<!doctype html public "-//W3C//DTD W3 HTML//EN"> <html> <head> <style type="text/css"></style> <title> Re: Greenspan </title> </head> <body> <div>>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?</div> <div> </div> <div>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...</div> <div> </div> <div>Brad DeLong</div> <div> </div> <div>Ah. Here it is: February 5, 1999 Wall Street Journal:</div> <div> </div> <div>  <x-tab>       </x-tab>Leader Surprisingly Resilient, America Even Gains From Global Pain By MICHAEL M. PHILLIPS Staff Reporter of THE WALL STREET JOURNAL 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."</div> <div>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.</div> <div>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."</div> <div> -- Alejandro Bodipo-Memba contributed to this article. </div> </body> </html>