A dime, perhaps, but not a quarter. The revision to Q1 US GDP pushed up personal consumption – which means it also pushed down personal savings once more. Each US citizen in the first three months of this year managed a daily dose of abstinence to the munificent tune of 23 cents – not even the price of a NYC subway token. At that rate, they have managed to put aside enough for 12 days’ supply of crude oil – it doesn’t leave much over does it?
Not just the Americans, though. John Bulled-Up was also in a gluttonous mood in the UK. Official numbers show he saved a near 50-year low of 3.8% of disposable income in the first quarter, but dig a little deeper and the picture is even darker. Fully 80% of that lofty total was the result of an imputed gain in his pension fund valuation – ie a paper mark-up as a result of the Bubble itself. Three years ago that proportion was less than 30%.
Taking consumption away from current income, less this fudge factor, and your average Brit squirreled away 0.8% of the total, compared to nearly 7% as recently as 1997. They may be able to spare a dime, but the Roast Beefs of England only stretched to 94 pence each – not enough for an extra ticket in the National Lottery.
Keynesians will fell a warm glow at total consumption coinciding with full employment, driven by monetary expansion – it’s the essential core of their doctrine. We Austrians take a darker view of inflation masking the effects of eating your seedcorn.
Meanwhile, the penny is finally beginning to drop among followers of that modern day Railway Boom, which is the Telecommunications sector, that heavy, capital-intensive products fraught with mutual competition and highly susceptible to the depredations of voracious governments are unsound bases for wealth generation, however sexy the story.
With estimates of UMTS licensing in Europe alone being projected up to $100 billion (hint to the Chancelleries: Don’t spend it all at once!) and Asian and Latam governments slavering at the prospects of their piece of the pie, the scale of the needs, even before a single hole has been dug, or tower erected or metre of cable laid, are truly mind-boggling.
Telcos themselves have been under assault ever since the first dim dawning of the problems arrived when Britannia proved she ruled at least the Airwaves with Her Majesty’s Treasury’s 22 billion confiscation from the lucky shareholders and users of the UK’s mobile phone companies. Now it has begun to filter up to the current and prospective suppliers to these companies, with Ericsson being notable in its candour, about the prospect for the infrastructure companies to share some of the burden. Semi-Conductors, ultimately, will have to chip in (sorry!) as well.
Governments missed the PC-based communications revolution which was the first-generation Internet : wireless gives them a much more obvious and immediate target. However, building tolls on international freight highways, however irresistible, will do little to promote their development and less to enhance their value.
Consider this from the pen of the (currently-indisposed) financier Martin Armstrong for a neat summation of a previous episode, the Panic of 1873:
"During 1872 the balance of trade was strongly against the United States. The circulation of depreciated paper money had brought to many an apparent prosperity which was not real, leading to the free creation of debts by individuals, corporations, towns, cities and States. An unprecedented mileage of railways had been constructed. Much supposed wealth consisted in the bonds of these railroads and of other new concerns, like mining and manufacturing corporations. Thus the entire business of the country was on a basis of inflation, and when contraction came disaster was inevitable."
Other parallels? Consider Larry Summers’ effusions in May:
"That is why our country has benefited enormously and will continue to benefit enormously from the group represented here today and from a national financial system that makes America the only place in the world where you can raise your first $100 million before you buy your first tie."
Now listen to Mark Twain and Charles Dudley Warner in The Gilded Age, written in you guessed it – 1873:
"Beautiful Credit! The foundation of a modern society…that is a peculiar condition of modern society which enables a whole country to instantly recognize point and meaning to the familiar newspaper anecdote….’I wasn’t worth a cent two years ago and now I owe two million dollars.’"
The Bubble to date has run on the usual weary themes of our forefathers – an overabundance of cheap credit, usually combined with innovations in monetizing it, mass participation, often aided by advances in communications, and the promise of boundless wealth based on the fruits of Man’s own natural genius.
To see the Bubble end, we need to see at least two – and possibly all three of these factors fade out or reverse.
Arguably, the large central banks are now finally acting to rein in credit (see our reviews of the BIS annual report for more on this on www.capitalinsight.co.uk). Money is not only more expensive, but there are signs that reserve provision has been less open-handed this quarter.
The denting of the armour of uninterrupted profit growth may set the wheels in reverse on the blithe and uncritical train of optimism. The public at large has been sold the snake-oil of riskless earnings growth amid the conquest of inflation. Thus, the psychological impact of seeing a stream of profit warnings and feeling the pain of higher prices in shops and gas stations may be intense.
As for mass participation, the last burst of this we see may well be the scramble for the few places in the lifeboats.
July 1, 2000
Sean Corrigan writes from London on the financial markets, and edits the daily Capital Letter and the Website Capital Insight.