Dr. Ed Yardeny on the current economy!

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*** See my special essay below on the causes of the longest economic expansion in US history. ***

COMMENT: An inflation scare on Friday pummeled stock prices. A global synchronized boom and tight labor markets could put some upward pressure on costs and prices. But, I expect offsetting deflationary pressures from productivity, technology, and lower oil prices. Investors are starting to worry about a series of rate hikes this year. I still expect just two 25-bp rate hikes during the first half of the year. My range for the Dow is 10000-13000 this year, with the bottom end likely to be tested in the next few months. The top end is my target for yearend. A flight to quality and talk of paying off the federal debt pushed bond yields lower notwithstanding renewed inflation jitters. My range this year is 6%-7% and 5%-6% in 2001.

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Dr. Ed

ESSAY: The Longest Expansion & Economic Democracy

The US economy is experiencing the longest expansion in our history. The forces driving our prosperity remain very powerful suggesting that the prospects are good that the expansion will continue. If I had to explain in 15 words or less why the US economy is performing so well, I'd say: Since the late 1970s, the individual has enjoyed more and more Economic Democracy. To put it in terms of Adam Smith's "The Wealth of Nations," the individual has more opportunities to pursue his and her self-interests and is less constrained by special interests. "Power to the People"--the mantra of the 1960s radicals--has become the established modus operandi.

Here are some of the sources of our new Economic Democracy:

1) DEMOCRATIC MARKETS. In the United States, and increasingly around the world, markets have been deregulated and opened to global competition by the elimination of Iron Curtains, Berlin Walls, and other trade barriers. Often, these barriers and regulations protected special interest groups at the expense of consumers. Power has shifted away from politically well-connected producers to consumers. In competitive markets, producers have lost their power to raise prices. Instead, to be profitable, they must find ways to offer consumers better and better products and services at lower prices. This forces them to cut costs, increase productivity, and to innovate. Increasingly, the individual has the power to choose the best products and services at the lowest prices from any producer in the world.

2) DEMOCRATIC CAPITAL. In the past, would-be entrepreneurs were unable to bring their ideas to the market for lack of financing. The deregulation of the US capital markets during the 1980s brought greater democracy to finance. Innovations such as high-yield bonds permitted much greater access to capital for entrepreneurs. The proliferation of Populist Capitalism means that the distinction between workers and capitalists is disappearing. More and more employees are getting a stake in their companies through profit sharing and stock incentives.

3) DEMOCRATIC TECHNOLOGY. Technology is empowering more and more people, and liberating us from the constraints of space and time. The PC and the Internet are "capitalist tools" that everyone can own and use. They level the playing field by giving everyone the same access to a seemingly infinite source of information, knowledge, and opportunities. Anyone can communicate and transact with anyone else on the planet any time. As broadband technologies become widespread, we will all have a 24x7 open line to the world.

Here are the probable consequences of greater Economic Democracy:

1) Inflation is dead. Of course, there can be brief spasms of inflation and plenty of inflation scares. But competition, productivity, and technology are all powerful inflation suppressors. So policy-engineered recessions to beat down inflation are less likely.

2) The tradeoff between economic growth and inflation is dead. There probably never was a tradeoff anyway. In the past, it was uncompetitive markets that caused higher inflation, which led to higher unemployment. Competition has lowered inflation, which has led to lower joblessness. As labor markets have become more competitive, we have all lost our job security. Instead, we have more job opportunities and record real incomes.

3) Productivity is alive and well. There is no reason why the rebound in productivity growth during the second half of the 1990s can't continue and even gain momentum. The technology revolution is in its early stages. Broadband, Internet appliances, B2C, and B2B all have the potential to boost productivity dramatically.

4) The forces of Economic Democracy are self-propagating. As they create more prosperity for more people, they spread around the world. Nothing succeeds like success. More and more people and their governments around the world are recognizing that the true meaning of life is SHOPPING! The well-being of the consumer is increasingly at the top of most economic agendas. The best means to achieve this goal is Economic Democracy.

The risk is that success breeds excess. In other words, we have nothing to fear but greed itself. In the past, economic recessions and even depressions followed the bursting of speculative bubbles. The bubbles burst when tight credit replaced easy credit. This happened in 1998 in Asia when capital poured out of the region. But Asians responded quickly by accepting greater Economic Democracy, and capital poured back, thus reviving economic growth. Some of the air is coming out of the speculative bubble in the US stock market right now. I doubt that this will be enough to derail the longest expansion as long as Economic Democracy continues to gain ground around the world.

Ed Yardeni

-- freddie (freddie@thefreeloader.com), January 29, 2000


Economic democracy?

Did he say "economic democracy"?


That term was created by Derek Shearer. Here's how _he_ defines it:

"Socialism has a bad name in America, and no amount of wishful thinking on the part of the left is going to change that.... The words Economic Democracy are an adequate and effective replacement."

Oh, who, you ask, was Derek Shearer?

He was Bill Clinton's chief economic advisor.

-- Sluggo (sluggo@your.head), January 29, 2000.

I found this to be an odd evaluation, considering that there is no reason to think the price of oil will go down or that inflation is beaten. I feel that he was so cowed by priorly being wrong that he's gotten on the bandwagon. I guess it's more comfortable to be in the crowd and be wrong than to be out of step and be wrong... Then, too, I could be wrong. What do I know?

-- Mara (MaraWayne@aol.com), January 29, 2000.

You GO Sluggo!

-- Hokie (Hokie_@hotmail.com), January 29, 2000.

This fucking moron should be ashamed to show his face in public.

-- Earl (earl.shuholm@worldnet.att.net), January 29, 2000.

Was'nt he wrong with his y2k predictions?

-- just (just@wondering.com), January 29, 2000.

Was'nt everybody wrong about Y2K except old Koskinen? Our country is NOT a democracy, it's a REPUBLIC. It is also mentioned in the pledge of allegiance that our country is a REPUBLIC!

-- ... (...@...com), January 29, 2000.

Those who predict usually end up eating glass as the saying goes.

-- Getmoor (Gold@better dot.com), January 30, 2000.

Quote from above Post:"The US Economy is experiencing the longest Expansion in our History" Translation:The Fat Lady is developing some real Gas Pains,it won't be long now, before she can no longer hold it,and blow that "Budweiser"right across your greedy,long Noses.(and You thought she was going to sing:-) )

-- Liberator (Feeding@the Trough.com), January 30, 2000.

Re: Dr. Ed - His prediction was for a 70% chance of a recession in 2000 due to preparation for, problems caused by and the aftermath of y2k. I never did see him call for a complete meltdown. My opinion is that he will get his predicted recession. The ducks are falling in line, higher interest rates, higher fuel prices, increasing layoffs (A T & T - 20%?, Coke, Amazon, Raytheon and growing), probable increase in margin rates, draw down of Y2k stockpiles,more companies missing earnings estimates, declining stock market, last years IPO's maturing past the "lock up" period etc. Yardeni is a good "outside the box" thinker. I think his predictions of last year will be acurate. The barrage of criticism may have intimidated him into tempering his prediction. It looks to me like the 70% call will be proven to be prescient.

-- REvans (my2scents@home.com), January 30, 2000.

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