2001 Ron Paul 77:1
Mr. PAUL. Mr. Speaker, I encourage each
and every one of my colleagues to read and
heed the insights contained in James Grant’s
Sunday New York Times article entitled
“Sometimes the Economy Needs a Setback.”
Mr. Grant explores the relationship of technology
to the business cycle and identifies the
real culprit in business cycles, namely “easy
money.” Grant explains:
2001 Ron Paul 77:2
Booms not only precede busts; they also
cause them. When capital is so cheap that it
might as well be free, entrepreneurs make
marginal investments. They build and hire
expecting the good times to continue to roll.
Optimistic bankers and steadily rising stock
prices shield new businesses from having to
show profits any sooner than “eventually.”
2001 Ron Paul 77:3
Those genuinely interested in understanding
the most recent economic downturn will do
well to read and contemplate Mr. Grant’s article.
[From the New York Times, Sept. 9, 2001]
SOMETIMES THE ECONOMY NEEDS A SETBACK
(By James Grant)
2001 Ron Paul 77:5
The weak economy and the multi-trilliondollar
drop in the value of stocks have raised
a rash of recrimination. Never a people to
suffer the loss of money in silence, Americans
are demanding to know what happened
to them. The truth is simple: There was a
boom.
2001 Ron Paul 77:6
A boom is a phase of accelerated prosperity.
For ignition, it requires easy money.
For inspiration, it draws on new technology.
A decade ago, farsighted investors saw a glorious
future for the personal computer in the
context of the more peaceful world after the
cold war. Stock prices began to rise — and
rose and rose. The cost of financing new investment
fell correspondingly, until by
about the middle of the decade the money
became too cheap to pass up. Business investment
soared, employment rose, reported
profits climbed.
2001 Ron Paul 77:7
Booms begin in reality and rise to fantasy.
Stock investors seemed to forget that more
capital spending means more competition,
not less; that more competition implies
lower profit margins, not higher ones; and
that lower profit margins do not point to rising
stock prices. It seemed to slip their
minds that high-technology companies work
ceaselessly to make their own products obsolete,
not just those of their competitors —
that they are inherently self-destructive.
2001 Ron Paul 77:8
At the 2000 peak of the titanic bull market,
as shares in companies with no visible means
of support commanded high prices, the value
of all stocks as a percentage of the American
gross domestic product reached 183 percent,
more than twice the level before the crash in
1929. Were investors out of their minds? Wall
Street analysts were happy to reassure them
on this point: No, they were the privileged
financiers of the new economy. Digital communications
were like the wheel or gunpowder
or the internal combustion engine,
only better. The Internet would revolutionize
the conveyance of human thought.
To quibble about the valuation of companies
as potentially transforming as any listed on
the Nasdaq stock market was seen almost as
an act of ingratitude. The same went for
questioning the integrity of the companies’
reports of lush profits.
2001 Ron Paul 77:9
In markets all things are cyclical, even the
idea that markets are not cyclical. The notion
that the millennial economy was in
some way “new” was an early portent of confusion.
Since the dawn of the industrial age,
technology has been lightening the burden of
work and industrial age, technology has been
lightening the burden of work and driving
the pace of economic change. In 1850, as the
telegraph was beginning to anticipate the
Internet, about 65 percent of the American
labor force worked on farms. In 2000, only 2.4
percent did. The prolonged migration of
hands and minds from the field to the factor,
office and classroom is all productivity
growth — the same phenomenon the chairman
of the Federal Reserve Board rhapsodizes
over. It’s true, just as Alan Greenspan says,
that technological progress is the bulwark of
the modern economy. Then again, it has
been true for most of the past 200 years.
2001 Ron Paul 77:10
In 1932 an eminent German analyst of business
cycles, Wilhelm Röpke, looked back
from amid the debris of the Depression. Citing
a series of inventions and innovations —
railroads, steelmaking, electricity, chemical
production, the automobile — he wrote: “The
jumpy increases in investment characterizing
every boom are usually connected with
some technological advance. * * * Our economic
system reacts to the stimulus. * * *
with the prompt and complete mobilization
of all its inner forces in order to carry it out
everywhere in the shortest possible time.
But this acceleration and concentration has
evidently to be bought at the expense of a
disturbance of equilibrium which is slowly
overcome in time of depression.”
2001 Ron Paul 77:11
Röpke, wrote before the 1946 Employment
Act, which directed the United States government
to cut recessions short — using tax
breaks, for example, or cuts in interest
rates — even if these actions stymie a salutary
process of economic adjustment. No one
doubts the humanity of this law. Yet equally,
no one can doubt the inhumanity of a
decade-long string a palliatives in Japan, intended
to insulate the Japanese people from
the consequences of their bubble economy of
the 1980’s. Rather than suppressing the bust,
the government has only managed to prolong
it, for a decade and counting.
2001 Ron Paul 77:12
Booms not only precede busts; they also
cause them. When capital is so cheap that it
might as well be free, entrepreneurs make
marginal investments. They build and hire
expecting the good times to continue to roll.
Optimistic bankers and steadily rising stock
prices shield new businesses from having to
show profits any sooner than “eventually.”
Then, when the stars change alignment and
investors decide to withhold new financing,
many companies are cash-poor and must retrench
or shut down. It is the work of a bear
market to reduce the prices of the white elephants
until they are cheap enough to interest
a new class of buyers.
2001 Ron Paul 77:13
The boom-and-bust pattern has characterized
the United States economy since before
the railroads. Growth has been two steps forward
and one step back, cycle by cycle.
Headlong building has been followed by necessary
tearing down, which has been followed
by another lusty round of building. Observing
this sequence from across the seas, foreigners
just shake their heads.
2001 Ron Paul 77:14
Less and less, however, are we bold and irrepressible
Americans willing to suffer the
tearing-down phase of the cycle. After all, it
has seemed increasingly unnecessary. With a
rising incidence of federal intervention in financial
markets, expansions have become
longer and contractions shorter. And year in
and year out, the United States is allowed to
consume more of the world’s goods than it
produces (the difference being approximately
defined as the trade deficit, running in excess
of $400 billion a year).
2001 Ron Paul 77:15
We have listened respectfully as our financial
elder statesmen have speculated on the
likelihood that digital technology has permanently
reduced the level of uncertainty in
our commercial life — never mind that last
year the information technology industries
had no inkling that the demand for their
products was beginning to undergo a very
old-fashioned collapse.
2001 Ron Paul 77:16
Even moderate expansions produce their
share of misconceived investments, and the
90’s boom, the gaudiest on record, was no exception.
In the upswing, faith in the American
financial leaders bordered on idolatry.
Now there is disillusionment. Investors are
right to resent Wall Street for its conflicts of
interest and to upbraid Alan Greenspan for
his wide-eyed embrace of the so-called productivity
miracle. But the underlying source
of recurring cycles in any economy is the average
human being.
2001 Ron Paul 77:17
The financial historian Max Winkler concluded
his tale of the fantastic career of the
swindler-financier Ivar Kreguer, the “Swedish
match king,” with the ancient epigram
“Mundus vult decipi; ergo decipiatur”: The
world wants to be deceived; let it therefore
be deceived. The Romans might have added,
for financial context, that the world is most
credulous during bull markets. Prosperity
makes it gullible.
2001 Ron Paul 77:18 James Grant is the editor of Grant’s Interest
Rate Observer.
