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Stephen Roach: Good Growth, Bad Growth

by Alexander G Rubio Mon Jun 27th, 2005 at 12:27:42 PM EST

Stephen Roach of Morgan Stanley raises a point that's too often ignored, that there's growth, and there's growth. The simplistic measuring of national economic growth by Gross Domestic Product overlooks the fact that it's not just a question of quantity of economic activity, but also quality. If I borrowed a million dollars and went on a spree, I'd create a lot of economic activity, but it wouldn't be sustainable growth. If the money came from outside the "system" or national border, not only would that economic boost dry out as soon as the money was spent, but it would actually have to be withdrawn, with interest at some point in time.

There’s good growth and bad growth.  The former is well supported by internal income generation and saving.  The latter is driven by asset bubbles and debt.  The United States, in my opinion, has been on a bad-growth binge for nearly a decade, but especially over the past five years.

He then goes on to the main difference between the dot.com boom and the recent real estate bubble:

unlike the equity bubble of the late 1990s, the housing bubble has been built on a mountain of debt


Steeped in denial, the Fed is trying to deflect attention away from its role in this sad state of affairs -- choosing, instead, to focus the debate on the so-called interest rate conundrum.

And the jigg keeps playing:

As former Fed Chairman Paul Volcker noted recently, the saddest thing of all is that no one in a position of responsibility wants to put an end to this madness.

No, but then again madness has a tendency to put an end to itself, but not before inflicting some serious hurt.

Also posted on Bitsofnews.com.

Of course I fully agree.

The saddest part of this is that we have now had years of the US (and to a certain extent the other anglos like the UK and Australia which are similarly bubbly) crowing over their superior economic performance, telling the retarded continental Europeans how hopeless, and rigid, and obsolete they are, and we are at the point where most people, incluinf ourselves, believe it, and this is actually self-sustaining; Morale and confidence are low, thus there is little dynamism, and less growth.

We need to rebuild confidence. We need to say the the European economies are not built on sand. They are not perfect, far from it, but they are not as fucked up as the American economy is. Just a little more patience...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jun 27th, 2005 at 03:20:03 PM EST
Yes, I've been of the opinion for quite some time that the real danger for the continental European economies is, to quote Roosevelt, "fear itself."

Looking back at the progress of the European Union, its setbacks and growth, and the resiliency of the "social-democratic" economic model, I feel confident that if the nations of Europe can hold the line against the bubble fed "growth" mechanisms and the sirens of panic driven "reforms" (meaning the Gordon Gecko'ing of the wellfare state), then they'll muddle through as they've done in the past.

That is why a part of me prays that the Anglo-Saxon bubble economy bursts sooner rather than later, not only because it would profit those nations in the long run, but before the logic of the bubble pulls the sane actors too deep and causes any systemic and long lasting harm to the European body politic.

Bitsofnews.com Giving you the latest bits.

by Alexander G Rubio (alexander.rubio@gmail.com) on Mon Jun 27th, 2005 at 03:41:46 PM EST
[ Parent ]
There is so much conventional wisdom about the superiority of the Anglo-Saxon model these days that it's hard to waft through the arguments. Facts are ignored. The CW rules.

Well, shouldn't be long now...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jun 27th, 2005 at 04:01:42 PM EST
[ Parent ]
I'm glad to hear this said so clearly and so well, Jérôme.

It's true that it's tiresome to keep on hearing about the runaway success of the American and British economies. People who are not in France may not realize this, but it's part and parcel of conventional wisdom in the French media.

Elsewhere in the Eurozone, is that so?

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Jun 28th, 2005 at 08:46:04 AM EST
[ Parent ]
FWIW, a great deal of the economic activity in the electronics business is just churning.  Electronics companies make circuit boards.  But they often make several prototypes before they end up with the final version.  It's a sign of productivity to the VCs and investors to spin boards quickly.  So prototypes are often created before all the design is finished in the initial boards, and before the bugs in the previous version are understood.  These all end up as scrap, and could be avoided by spending some more time thinking before acting.  But investors and managers like to see hardware, and don't understand paper designs.

In SW companies, something similar happens.  For defence contracts, people are often paid in phases.  After a design phase the contractor will get a big chunk of money, after alpha test the contractor will get a second chunk of money, and so on.  This means it's expensive to delay the end of the design phase, which means that design and thought get short shrift.  These early phases contribute much more to SW quality than the later, implementation phases.

I only add this, somewhat technical, comment because it in an example of drunken sailor behavior by a non-consumer.  It happens all over the economy.  I don't know how EU projects are run, but this is the way projects in the US seem to be run.

by guleblanc on Tue Jun 28th, 2005 at 06:12:52 AM EST

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