Imagine a juggler tossing a bunch of balls up in the air. You give him more and more balls to juggle until finally there are too many and the balls crash to the floor.
That is akin to what is happening in the United States. An environment has been created where corporate managements are rewarded through stock options. The name of the game is keeping the bottom line performing and eventually you will have not only a yacht, but also your own aircraft. Greed, to quote Wall Street's Gordon Gecko, was good.
Unfortunately, in the wake of the Enron Corp debacle it seems to be less good.
US earnings growth in the go-go 1990s was typically 15 per cent to 20 per cent a year. But business, whatever the new economy people told us, always runs in cycles. Coming out of the low base of a recession, profits rise, get reinvested in expansion and rise again. Eventually, however, profits are invested in projects which cannot produce a meaningful return, sowing the seeds for the next recession.
That is finally what caught up with the US just as it did in 1997 with Asia, where there were similar beliefs that the business cycle had been repealed.
Captains of industry hate to admit the party is over and so resort to dubious tactics to delay the inevitable. The truth has to be slowly extracted from a kicking and screaming patient.
