[OPE-L:1199] Re: Re: Re: Re: monetary inflows versus capital accumulation

From: Fred B. Moseley (fmoseley@mtholyoke.edu)
Date: Mon Sep 13 1999 - 00:42:27 EDT


Thanks very much for your comments. My brief responses below.

> > The US rate of growth right now depends above all else on
> > consumer spending, which in turn depends heavily on the
> > stock market...
> I wonder if that might be overstated. It's interesting to look
> at the components of US GDP over the last few years. Between
> 1995.1 and 1992.2 investment has risen from 14.6 to 17.9% of
> GDP, while consumption has risen from 67.8 to 69.2%. (Government
> purchases have fallen from 18.7 to 16.9%, and net exports have
> fallen from -1.6 to -4.3%.) While consumption has increased as
> a proportion of aggregate demand, investment seems to have been
> the really dynamic component. Of course a big drop in the stock
> market would hurt investment too... but I'm not sure how likely
> that is.

I agree that investment spending has been strong in the 1990s. But the
increase of the investment share of GDP is mostly a recovery of the
decline of the investment share in the 1980s. If you look at a graph of
the investment share of NOMINAL GDP, it looks like a pretty neat V, with
the beginning and ending peaks about equal (16%) and the trough in 1992
(13%). You cite the investment share of REAL GDP, which has increased
somewhat above its early 80's peak (17.9% compared to 16.2).

But to me what is really extraordinary and unprecedented is the rapid
decline in the savings rate from around 6% in the 1994 to MINUS 1% today.
Without this decline in the savings rate, the rate of growth in the US
economy would have been about 1% less a year. But surely this decline of
the savings rate into negative territory cannot continue for much longer.

> One other observation (just "thinking aloud"): Yes, it seems
> very plausible that the stock market has a lot to do with
> buoyant personal consumption in the US -- but could the new
> state of the federal budget also be a significant factor? I
> think one could make a case that government saving has displaced
> personal saving.

Or one could say household spending and household debt have replaced
government spending and debt. I think this is true to some extent. But
this shift also makes the economy more vulnerable. Households are a lot
more vulnerable to defaults, bankruptcies, etc. than is the federal
government. This is the main factor that makes me think that, if a
recession does indeed occur in the next year or two, then it will be a bad
one. Households will have to cut back their spending sharply in order
meet their debt payments and rebuild their savings lost from a stock
market decline; so the negative multiplier effect will be large.

Thanks again.


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