1997 was a "magical" year

Real labor compensation house prices and the current account deficit took off

The question I try to answer, is why!

Many may remember that in 2001 the IRS went down on Eron and several other companies for undertaking balance sheet shenanigans. Also, they carried their examination back to 1997.

Did companies exectives suddenly wake up in 1997 & decided that the way to go was to “embelish balance sheets”? Unlikely.

By looking at what happened in 1997 we see that in 1997 labor productivity went above the ongoing trend. Real labor compensation followed suit. This rise in wages made a dent in balance sheets, and with exective compensation linked to company income they were bound to be affected, leading to manipulation.

Also, in 1997 we note the begining of the rise in house prices (that 10 years later was defined a bubble). We note that, also in 1997, the current account deficit increases strongly. Are these moves related?

Remember that 1997 was the year that the Asia crisis happened, begining with Thailand and quickly moving to larger economies such as South Korea.

The adjustment required that Asians decrease their current account deficit. The Asian currencies depreciated strongly and economic policy tightened leading to recession.

At the time, the large economy that was doing well was the US. To facilitate the required international adjustment, the dollar appreciated and given the strong economy, expenditures were directed to non traded goods, with houses being the iconic example.

This shows that labeling current account deficits as “bad” and house prices as “bubble” is misguided. They were the moves required by global adjustments! Its as if Asians “exported their houses to the US” and the US “imported their cars, washing machnes and computers”!