Repeating History is not a Recipe for Economic Recovery

The title of Jeff Madrick’s latest piece for The New York Review of Books, “How Can the Economy Recover?,” shows some signs of optimism, since it at least implies that recovery is possible.  Nevertheless, most of the article makes for pretty grim reading.  The good news is that he has tried admirably to take to task those who would equate recovery with the restoration of growth rates, rather than some more useful metric that would address the quality of life on Main Street.  This is painfully ironic when we consider that the income gap between Main Street and Wall Street seems to be the only quantitative measurement that is  I would like to call attention to a couple of sentences that, by all rights, should emphasize just how distorted this view of economic growth is: growing.

For more than three decades, economic growth had been largely dependent on rapidly rising levels of debt and on two major speculative bubbles, first in high technology and dot-com stocks in the late 1990s, then in housing in the 2000s. What will now replace them?

Unfortunately, nothing is worse than a concrete answer to a rhetorical question;  and one such concrete answer may found today in the latest post to Don Reisinger’s The Digital Home blog on the CNET Blog Network.  That answer lies in the following paragraphs:

Chinese video site Youku made its debut on the New York Stock Exchange yesterday, and after all the trading was said and done, the stock price was up 161 percent over its initial per-share price of $12.80. It closed the day at $33.44. That momentum is helping to carry the stock to even greater heights today. As of this writing, Youku shares are up nearly $5 to $38.36. The company's market cap is now at over $2.6 billion.

Youku's IPO success is following in the footsteps of China's largest search engine, Baidu. According to CBS Marketwatch, which reported on Baidu's IPO in August 2005, the company's shares rose 354 percent that month, sending the price to $66 from their opening price of $27. Currently, Baidu shares are trading at $107.68.

In other words, to answer Madrick’s question, what will replace the speculative bubble of technology stocks in the second half of the nineties will be a new speculative bubble based on Chinese technology stocks!  I have every confidence that there will be many traders on Wall Street who will benefit mightily as this bubble inflates (thus further widening that income gap that separates them from Main Street);  and I am equally confident that almost no one else will benefit (probably even in China, which, as a country, has yet to cope with the consequences of a bursting bubble).  Once again our government will hurtle us down the tracks into yet another train wreck (possibly taking the Chinese along with us);  and, once again, “warnings all” will be “ignored again.”  The only thing I have learned from these experiences is that one should never ask, “Can things get any worse?”