black, Myron T. Scholes and Robert Merton, for popularizing and winning the Nobel prize with a risk management formula and rationale that didn't work.
-- The Bureau of Labor Statistics and Bureau of Economic Analysis, for changing their methodology in the mid-1990s and producing an apparent "productivity miracle" that was in fact almost wholly spurious (and has since been revised back into insignificance by those same agencies, working under cover of an "annual correction" process each July that few track).
-- Robert Rubin and Larry Summers who, although two of the cleverest and most savvy Treasury Secretaries of all time, never even attempted to rein in the stock market bubble, merely punting the problem into the next administration, leaving it for a hated Republican, or at worst the despised Al Gore. NOTHING will convince me they didn't know things were amiss.
But of course, the greatest single responsibility for the era of irresponsible excess, and the disaster that is still in the process of unfolding, is Alan Greenspan. He bears a good share of the blame for George H.W. Bush's poor electoral performance in 1992, by keeping M3 money supply growth negative in the last two years of Bush's term.
However, from 1993 on, possibly seduced by the charms of Hillary Clinton (or by his new media girlfriend and then wife Andrea Mitchell), he wholly abandoned his previous tight money policy and allowed M3 money supply to grow at a rate that from 1995 averaged almost 9 percent per annum, in a period when inflation was no more than 2 percent to 3 percent.
And, notoriously, on Dec. 4, 1996, with the Dow at 6,400, he worried that the stock market might be in a period of "irrational exuberance" and then did nothing about it, instead choosing to trumpet his belief in BLS's non-existent "productivity miracle."
Worse, in 1998 he decided that the collapse of an obscure and mismanaged hedge fund, Long Term Capital Management, was a threat to world economic stability, and so reduced interest rates, at a time when all economic signs were screaming at him to increase them.
In November 2004, people will blame Bush and his administration, but will they be justified in doing so? To a limited extent, yes.
He has appointed not one but two Treasury secretaries with no experience of international financial markets, whose major qualification for the post was a management track record that was certainly lucrative (by normal standards, excessively so) but was on close inspection mediocre at best.
He has failed to control public spending, which is continuing to increase at close to 10 percent per annum.
While his first tax cut was beneficial, it included a lot of hidden land-mines, such as the sharp jump in Alternative Minimum Tax in 2005 and the revival of estate tax in 2011, that may well come back to haunt us. His dividend tax cut, on the other hand, looks unlikely to pass in full, and in any case was appallingly designed: as it stands, it would worsen the agency problem between shareholders and management, and cause an entirely unnecessary crisis in the municipal bond market.
His protectionism on steel and agriculture have probably doomed the Doha round of free trade talks -- not the infamous Smoot-Hawley Tariff of 1930, but a step in the same wrong direction.
And finally, he has indicated he will reappoint Alan Greenspan, the greatest single architect of the problem. Reappointing Greenspan is an indication that Bush, and his advisers, are staggering around economically in a fog of ignorance, as to where we have been and where we are going.
In November 2004, Bush will pay the price for this and other mistakes. And, on balance, he will deserve to.
