Marta Russell ap888 at
Sat Feb 20 11:20:54 PST 1999

Brad and Doug and Henry,

I am abundant in Greenspan sources now. Let the good times roll.


Brad De Long wrote:

> >Marta Russell wrote:
> >>A while back there was discussion about Greenspan making some noise
> >>about the fact that the U.S. could not remain an "oasis" in the
> middle
> >>of the world economic mess. Does anyone have a source for that
> >>statement? I think he said it at a speech he gave in Berkeley last
> September that I went to, but I do not have the text handy... Brad
> DeLong Ah. Here it is: February 5, 1999 Wall Street Journal:
> Leader
> Surprisingly Resilient, America
> Even Gains From Global Pain
> WASHINGTON -- Federal Reserve Chairman Alan Greenspan has sternly
> warned Americans that the U.S. cannot remain "an oasis of prosperity"
> amid global economic turmoil.
> Sounds wise, but is it true?
> Sure, countries from Japan to Brazil are economic disaster zones, and
> their residents face lean times. Yet the U.S. is enjoying economic
> conditions unseen for a generation. The U.S. economy just ended its
> second straight year of growth near 4%, unemployment has been below 5%
> for 18 months, and inflation is a paltry 1.6%. At least for the
> moment, the stock market is hovering near record territory. In other
> words, Americans aren't just luckily avoiding the worst of what ails
> much of the rest of the world. They are swimming in money, jobs and
> low-priced goods -- all in a wider sea of global turmoil.
> "Global economic crisis? Is there really such a thing or are you just
> making that up?" asks Melinda Wodatch, a receptionist at a McLean,
> Va., home builder. Well she might wonder. Sales of newly built homes
> in 1998 were a full 10% higher than in 1997, thanks to a triple
> blessing of strong employment, low mortgage rates and favorable
> weather.
> Gaining From Instability
> Ironically, in important ways the global financial mess has actually
> been good for the U.S. Instability abroad has helped keep inflation in
> check by reducing import prices, has allowed interest rates to fall
> and has generated a windfall of foreign money to support American
> businesses and their stocks. Globalization, it turns out, doesn't
> necessarily mean that everyone sinks or swims together, and right now
> the U.S. seems to be standing on the shoulders of the ones whose heads
> are underwater.
> "Apparently, so far, we aren't an oasis -- we're thriving as a result
> of the global malaise," says Donald Ratajczak, director of the
> economic-forecasting center at Georgia State University.
> Certainly, the malaise could come ashore here as well, especially if
> the stock market experiences a sustained downturn or the global crisis
> gets even worse. But up to now, America's good fortune has surprised
> many economists. While the International Monetary Fund has repeatedly
> had to downgrade its economic-growth projections for much of the world
> over the past 18 months, forecasters here have consistently
> underestimated the U.S. economy.
> "Everything we forecast turns out to be too pessimistic -- over and
> over again," says Jeffrey A. Frankel, a member of President Clinton's
> Council of Economic Advisers. They're still trying; just this week the
> White House estimated that U.S. economic growth will slow to 2.4% this
> year, down from 3.9% in 1998.
> J.P. Morgan's forecasts have been among the bleakest. In December
> 1997, when South Korea desperately negotiated a $58.4 billion
> international rescue package, J.P. Morgan predicted a significant
> slowing of U.S. growth by the end of 1998. Gross domestic product
> actually rose at an astounding 5.6% annual rate during the last
> quarter. Last November, the month Brazil desperately negotiated a
> $41.5 billion international rescue package, J.P. Morgan forecast a
> U.S. recession in the second quarter of 1999. Now the bank's
> economists -- still worried about falling exports, overcapacity among
> manufacturers and possible stagnation in the stock market -- have
> postponed the recession until the second half of this year.
> "In our view, this can go on as long as bond yields and mortgage rates
> keep going down and stock prices keep going up," says a chagrined
> Robert J. Mellman, senior economist at J.P. Morgan. "As soon as
> financial markets level off, you're going to see some real
