FINANCIAL PROBLEMS SPREADING THROUGH THE ECONOMY--Recession Now Probable

Mount Kisco, NY, October 24, 2000BIn the fourth quarter, with the stock market down considerably from the end of 1999, the negative impact on consumersB wealth and willingness to spend will most likely cause their consumption to fall and saving to rise. If so, the increase in personal saving will cause the profits decline to steepen, making it even harder to escape financial crisis and recession, according to the current issue of The Levy Institute Forecast and Macroeconomic Profits Analysis, published monthly by the Levy Institute Forecasting Center.

BDisappointing profits and revenues have been an important cause of the recent stock market difficulty,B writes David A. Levy, director of the Levy Institute Forecasting Center. BOverall, business conditions declined during the third quarter, and anecdotal and leading business indicators suggest worse news ahead.B

The Forecasting Center disputes the widely accepted notion that nothing worse than a gentle slowdown is at hand, and points out the following problems with this conclusion: (1) The stock market wealth effects are far greater than generally appreciated and the stocks increasingly look like they are in a bear market; (2) The weakening of the economy will tend to slow capital spending, causing a further slowdown; and (3) The deteriorating condition of the credit system is yet another problem area. All three spheres of trouble will interact and reinforce each other.

Excessive debt may be the economyBs greatest problem. BThe boom of the late 1990s was financed by rapid debt growth,B according to the Levy Institute Forecasting Center. BLiquidity provided by the Federal Reserve plus many lendersB reckless disregard for risk pushed already record debt levels to even greater heights. The temptation to view assets with soaring prices, especially stockholdings, as reliable collateral contributed to the lack of judgment.B Currently, in virtually every credit market, lenders are experiencing unexpected problems and many borrowers are finding it more difficult to raise funds.

In addition, the vulnerability of the international economy and financial system canBt be ignored, the Levy Forecasting Center contends. BThe rest of the world depends on the United States for profits to an unprecedented degree. Moreover, in much of the world the debt is more excessive than in the United States; in many countries leverage is greater than it was in 1997.B

The probability of a recession beginning in the coming 12 months is 70%, says the Forecasting Center. BBut even if the economy escapes a downturn in the coming 12 months, it cannot eliminate the massive debt overhang and its dependence on boom conditions to forestall a systemic financial crisis.B

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-- Carl Jenkins (Somewherepress@aol.com), October 25, 2000