Problems of Growth and Stability
Edited by Pier Carlo Padoan, Paul A. Brenton and Gavin Boyd
Chapter 7: Cracks in the façade: American economic and financial structures after the boom
William R. Emmons and Frank A. Schmid* Many observers of the boom in the USA during the late 1990s concluded that a ‘new era’ had arrived. Real economic growth averaged almost 4 percent annually during the five years ending March 2000, compared to about 3 percent per year during the preceding 20 years. Inflation-adjusted increases in stock prices (measured by the Wilshire, 5000) averaged nearly 19 percent annually during the five years ending March 2000, compared to about 3 percent annual increases during the preceding 20 years. The prestige of the Federal Reserve and its chairman, Alan Greenspan, rose along with faith in the US economy, the dollar, and its stock market. During the nine quarters following March 2000, however, the US economy fell into its first recession in ten years; the annualized rate of real economic growth during those nine quarters was only 1.4 percent. Real stock prices fell at a 21 percent compounded annual rate, wiping away about $4.9 trillion of paper wealth ($5.2 trillion after inflation adjustment). Corporate profitability and business investment – especially in high technology and telecommunications – collapsed. Bankruptcy and bond default rates increased as the huge debt loads taken on by optimistic entrepreneurs and established firms alike became crushing burdens unsupportable by dwindling revenues. Corporate-governance scandals threatened to undermine the prestige of the American financial system. Meanwhile, federal government budget deficits re-emerged as tax revenues plunged and spending commitments – especially relating to the aftermath of the 11 September terrorist attacks – soared. The Federal Reserve slashed...
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