So I read David Malpass on National Review. He has a list: six key policy actions that Bush can take to boost the stock market:
The problem is that this macedoine of policy proposals has next to nothing to do with the stock market. The first suggestion is positively counterproductive: stopping the decline in the dollar requires making dollar-denominated bonds more attractive to foreigners, hence requires raising interest rates, and higher interest rates put downward pressure on stock prices. The second and third are simply irrelevant: Japan's recession is irrelevant for the value of the American stock market; ditto for Brazil. The fourth is hard to evaluate: only somebody truly certain from faith alone that we are about to move too far in the direction of providing tools to recover from those accused of dereliction of fiduciary duty could know the sign of the effect of the details of the accounting reform bill on the stock market, and by no stretch of the imagination can I see how the effect could be large in either direction. I wish as much as anyone that Bush would abandon his protectionism, but once again it is impossible to see how the damage done by it could significantly affect the stock market.
Only the sixth and last seems likely to--if this administration wished to try to put the screws to the Saudis, and if it succeeded--have any significant positive impact. And that impact would be negated (or more than negated) by the first item on his list.
So why does David Malpass think that these six items are the magic policy bullet to boost stock prices? What train of thought could possibly have come up with such a list--a list that starts with a call for just the higher-interest rate policies that seem most likely to me to push the stock market down further?
Posted by DeLong at July 23, 2002 04:41 PM | TrackbackDavid Malpass on Bush Policy & the Stock Market on NRO Financial
Get a look at this statement, to start off:
'While we must remember that we're emerging from the Great Deflation of 1997-2001 — and that takes time — we are also blessed with a flexible labor force and a relatively low unemployment rate at this point in the recovery. We're in good shape.'
He thinks there was a 1997-2001 Great Deflation? Is this a gold bug thing?
Posted by: Jason McCullough on July 23, 2002 05:39 PMNo, it's not a gold bug thing. I just checked the web, and over the last ten years, gold prices peaked in end-of-95, bottomed out in 99, and have since traded in the 280-320 $/oz range.
I think he means the appreciation in the dollar, as he writes "There was deflationary damage in the ever-strengthening dollar." The first problem with this theory is that two paragraphs later he cites a drop in the dollar as bad news for the economy, and advocates propping it up. The second problem is that the appreciation didn't begin until 1999 -- the ecu/euro exchange rate went from 1.06 in mid '97 to 1.17 at the start of '99, and then steadily rose to 0.87 $/euro a few months ago.
Maybe he meant to imply some link to the 1997 Asian financial crisis? If so he should have spilled it out, because to me it looks like he was just incoherent.
Posted by: Neel Krishnaswami on July 23, 2002 06:46 PM"spilled it out" should be "spelled it out", of course.
Posted by: Neel Krishnaswami on July 23, 2002 06:47 PMAh, ok, that makes sense. I was jumping to conclusions, since NRO actually does run articles calling for a return to the gold standard occasionally.
The position still doesn't make sense though. What is this huge deflation risk from a weak dollar? Assuming it exists, how is the government going to keep the dollar from weakening? They can probably do some sort of short-term propup, sure, but on the fundamentals it's about time for a current accounts reversal.
Posted by: Jason McCullough on July 23, 2002 07:04 PMI don't think so--for gold bugs, the really great deflation took place during Reagan's first term. I don't think Malpass would dare offend by saying anything bad about economic policy under Ronnie.
Brad DeLong
Re: stopping the decline of the dollar -- I assume Malpass has been planning his European vacation?
Posted by: jda on July 24, 2002 08:18 AMOK I'll offer the gold bug interpretation since you asked, although I'm not a gold bug. The gold bugs I would say are those who want us to return to a precious metals currency, who oppose fractional banking etc. It's a given that this is crazy.
I think what Malpass is after is that gold offered a signal at the end of 1996, that the economy was demanding dollars be put into the banking system by the Fed in order to feed the new companies emerging on Wall Street etc.
The gold price collapsed by 30% in the next year. The interpretation was that the Fed did not supply the dollars which the market demanded.
In this gold standard interpretation, each dollar became more desired and more valuable.
The price of gold has crept up steadily since the US economy entered a recession in 2001. With less economic activity, the desire for dollars slacked off, and dollars have become less valuable.
The only clearcut convincing supportign evidence for this gold theory is the change in the CRB, which collapsed roughly in line with gold. No technological changes occured to make this happen.
Where Malpass sort of makes a mistake is in believing that the economy could recover quickly from such a 30% collapse. It takes a lot of time for these things to work there way through.
Posted by: Eric M on July 24, 2002 11:32 AMOK I'll offer the gold bug interpretation since you asked, although I'm not a gold bug. The gold bugs I would say are those who want us to return to a precious metals currency, who oppose fractional banking etc. It's a given that this is crazy.
I think what Malpass is after is that gold offered a signal at the end of 1996, that the economy was demanding dollars be put into the banking system by the Fed in order to feed the new companies emerging on Wall Street etc.
The gold price collapsed by 30% in the next year. The interpretation was that the Fed did not supply the dollars which the market demanded.
In this gold standard interpretation, each dollar became more desired and more valuable.
The price of gold has crept up steadily since the US economy entered a recession in 2001. With less economic activity, the desire for dollars slacked off, and dollars have become less valuable.
The only clearcut convincing supportign evidence for this gold theory is the change in the CRB, which collapsed roughly in line with gold. No technological changes occured to make this happen.
Where Malpass sort of makes a mistake is in believing that the economy could recover quickly from such a 30% collapse. It takes a lot of time for these things to work their ways through.
Posted by: Eric M on July 24, 2002 11:33 AMIn addition to its other shortcomings, the article seems to be lacking an explanation of why the government should make it its business to manipulate stock prices in the first place.
Posted by: Paul Zrimsek on July 24, 2002 11:45 AMEric, in addition, there is at least one excellent reason to sell gold for dollars - the US stock market. When it seemed that 10%/year w/o risk was natural, I'm sure that a lot of people dumped their gold, and bought stocks. I remember somebody in the 1990's saying that the only risk was not being in stocks.
Posted by: Barry on July 25, 2002 05:30 AMCorrection - I meant to say that there *was* at least one excellent reason - the US stock market in the 1990's.
Posted by: Barry on July 25, 2002 05:32 AM