From all appearances, the U.S. economy seems to be doing well. The Dow Jones is at an all-time high, and the S&P 500 last week reported its highest level ever. But there is more to the story that could indicate continued fragility, which has some analysts questioning America’s long-term economic outlook.
In the last 10 months, the S&P growth has been heavily confined to a handful of stocks, and among them is Seattle-based Amazon, which recently celebrated its 25th anniversary. The company went public in 1997, trading at $18 a share; today that share is worth over $900. Yet only recently has it reported significant profit – or any profit at all.
So what if all this reported growth is just an illusion?
This and other questions were posed by Jeff Deist, president of the Mises Institute, in a speech titled “Is The Sky Falling?” during a Saturday, May 20 forum of the Mises Circle held at Town Hall Seattle.
The Alabama-based institute is named after Austrian economist Ludwig von Mises and promotes the Austrian School of economic thought, which teaches that economic prosperity is created through production and accumulation of capital. Its primary rival economic theory is Keynesianism, which advocates private and public spending to boost the economy.
The topic of Deist’s speech complemented well the title of the forum: House of Cards: Has the US Economy Recovered? Although there are troublesome signs in the economy, whether the sky is falling depends on who you ask, he argues.
However, there is reason to be concerned about the type of growth companies such as Amazon have experienced, according to Deist. “By any measure, Amazon is a blue-chip stock in the new economy.” While it’s large and well-established, “there’s just one little catch with Amazon: It doesn’t make money. Or at least not much. It’s had some very thin profitable years. For the most part, Amazon has lost money. Now how can this be?”
Two competing answers to that question reflect differing long-term views of the overall economy. One opinion is that the true value of the company isn’t how much money it makes, but rather how much it will make in the future.
“Of course, we can’t know how much Amazon is going to make down the road,” Deist said. “That’s an ‘if’, that’s a ‘what if.’”
The other view, promoted by David Stockman who is the former director of the Office of Management and Budget under President Reagan, contends that such companies are simply overvalued.
Although long-term planning strategies could be the sign of a “new corporate paradigm in America,” Deist argued that it has made investing less of a market and more akin to “horse-betting” – which is not the sign of a healthy economy.
Another indicator calling economic stability into question are the historically low interest rates set by central banks such as the Federal Reserve, which alter capital investments, he said, along with the fact that people are forced into riskier investments when previously safe ones, such as treasury bonds, CDs and money market funds don’t pay as well.
If the sky is indeed falling, it may fall at different speeds for different people, Deist said. “I think the sky really has fallen especially for…probably millions of Americans who simply feel kind of lost in this new economy…People who aren’t comfortable or ready or nimble enough to just say ‘Hey, I’m going to drop everything and move every three years and be part of a new economy.’”
Despite these troublesome signs of inflated prosperity in some industries, Deist said there’s a case for optimism regarding the overall state of the U.S. “At least on paper, America still has the raw materials for success. We have a currency that at least in the short term is the least dirty shirt in the laundry…we still have the best universities in the world, the best and brightest foreign kids flock to them from all over. We have an unbelievably abundant amount of energy in this country…we have twice the amount of oil, and three times the amount of natural gas we imagined we had just a few years ago. We have more arable farmland than any other country on the earth.
“And I think most of all we have this indefinable…sense of optimism. There’s something uniquely American about this.”