More Reason Not to Get Too Excited

As the market go-go-goes, should we be breathing a sigh of relief? Probably not. For one thing, volatility is not the sign of a healthy market--in either direction. For another, I've already mentioned the false sense of solvency the changed in the accounting rules caused. But last and most important, this recent market surge has come on the heels of "less bad than expected" profit numbers from several big companies. But why are they less bad? Robert Reich, Clinton's secretary of labor, warns:

"[T]hose profits aren't being powered by consumers who have suddenly found themselves with a lot more money in their pockets. The profits are coming from dramatic cost-cutting -- including, most notably, payroll cuts. If a firm cuts its costs enough, it can show a profit even if its sales are still in the basement."

"The problem here is twofold. First, such profits can't be maintained. There's a limit to how much can be cut without a business eventually disappearing -- becoming, in effect, a balance sheet in space. Secondly, when businesses slash payrolls to show profits, consumers end up with even less money in their pockets to buy the things businesses produce. Even if they hold on to their jobs, they're likely to fear that they won't have the jobs for long, which causes them to retreat even further from the malls."

Read his whole blog post here.