PERSPECTIVES ON THE WORLD ECONOMY
Americans are Taking a Dive With the Rest of the World
By ROBERT J. SAMUELSON [no relation to Paul]
We should not fool ourselves that the recent sell-offs in world
stock markets simply reflect a nervous reaction to Russia's
turmoil or a long-overdue "correction." They signify instead a
gathering fear that the global economy is drifting toward a dangerous
slump, driven by forces that world leaders only vaguely understand
and seem powerless to affect. Even those supposed titans of global
finance--Treasury Secretary Robert Rubin and Federal Reserve
Chairman Alan Greenspan--give little hint publicly that they grasp the
threat or know what to do about it.
This is no longer a minor "Asian" crisis. Japan's recession is its worst
since World War II. Latin America's economies are slowing.
Russia's depression hurts its Eastern European trading partners.
China is slowing. Together, these areas represent almost half the
world economy's output. The United States and Europe, with 40% of
global gross domestic product, cannot easily escape the fallout.
Given today's prosperity, Americans are naturally disbelieving.
Unemployment is 4.5%. Inflation barely exists. Exports--the sector
directly affected by the global slump--are only 12% of U.S. GDP.
But economists (and others) often blunder by projecting the present
into the future. America's prosperity is precarious precisely because
things can't get better; they could easily get worse.
How? The economic expansion began in 1991. Americans have
already bought lots of cars, computers and clothes. Consumer debt
(including home loans) is high. The personal savings rate is less than
1%. Until recently, the jubilant stock market made Americans feel
wealthier. They are spending some of their stock profits. Now, lower
stock prices could dampen confidence and consumer spending, which
is two-thirds of GDP. Exports are already weakening; rising imports
further imperil domestic production. Why, then, would companies
continue to increase investment (11% of GDP)? A recession is
clearly possible.
And a U.S. slump would compound everyone else's problems. The
United States is the world's largest importer, and other
countries--from South Korea to Brazil--need to export to recover.
Lower interest rates would improve the outlook. The Federal
Reserve should cut rates by at least half a percentage point. Lower
rates would ease debt burdens and help sustain consumer spending
and home buying.
The Fed's refusal so far to cut rates seems less and less defensible.
The inflation that an economic boom normally produces has been
largely stifled by global deflation and competitive markets. By various
indicators, inflation in 1998 is somewhere between 0.9% and 1.7%.
The interest rate that the Fed controls--the Fed funds rate, on
overnight loans between banks--is 5.5%. This implies that "real"
interest rates (adjusted for inflation) exceed 4%, which is high
historically.
The reason to lower rates is not simply to give the U.S. economy a
shove. It is also to counteract capital flight out of other countries,
which is now spreading economic distress around the globe. Capital
flight involves moving funds out of local currencies (say, the Russian
ruble or Mexican peso) into "hard" currencies, such as the dollar or
the German mark. When this happens, countries lose foreign
exchange reserves (again, mainly dollars) or suffer sharp currency
depreciations, as their currencies are dumped. Or both.
Capital flight imposes austerity. Countries raise interest rates to
entice investors to keep funds in local deposits--or to dampen
economic growth. A slumping economy cuts imports and saves
scarce foreign exchange reserves. Many countries are now
succumbing to this cycle. Canada's central bank (its Federal
Reserve) recently raised interest rates by 1 percentage point to
stop the Canadian dollar's slide. Earlier, India increased rates from
5% to 8%. What makes sense for one country can, if done by too
many, cause calamity. If all squeeze their economies, their slumps
feed on each other through less trade. This is now an obvious danger.
Lower U.S. interest rates would relax these pressures. It would be
easier to earn dollars by exporting. Dollar investments would become
slightly less attractive for those fleeing local currencies. But lower
U.S. rates, by themselves, probably can't stop capital flight and its
fallout. And this creates a Catch-22: Individual countries can't
recover until the world economy improves; and the world economy
won't improve unless many individual economies do.
What is to be done? Good question. The International Monetary Fund
and the U.S. Treasury have treated each ailing economy as an
isolated case in need of "reform." Larger problems--capital flight,
global growth--have been ignored. Meanwhile, political leaders in the
world's three largest economies (the United States, Japan and
Germany) are weak. The result is an intellectual and political
vacuum. Why shouldn't the world's stock markets be nervous? The
wonder is that it took them so long to get that way.
- - -
Robert J. Samuelson Writes About Economic Issues From
Washington
Copyright 1998 Los Angeles Times. All Rights Reserved
Jim Devine jdevine at popmail.lmu.edu & http://clawww.lmu.edu/Departments/ECON/jdevine.html