The Post-bubble Us Economy: Implications For Financial Markets And The Economy

The Post-Bubble US Economy The Post-Bubble US Economy Implications for Financial Markets and the Economy Philip Arestis University of Cambridge and Levy Economics Institute and Elias Karakitsos Global Economic Research and Associate Member of the Cambridge Centre for Economic and Public Policy University of Cambridge © Philip Arestis and Elias Karakitsos 2004 Softcover reprint of the hardcover 1st edition 2004 978-1-4039-3649-3 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2004 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-4039-3650-9 DOI 10.1057/9780230501058 ISBN 978-0-230-50105-8 (eBook) This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 13 12 8 11 7 10 6 09 5 08 4 07 3 2 06 05 1 04 This book is dedicated to our children Natalia (and to her husband Tom) and Stefan (Philip Arestis), Nepheli and Eliza (Elias Karakitsos) Contents List of Figures viii List of Tables xiv Acknowledgements xv Foreword: John Mather xvi Foreword: Farhan Sharaff xvii Prolegomena 1 xx Introduction 1 2 The Causes and Consequences of the Post-‘New Economy’ Bubble 17 3 Wages and Prices and the Proper Conduct of Monetary Policy 34 4 Corporate Profits and Relationship to Investment 66 5 Long-term Risks to Investment Recovery 101 6 The Housing Market and Residential Investment 136 7 Long-term Risks of Robust Consumer Behaviour 167 8 Foreign Demand 206 9 The US External Imbalance and the Dollar: A Long-term View 235 The Long-term Risks to US Financial Markets 264 10 Notes 288 Bibliography 293 Index 298 vii List of Figures 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 2.1