> weakness."There are two facets to the U.S. economy's surprising
> immunity. First, the collateral damage from the global financial and
> economic crisis hasn't been as severe as many expected. Second, the
> spinoff benefits from the crisis have been more than most experts
> could have hoped.
> One reason the damage hasn't been as bad as some feared is that
> globalization hasn't gone nearly as far as some thought. Trade
> certainly makes up a larger share of the U.S. economy than it did a
> decade ago, but exports still make up only 11% of U.S. GDP. And most
> of that trade is with Canada, Mexico and the European Union, which
> have suffered far less from financial turmoil than have Japan, South
> Korea, Thailand, Russia, Indonesia and Brazil.
> "International trade isn't so important for the U.S. that we couldn't
> get by without the rest of the world," says Harvard economist N.
> Gregory Mankiw, although he certainly wouldn't recommend such a thing.
> To be sure, a decline in U.S. exports has hit American farmers, and
> many manufacturers. Steelmakers in particular have been clobbered by a
> sharp drop-off in export orders and a swelling of cheap imports. And
> others have felt the pain as well, as the U.S. trade deficit has gone
> to $170 billion in 1998 from $110 billion in 1997.
> Down on the Farm
> One typical global player, Caterpillar Inc., the Peoria, Ill., maker
> of heavy equipment, saw its net income drop 33% in the fourth quarter.
> Not only has Caterpillar seen sales shrink in Asia and, toward the end
> of year, Latin America, but its U.S. competitors have also started
> discounting construction equipment in an attempt to make up for their
> own weak sales of farm machinery. Caterpillar's North American sales,
> however, still rose 13% in 1998 over 1997.
> U.S. banks, too, have lost money on the upheaval in developing
> countries. After August, when Russia in effect defaulted on some of
> its domestic debt and devalued the ruble, many U.S. banks and
> bondholders were forced to write off millions of dollars in losses on
> Russian investments.
> The banks, however, have since set aside money to cover those losses
> and have reduced their exposure in the emerging markets. And last
> month, even exports and manufacturing started to show signs of a
> nascent recovery.
> "The fact that the international sector has been a drag on growth
> hasn't really slowed us down that much," says Mr. Frankel of the
> Council of Economic Advisers. He calculates that the trade deficit
> sliced 1.5 percentage points off GDP growth last year. Despite that,
> the economy still grew 3.9%.
> The reason is that the unforeseen benefits of the economic crisis
> have, so far, proven a counterweight to its predictable costs. Even
> some of the same forces that have devastated certain U.S. industries
> have been good for the U.S. economy as a whole.
> Raw-Material Costs
> Plunging commodity prices are a prime example. Imported petroleum
> products cost 43% less in December 1998 than they did in August 1997,
> a month after the collapse of the Thai currency sparked the global
> crisis. Import prices for agricultural products fell 3.3% during the
> same period. That's bad for oil companies and farmers, but it's great
> news for drivers and eaters, not to mention companies that use
> commodities to make other products.
> By keeping raw-material costs down, for instance, Asia's profound
> recessions have helped Toll Brothers, Inc., a builder of upscale homes
> based in Huntingdon Valley, Pa., continue a six-year streak of record
> net earnings.
> "There are products like lumber that would normally be going up in
> price if the rest of the world were booming," says Toll Brothers'
> chief financial officer, Joel H. Rassman. Since the rest of the world
> isn't, "we don't have to compete against other countries like Japan
> for lumber."
> The strong dollar has also helped make imports cheaper for American
> consumers and companies. And U.S. labor productivity has picked up in
> recent years, allowing American firms to keep their prices in check,
> as well. Even the U.S. government has helped things along by
> eliminating its budget deficit, leaving more capital for use in the
> private sector.Focus on Growth
> Those effects have made Mr. Greenspan's job much easier. Instead of
> worrying about inflation, the Federal Reserve has concentrated on
