“IT'S only when the tide goes out that you can see who's swimming naked.” This famous remark by Warren Buffett, America's best-known investor, is a perfect description of what is happening in the American economy at present. The bubble in the late 1990s masked excessive borrowing by firms and households, widespread accounting fraud and the incompetence of company bosses, but now the effects of irrational exuberance and infectious greed are being shockingly exposed. Share prices have suffered their steepest slide since the 1930s. The tide has well and truly receded.
Yet most economists are still predicting robust economic growth of 3-3.5% over the next 12 months. Many of these are the same economists who in the late 1990s dismissed the idea that America was experiencing a bubble, and who insisted only last year that the economy was not heading for a recession. They were wrong then and are likely to be wrong again. America's economic downturn is not yet over. A protracted period of slow growth—perhaps even a further slump in output—is likely to expose more financial embarrassment of the Enron and WorldCom sort.
This is no normal business cycle, but the bursting of the biggest bubble in America's history. Never before have shares become so overvalued (see chart 1). Never before have so many people owned shares. And never before has every part of the economy invested (indeed, overinvested) in a new technology with such gusto. All this makes it likely that the hangover from the binge will last longer and be more widespread than is generally expected.
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