Rakesh, thanks for your comments on my article. A few brief responses: On Sat, 4 May 2002, Rakesh Bhandari wrote: > OPE-L'ers may be interested in Fred M's recent analysis. > > http://monthlyreview.org/0402moseley.htm > > Fred writes > > >The profit share of total income depends on the relative rates of > >increase of prices and costs, especially labor costs. In recent > >years, the profit share declined because labor costs have increased > >faster than prices > > Does Fred now subscribe to a wage squeeze theory of crisis? This is a simplified explanation. In a more complete explanation, I would argue that the reason why labor costs have increased faster than productivity is the continuing increase of unproductive labor. > Fred writes: > > >However, this huge inflow of foreign capital also has its > >disadvantages for the U.S. economy in the longer run. In the first > >place, interest and dividends will have to be paid on this foreign > >capital in future years; that is, a part of the income produced in > >the U.S. economy every year will have to be used to pay interest and > >dividends to foreign investors, thereby draining income from the > >U.S. economy. > > I don't think this drain of income is imminent: there seems to be > little evidence (?) that central banks are diversifying out of the > dollar and much of the foreign debt which the US seems to owe could > be to Americans who only appear as foreigners because they are > operating out of offshore hedge funds. > > Of course one can never be sure given the massive differential > between US and EU P/E ratios. > > At any rate, even if there is a slow down in the inflow of capital to > the US, won't it be primarily due to the strengthening of foreign > economies which will boost US exports especially since the dollar > will fall with a drop off in the inflow of capital. So I don't see > why a slow down in the inflow of capital has to be an important > signal of a crisis in the real economy of the US. Not necessarily. It might be due to a weakening of the US eonomy, in which case the reduction of capital inflows could lead to more serious consequences, as outlned in my article. > However, if capital flows out for the reason: > > >Or the exodus of foreign capital could be triggered by external > >events, like the Japanese banking crisis, which could force Japanese > >banks to sell their U.S. assets in order to offset losses at home > >(Japanese banks own approximately 10 percent of all U.S. Treasury > >bonds). If such a capital flight were to occur, then the U.S. > >economy would be in serious trouble. > > > I find myself agreeing with Fred. After having read Susan Strange's > Mad Money, I have thought that a Japanese repatriation of capital > from the US market is a very likely trigger for global depression. Thanks for the reference. I have not read the Strange book, but I will now, based on your recommendation. Comradely, Fred
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