Two spectres that haunt America's future
Paul Samuelson
10/05/1999
Business Times (Singapore)
Page 14
Copyright 1999, STP (1975) Limited
Will Wall St bubble burst or a slower demise of prosperity come from worsening balance of trade?
AMERICA'S economic prosperity continues to prevail -- much as it has done throughout most of the 1990s, and in statistically significant superiority to Europe (Germany, France, Spain, Italy) or any
other advanced regions of the world.
Obviously, Americans are pleased with this good performance and hope fervently that it will persist well into the new century.
Abroad, in countries like Spain or Thailand, the citizenry have no special interest in how the US standard of living has risen or will rise in the future.
After all, America has long been the single most affluent society per capita anywhere in the world, and from that point of view is least in need of further good luck.
However, it has been the case, and will continue to be the case, that Spanish or Thai self-interest should make them wish that there not be in the year ahead any serious interruption to America's full-employment stability and its virtually inflation-free honeymoon.
If serious recession were to strike America in 1999-2000, the US would cease to be a strong importer from Europe and Asia's emerging markets.
US politicians' adherence to free-trade philosophy and practices would become sorely tested once out-of-work voters and money-losing domestic corporations begin to lobby Congress members for import quotas and other protectionist controls.
Recovery in Asia from the mid-1997 Thailand financial collapse has been helped much by (a) the strong US dollar and (b) Washington's acceptance of exchange-rate depreciations by the struggling emerging Asian countries.
Thus, Korean exports were able to soar and keep the country's factories from being shut down primarily because the Korean won could depreciate against the US dollar and thereby cheapen the prices to American consumers of Korean products.
Two spectres haunt forecasters of America's future macroeconomic health.
Will the Wall Street strong bull market have its speculative bubble burst? Such a severe correction would destroy hundreds of billions of dollars of US spenders' wealth, reversing the bulge of consumer spending that has ignited US real GDP growth.
Japanese economic history, in which the land and share bubbles of the 1980s simultaneously burst in 1990, warns how serious for US prosperity would be a 20 per cent to 30 per cent sustained decline in the indexes of US stock prices.
As computers spread the bad news of Wall Street weakness with the speed of light, Madrid and Bangkok stock prices would immediately collapse just as they did after the Wall Street crisis of October 1987. That same sad story would be told about the London, Tokyo, Frankfurt and Paris
stock exchanges.
In turn, Main Street production and payrolls all over the world would drop in sympathy with the universal financial crises -- just as did happen back in the Great Depression years of 1929-1931.
To quote the great American poet, Robert Frost: Some say the world will end in fire, some say in ice.
Therefore, it could be a slow decline when the next recession does hit America -- in contrast to a Wall Street collapse that represents a fiery end to President Clinton's honeymoon prosperity.
A slower demise of prosperity could come from America's 20-year worsening balance of trade. In almost every year since Ronald Reagan's presidency, our trade deficit has worsened. 1999 is worst of all: the US bilateral trade deficit with Europe has established a new record and the future trend worsens; the same with China and with emerging Asian markets.
America's international deficit is foreigners' international surplus. Up until now, savers and investors abroad have been willing to recycle their surpluses back into the New York money market.
The US market is regarded as a safe haven. At the same time, US earning yields on highest-quality securities materially exceed what Japanese and other investors can earn at home.
But at what point will foreign investors come to say: "Our money at stake is growing too large in America. We could be imperilled by the next US recession. Why have to gamble so much of our nest eggs on whether the future US dollar appreciates or depreciates? These days, there may be better bargains to invest our funds in here at home or out there in places other than America."
To summarise: The second major disruption that could precipitate US recession and global upset would be a capital outflow from America brought on by our accumulative total net foreign indebtedness .
This would not happen on any single day. It would be a stretched-out affair, putting repeated downward pressure on the US dollar exchange rate. Depreciation of the dollar would mean, in all probability, appreciation of the euro currency for the European Common Market, as well as
appreciation of the yen and other Asian currencies such as the Korean won.
All this would be a new head wind slowing down recovery abroad from the Asian flu.
Most probably, the International Monetary Fund would, in such a contingency, re-intensify pressures on Brazil and Korea to pursue more austere macroeconomic policies.
This raises for me some key questions. With what probability can we expect in 1999-2000 a bursting of Wall Street's developing speculative bubble?
Are the odds favouring an appreciable dollar depreciation in the next 18 months 2-to-1, 1-to-1, or 2-to-1 in favour of dollar appreciation?
Mine are cautious answers. I'd bet against an appreciable general rise in the dollar exchange rate.
At this time, I'd still bet against a sustained major decline in the Dow Jones and S&P 500 stock indexes.
But I do not expect, and will not welcome, a strong continuation of Wall Street's bull market in stocks.
The single most likely future scenario I expect will involve: (a) some slowing down of US real production growth; (b) some increasing signs of overheating of wage rates and price indexes; (c) further induced tightness by the Federal Reserve of interest rates; (d) some rise in the statistical
reports on US unemployment rates.
All of the above would be compatible in the first years of the new century with gradual catch-up abroad towards America's scale of well-being and productivity.
The populous nations of China and India may become the most important competition to Asian neighbours and developing regions of Latin America and Eastern Europe.
Historians used to have to concentrate primarily on Europe and America. That may have to change in the dynamic decades just ahead. The writer is an economist at the Massachusetts Institute of Technology
Happy traders : but a Wall St collapse would represent a fiery end to US prosperity