[Congressional Record (Bound Edition), Volume 147 (2001), Part 12]
[Extensions of Remarks]
[Pages 16742-16743]
[From the U.S. Government Publishing Office, www.gpo.gov]



                 SOMETIMES THE ECONOMY NEEDS A SETBACK

                                 ______
                                 

                             HON. RON PAUL

                                of texas

                    in the house of representatives

                       Monday, September 10, 2001

  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:

       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.''

  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)

       The weak economy and the multi-trillion-dollar 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.
       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.
       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.
       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.
       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.
       In 1932 an eminent German analyst of business cycles, 
     Wilhelm Ropke, 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.''
       Ropke, 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.
       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.
       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.
       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

[[Page 16743]]

     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).
       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.
       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.
       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.
       James Grant is the editor of Grant's Interest Rate 
     Observer.

     

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