> promoting economic growth, and has lowered interest rates three times
> since September. Lower interest rates translate directly into greater
> economic activity by making it more affordable for companies to borrow
> to buy new equipment and for consumers to borrow to buy more stuff.
> The White Bear Lake Superstore, a Pontiac, GMC and Hyundai dealer in
> suburban White Bear Lake, Minn., this month offers 13 different models
> with low 2.9% financing. A customer can lease a $17,385 Pontiac Grand
> Am for $1,075 down and payments of just $209 a month.
> The dealership's general manager, Lee Gatrell, keeps an eye on global
> economic events. "However, my world isn't that big," he says. "My
> world is right here on my showroom floor." And with interest rates so
> low, and jobs plentiful in the Twin Cities area, customers come in the
> door ready to spend, Mr. Gatrell reports.
> Consumers are the driving force behind the booming U.S. economy, and
> one of the things that makes them so optimistic is the soaring U.S.
> stock market. Even there economists see positive side effects from the
> global financial crisis. With markets climbing and diving all over the
> world, investors have sought the security of the U.S. economy. That
> means foreigners are pouring money into the U.S. markets, helping keep
> stock prices up and bond yields down.
> 'Sea of Excess Savings'
> Foreign purchases of U.S. stocks, corporate bonds and other
> non-Treasury securities measured just $57 billion in 1994, according
> to the Commerce Department's Bureau of Economic Analysis. By 1997
> inflows rose to $197 billion, and they were on a path to hit $228
> billion last year.
> "The world is awash in a sea of excess savings -- there aren't enough
> good investments to go around," says Roseanne M. Cahn, chief economist
> of Credit Suisse First Boston's equity department. "Under those
> circumstances you could do a whole lot worse than buying U.S. stocks."
> Many foreigners -- and Americans, of course -- have taken that advice
> to heart. At the end of January, U.S. equities were valued at $13.1
> trillion, a huge supply of capital that in itself helps keep borrowing
> costs down for U.S. companies.
> "Foreign money is one of the reasons -- not the only reason -- why
> stock prices are so high and interest rates are so low," says Alan
> Blinder, a former Fed vice chairman who now teaches at Princeton
> University.
> It didn't have to work out so well. Back in September, when Mr.
> Greenspan first issued his oasis warning, there was a very real fear
> that lenders, terrified by Russia's default, would stop financing even
> relatively safe corporate activities in the U.S. It was the specter of
> such a credit crunch, and the devastating effect it would have had on
> U.S. and global growth, that prompted the first Fed rate cut.
> Even now, as forecasters are turning more optimistic about the U.S.
> economy, they are careful to point to the risks that still threaten
> this sustained burst of prosperity. Their biggest worry is that the
> stock market might crash, bringing down consumer confidence with it.
> Worst-Case Scenario
> The international situation could also worsen. Already Europe is
> showing signs of slower growth. Brazil is balanced on a cliff's edge,
> and, should it fall, Argentina, Mexico and other Latin American
> countries could tumble, too. A worst-case scenario would envision the
> financial contagion then leaping back to Asia, through Hong Kong and
> China. The damage to U.S. exports would be even more serious, and the
> pressures for trade protectionism here could mount.
> But so far those are only scenarios. The reality is that the U.S. has
> ducked the worst of the global crisis.
> Just last week Mr. Greenspan amended his oasis line slightly. "You
> cannot have the United States as an oasis of prosperity ... if the
> rest of the world is in serious trouble," he told the Senate Budget
> Committee. "So far, we've managed to do that, and so far there is no
> evidence of which I'm aware that that is about to change. But clearly,
> we do live in a global world and we will be impacted in a more general
> way eventually unless the rest of the world starts to pick up in a
> significant manner."
> -- Alejandro Bodipo-Memba contributed to this article.

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