a future that is not only unknown to mortals but like toothsome taffy is stretched to the breaking point.

Something similar can be said of President Bush�s tax cuts. �In January consumer spending grew at a surprisingly brisk 0.4% rate unadjusted for inflation [over that in December], the Commerce Department said. One striking factor: last year�s tax cut, which helped boost disposable income 1.6%. That strength may not be sustained The University of Michigan said Friday that the index of consumer sentiment slipped for the first time in five months.

�But there were stronger signs of growth elsewhere: In February, the purchasing managers� index maintained by the Institute for Supply Management, shot from 49.9 in January to 54.7. That indicates an expanding industrial sector for the first time in 19 months.

�[This] increased flexibility has been an important source of resilience for the overall economy. In the last decade, manufacturers have tightened their control of inventories, often with supply-chain management software that closely track parts, materials and customer inventory, helping the companies to reduce waste, interest expenses and lead times.�

But this is poppycock when the top management of Enron, Global Crossing, etc., kept their shareholders in the dark about what was a real sale and what was make-believe. And against the economies of capitalizing what might or might not happen in the future, we must place the cost of retaining battalions of lawyers to straighten out the muddle.

These things, however, are treated as �externalities� � i.e., off-balance-sheet. That is strictly after the model of our official economic theory�s handling of the environment, public education and health, and on other non-marketed but vital services.

Possibly the point would register more easily if we dropped the term �off balance sheet� for undeclared debts, options, and whatever, and used �externality� instead. Then economists might realize that one such group of �externalities� leads to other externalities. That is the essence of the Enron and Global Crossing scandals.

Like the Efficiency of Cancelling Fire Insurance

Of course, stripping inventories to the bare minimum with the aid of �supply-chain management software,� would be the purest efficiency if the software could alert management to when the economy will turn around and everybody will scurry to build up their inventories to get in on �the good thing.� The fact that it doesn�t will give back some of the supposed efficiencies: prices will shoot up, delivery times lengthen. You might as well cancel your fire insurance in the name of greater �efficiency.�

The same holds for the growing dependence on temporary workers, �who are among the first [to be let go]when business slows.� Temporary employees account for 2% of employment, but they represent more than a third of the net loss of jobs since the end of 2000.

�Perhaps no part of the economy has shown as much increased flexibility as the financial markets. None was as critical in helping the economy survive its slump as the migration from banks to the capital markets. Asset-backed securities and more exotic derivatives have proliferated.

�As the markets have become more sophisticated, they have become quicker to respond to new information, indeed, as fast as the Fed was to respond to the slowing of the economy by starting to cut rates in January of 2001.� But at no time have the Fed, the Bank of Canada, or the Bank for International Settlements abandoned their dogma that �inflation� must be combatted by raising interest rates. This almost destroyed the economy in the early eighties and once again in 1987. In fact a rising price level may not be due to real �inflation,� but to disasters forcing attention to some of the neglected �externalities� � the environment, public health, education, social security. Such �externalities,� in fact, are essential public investments whose costs must turn up eventually in a deeper layer of taxation in the price level. Yet our central banks ignore not only the depression that has overtaken the world, but the alternative to interest rates as a means of controlling real inflation when it exists � for example by the simple device of increasing the reserve requirements that banks must deposit with the central bank as a proportion of their public deposits. This was abolished in Canada in 1991-93 to increase the amount of federal debt the banks could hold without having to put up cash or capital of their own. If the Fed was �fast to respond to the slowing of the economy� it was not that it or the market had become more sophisticated, but that our banks had taken over every aspect of stock market activity. High interest rates no longer served their interests as when they were first and foremost lenders. Rising interest rates are poison to almost every aspect of stock market activities. As for the sophistication shown by their interest in financial instruments in more exotic derivatives, Enron and Global Crossing showed again that derivatives are essentially a gambling device. Too often they are beyond the understanding of the �experts� who sell or use them. Too frequently their purpose is to con rather than to clarify. Too often the gaps in their suppose hedging for purposes of risk management is filled by little more than the dogma of the �self-balancing market.� The highly unbalanced state of the world today is overwhelming evidence that the deregulated market is anything but self-balancing.

Globalization is Shrinking the�World

The important phenomenon that commentators shut heir eyes to is that the virtuous empire is shrinking steadily. The Third World has never recovered from its massive losses caused by the carnivorous interest rates of the early 1980s. Its debts were simply restructured. The effects of the East Asian meltdown of 1987 knocked out a goodly part of East Asia, as did the Russian partial default on its debt in 1998. More money has been pulled out of the Third World in the past decade that has gone back into it. Now the Argentine, once a promising First World Country, is a basket case as is Japan, its banks crammed with assets that have become pure fiction with the collapse of its stock markets and real estate values. Globalization and Deregulation has removed all fire walls against the spread of deflation. At the very time that the Americans are whistling in the dark as only Washington can, obscure items in their financial press are telling of the spread of the �Japanese disease� � really the �American� � to the heart of Europe. Thus, The Wall Street Journal (12/03, �Telecom Debt Gets Tougher to Pare Down� by Almar Latour) informs us: �Since the beginning of 2000, France Telecom�s shares have fallen 85% and Deutsche Telekom�s more than 80%. This sharp decline is a pressing issue all across the European industry, prompting operators to consider writing down investments such as costly new wireless technology licenses that in some cases have so far gone unused. But no major operator has done so yet. For example, Telefonica SA of Spain stated recently that it has no plan to write down investments in Group 3G, the German venture with Finland�s Sonera Corp. that many observers consider valueless.

�The ratios of debt to market capitalization of France Telecom and Deutsche Tele�kom are, respectively 160 and slightly more than 100%, the first and third-highest in Europe: KPN NV of the Nederlands is No. 2 with a ratio of 156%.�

There are several further shoes waiting to drop. And with Globalization this will not stop at the shores of the Atlantic. A good part of the revival spirit that has taken over Wall Street is sheer hysteria � the hysteria of fear about what has yet to happen.

William Krehm �from Economic Reform, April 2002