Economic winter looming?
An American credit bubble that was propped up by former U.S. Federal Reserve chair Alan Greenspan has burst. This, according to Vancouver-based investment adviser Ian Gordon, is the underlying cause behind the turmoil that has sent global stock markets—including Canada’s—on a wild ride this month.
Gordon, a student of the wave theory developed by early 20th-century Russian economist Nikolai Kondratieff, also believes that the market turmoil is capitalism’s method of purging itself of debts.
“We’re really seeing a mirror image of what happened following the 29 peak in equity prices in the United States, and the subsequent crash in equities,” Gordon told the Georgia Straight. “We’re seeing really the mirror of the huge debt bubble that was built into the economy in the ’20s in the United States. We’re now seeing the collapse of the debt bubble that was built into the world economies, but principally in the United States.”
Kondratieff held that capitalist systems move through stages in a seasonlike pattern of spring, summer, fall, and winter. It’s a grow-boom-bust cycle that plays itself out in periods lasting 50 to 60 years.
Gordon argues that the realistic peak of the American stock market occurred in 2000. But when U.S. indices started to fall, he claimed, Greenspan simply delayed the onset of the inevitable Kondratieff winter.
“Greenspan panicked, injected a tremendous amount of money into the economy through the banks [and] dropped the loan rate to one percent,” Gordon said. “That effectively reignited the stock market and also caused, more importantly, a tremendous bubble in real estate in the United States.”
Greenspan, who will speak in Vancouver on Thursday (January 24), wrote in his 2007 memoir The Age of Turbulence: Adventures in a New World (Penguin Press) that economists have been worried about the high ratio of U.S. household debt to income, which is such that the average American family was on the brink of default.
However, Greenspan dismissed such concerns. “Such fears ignore a fundamental fact of modern life: in a market economy, rising debt goes hand in hand with progress,” he wrote. “To put it more formally, debt will always rise relative to incomes so long as we have an ever-increasing division of labor and specialization of tasks, increasing productivity, and a consequent rise in both assets and liabilities as a percentage of income.”
The U.S. central bank may still have been drawing inspiration from its former chair when it announced a three-quarters-of-a-percentage-point slash to interest rates on January 22 to calm the markets. Still, American stocks continued to plummet on that day.
According to Gordon, the federal- funds rate cut will not necessarily translate into banks giving out more loans. “Neither [banks nor consumers] wants to engage,” he said. “The consumer because he can’t borrow any more”¦and the banks because they’re having real problems with the debt they’ve already loaned out.”
Gordon suggested that because Kondratieff seasons, or waves, last 15 years, the economic winter that set in during the early 2000s could last another seven or eight years. “As this whole collapse in paper assets begins to unfold, causing tremendous strain on the banking system, we will see a tremendous rush to gold, to own gold,” he said. “But I think the worst is definitely in front of us, and not behind us.”
Helmut Pastrick, chief economist at Credit Union Central of British Columbia, doesn’t subscribe to the Kondratieff wave theory, but he concedes that economies go through cycles.
“I do know that, yes, there are movements in markets and the economy, cycles, if you will,” Pastrick told the Straight. “Obviously, we’re in a down move now, and equity markets have been down. But I’d go back to say that what goes down will come back up.”
According to Pastrick, more negative financial news will likely come out in the near term, but he claimed that markets will begin to show signs of stabilization in three to six months.
The Bank of Canada also cut interest rates on January 22 in a bid to stimulate the economy. According to Stephen MacInnes, chief investment officer at Vancouver-based Inhance Investment Management Inc., Canadians will definitely see slow growth for this quarter and possibly the next. However, he suggested that the situation won’t deteriorate.
“The rampant pessimism is going to change, and people will probably say, ”˜Yeah, the economy isn’t as bad as we thought,’ ” MacInnes told the Straight. “That’s what we look forward to.”