Wall Street Journal - September 27, 1999
The Outlook
NEW YORK - The U.S. and Japan have long been like an old married couple. The U.S. likes to spend. Japan likes to save. And for nearly 20 years, this strangely symbiotic relationship has endured, but not without strain.
These days, there are fresh questions about whether the world's biggest saver will continue to provide relatively cheap, abundant capital to the world's biggest spender.
It's no secret that the U.S. economic expansion of the 1990s has been fueled with wads of borrowed money. Corporations are issuing huge amounts of debt, often to buy back company shares. American consumer debt is enormous. And the spending boom here has generated record trade deficits exceeding $25 billion a month. Squaring the current-account shortfall has forced the U.S. to borrow nearly $1 billion a day. Most of it comes from foreign investors.
For many years, only the gloomy fringe of economists and investment bears worried loudly about this, to small avail. But now, such worries are getting a larger audience. There is concern over whether the Japanese and other foreign investors will keep funding America's boom.
To Lawrence Lindsey, former Federal Reserve governor and currently chief economic adviser to Republican presidential hopeful George W. Bush, the huge funding gap is enough to call into question the future of America's "Goldilocks economy." Speaking at an investment conference in New York last Tuesday, Mr. Lindsey noted that "we're already taking in $300 billion a year from the rest of the world to finance our spending boom." Next year, the sum could be even larger. Then he told his audience if they can imagine easily raising well over $300 billion from world investors next year, "then you can imagine Goldilocks continuing through the year 2000." Mr. Lindsey made it clear that he is concerned about growing tightness in credit markets.
The conference where he spoke was organized by the bearish firm of David W. Tice & Associates of Dallas and titled "The Credit Bubble and Its Aftermath." Yet there is no question that he and the other gloomsters see fresh signs of trouble.
The first beeping barometer of concern is the yen/dollar rate. Though Group of Seven officials gave it a verbal nudge downward over the weekend, the yen rose last week to a 44-month high against the dollar. To most observers, this largely reflects a strengthening Japanese economy, and a rush to invest there. But a falling dollar could, at least hypothetically, reduce the appetite for U.S. assets by Japanese.
True, the dollar has slumped before, and Japanese investment has continued to pile into the U.S. But it's possible that in the months ahead, nervous foreign investors, especially Japanese, will require higher interest rates to keep recycling their own huge current-account surplus. And the prospect of higher interest rates is already spooking the U.S. stock market, down more than 9% from its peak in August.
Compounding the issue is a belief among many Japanese investors and policy makers that the U.S. financial markets are in a bubble. In Japan, understandably, people are highly sensitive to asset bubbles, having suffered through the boom and bust of real-estate and equities prices throughout the 1990s. Most Americans are convinced that the U.S. economy is far more resilient than Japan's was a decade ago. Yet nervousness in Japan about the sustainability of America's bull market is palpable.
By extension, Japan worries about the U.S. consumption boom. To the Japanese, whose household savings rate has remained in the double digits all through the perilous 1990s, the U.S. consumption machine looks unsustainable. Some U.S. experts also fear the consumer boom isn't living just on borrowed money but on borrowed time.
What's missing here is an acknowledgment that the equities boom of the 1990s has made tens of millions of Americans wealthier. Also, rising real income has pretty much kept pace with spending.
Something else the gloomy analysts conveniently overlook, is a powerful fact: that a portion of this foreign investment has been used to finance American investment in competitive businesses. It isn't just a matter of financing consumption.
Still, if there isn't an acute problem, there probably is a long-term problem surrounding America's current-account gap. The U.S. has indeed served as the consumer of last resort for a troubled world. As emerging markets in Asia and elsewhere descended into crisis in 1997 and 1998, one country after another exported its way out of trouble. The No. 1 export destination: the U.S. The legacy: huge U.S. trade deficits.
Looking ahead, some pessimistic analysts think this yawning trade gap will prove stubborn. Frank Veneroso, a veteran investment and economic adviser, is convinced that America's trade partners are hooked on their surpluses and will work hard to prevent them from shrinking. Of course, a rapid deterioration of the U.S. economy could reduce the trade deficit quickly. That's the most unhappy scenario.
On the other hand, if the U.S. economy slows somewhat, and if the nascent economic recoveries abroad continue, the worst of America's trade deficit worries could pass within a matter of months. By itself, this wouldn't assure the continuation of the Goldilocks economy into the first years of the 21st century. (It could heat up competition for capital.) But in curbing America's voracious need to plug its yawning current-account gap, it might be enough to undermine the bears' gloomiest prognosis.
--Bernard Wysocki Jr.