FINANCIAL TIMES - MONDAY DECEMBER 7 1998
SPENDING: Paying for shop therapy By Richard Waters Will somebody else out there start spending soon? Please?
These days it sometimes feels as though Americans are the only spenders left. US domestic demand has become the antidote to the world's economic malaise. Send us your tired, your poor and your huddled masses, but above all send us your Hitachis, your Hibachis and your Hyundais.
The shoulders of the US consumer are not broad enough to carry the burden indefinitely. The side effects of this consumer boom could leave a nasty headache when the party is finally over. And that could make the end of the bull market, when it comes, a very unpleasant affair.
The dangers of the US consumer boom are outlined in a paper* today by Tim Congdon, formerly one of the "wise men" appointed by the UK Treasury to advise on monetary policy.
The argument runs as follows. To help US consumers soak up some of the world's excess supply of things such as television sets, barbecue grills and cars, the Federal Reserve has cut interest rates further than it would otherwise think prudent. The extra liquidity in the system has driven share prices to high levels, which has in turn made consumers feel wealthy enough to go out and spend.
The problems with this shot in the arm to the world economy are the imbalances it creates. The US consumer boom is set to send the current account spiralling down, says Mr Congdon. This year's deficit, equivalent to 3 per cent of gross domestic product, may be smaller than the 3.6 per cent of GDP seen in 1987, but the last year of the 20th century could also bring its biggest current account deficit, in terms of GDP.
There is an extra twist to this deficit that makes it potentially more dangerous than 1987. Then, the US was still a creditor nation. The returns it earned on its overseas investments helped offset the impact of its trade deficit, taking pressure off the current account.
These days, the US is a debtor. Rather than investment income flowing in, it flows out in the form of debt service. As long as there is no trade surplus to balance the outflow, the debt keeps piling up. As Neal Soss, chief economist at Credit Suisse First Boston in New York, says: "It accumulates, and then it compounds, and then it gets really big."
How big is anyone's guess. But extrapolating from current trends suggests the US will be a basket case by the year 2010, according to Mr Congdon. Its foreign liabilities could by then be 50 per cent larger than its foreign assets - the sort of situation found in what he calls "semi-bankrupt developing countries".
Somewhere along the way, foreign investors would have had their fill of dollars and bond yields would have had to rise sharply to keep the money flowing in. Also, to balance the drain on the investment account, the trade deficit would eventually have to turn into a surplus.
That would mean squashing domestic demand, something that could only happen by damping the wealth effect - and that means lower share prices, says Mr Congdon. The longer the deficit piles up, the bigger the correction needed.
As predictions about the real world go, long-term extrapolations are usually of little worth. Whatever happens over the next 12 years, it will probably not involve an endless repetition of what has happened in the past 18 months. But such exercises do have their uses in illuminating the limits of current policy.
Unfortunately, Alan Greenspan has few options at the moment. That makes last week's European rate cuts a welcome relief. Perhaps other nations will eventually help to take up some of the slack. Indeed, they might have been forced to act sooner if Mr Greenspan hadn't been so accommodating with US monetary policy, says Mr Congdon.
Mr Soss says: "Right now, the world needs large current account deficits in the west to support large current account surpluses in Asia." The US deficit may well become the next big problem or the one after that, he adds, but "the world is not ready for the US to adopt austerity now".
Let the bull market continue - only don't think it will last forever.