Are we ready for a Golden Age?
10 May 2001
I cannot help being amazed at the wishful thinking of some writers. In his book, Greenspan's Taming of the Wave, François-Xavier Chevallier, Head of Research of BNP Paribas Asset Management, suggested that the US Federal Reserve Chairman, Alan Greenspan, has successfully tamed the long-term Kondratieff cycle in the US by engineering a gradual de-leveraging of the US economy, and that this has set the stage for a steady, long-term, upward phase, or a "Golden Age" in the economy.
But first, let me give a brief overview of the Kondratieff cycle. Named after a Russian economist, this cycle is a long cycle that is claimed to last about 50 to 60 years. It consists of an up wave and a down wave, each of about 25 to 30 years in duration. The up wave ends in inflation, while the down wave ends in deflation, usually brought about by excessive debt.
In his book, Chevallier states that debt levels hit a peak in the late 1980s and early 1990s in the US and Japan. Subsequently, weighed down by those debts, the Japanese stock market crashed in the 1990s, and the Japanese economy went into depression.
I have no arguments with the comments on Japan. But Chevallier then goes on to claim that the US has successfully de-leveraged itself and is ready for the next up wave. The basis of his claim? The improvement in the balance sheets of corporations, individuals and the US Government. But what are the figures he used to support his contention? The US Federal budget, which was -- and still is -- in surplus, and the ddecline in the rate of growth of total US debt (public and private).
What he failed to consider is that while the Federal budget may be in surplus, so that public debt is declining, private debt continues to rise, as his own figures on total debt indicate. A decline in the rate of growth still leaves the debt growing -- hardly a case of de-leveraging -- and leaves one doubtful that the US is ready for a golden age of economic growth. That would be akin to saying that when the US stock market hit a "permanently high plateau" (in the words of Irving Fisher) in 1929, it was ready for another bull run.
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