http://www.asahi.com/english/opinion/TKY200402180127.html
POINT OF VIEW/ Susumu Saito: Looks can be deceiving with U.S. economy ---------------------------------------------------------------------------- ----
Fashionable nowadays is the news that the U.S. economy has rebounded strongly since 2000 from the shock of the bursting of the stock ``bubbles.'' U.S. Federal Reserve Board Chairman Alan Greenspan proudly praised the resilience of the U.S. economy in his self-congratulatory testimony to the U.S. Congress last week.
Indeed, the Fed has been apparently preoccupied with its own determination not to repeat the mistakes of its Japanese counterpart in the 1990s following the cave-in of Japan's asset-inflated economy. To wit, Japanese policymakers at that time acted too late and with too little in the way of monetary and fiscal policy to counter the contractional economic forces.
So, readers might get the impression that the U.S. monetary and fiscal authorities have acted swiftly to avoid the Japanese mistake and that the U.S. economy must have performed significantly better for the past four years than the Japanese economy did in the first four years of the 1990s.
Firing off monetary silver bullets
The Fed wasted no time in firing off its monetary silver bullets. In January 2001, only a year after the stock market began its steep slide, the Fed started cutting the federal funds rate from a high of 6.50 percent down to 1.00 percent by June 2003. In two and a half years, the federal funds rate fell by 5.50 percent to 1.00 percent, where it has remained.
Compared to the Fed, the Bank of Japan indeed acted very slowly in lowering the discount rate in the 1990s. Also, the Japanese central bank began to lower its policy interest rate in the second year after the bubble started to burst. On July 1, 1991, the BOJ cut the discount rate by 50 basis points to 5.50 percent from the high of 6.00 percent, which had lasted since August 1990. However, it was only in the sixth year of the 1990s, in April 1995, when the discount rate finally fell to 1.00 percent.
Also, the U.S. fiscal authorities appear to have acted more swiftly and forcefully than their Japanese counterparts in the comparable period after the bursting of the stock bubbles.
The American budget balance (federal, state and local) has swung from a ``surplus'' of $268.7 billion (29.557 trillion yen) in the first quarter of 2000 to a ``deficit'' of about $500 billion in the fourth quarter of 2003. For the past four years, the total swing in the budgetary position has amounted to more than $760 billion, or 6.8 percent of gross domestic product in the final quarter of 2003.
Likewise, Japan's budgetary position on a comparable basis with the United States swung from a ``surplus'' of 9 trillion yen in 1990 to a ``deficit'' of 8 trillion yen in 1993. But the total swing of 17 trillion yen in the budgetary position from 1990 to 1993 amounted to only 3.5 percent of GDP in 1993.
The problem is that the response of the American economy, despite the massive doses of monetary and fiscal medecine, has not been so impressive as the U.S. policymakers would have us believe.
Most readers might be surprised to hear that the U.S. economy actually lagged behind the Japanese economy in the first three and a half years after their respective stock bubbles burst.
>From the first quarter of 1990 to the second quarter of 1993, Japan's GDP
expanded 13.8 percent in nominal terms and 7.3 percent in real terms. During
the comparable period from the first quarter of 2000 to the second quarter
of 2003, America's GDP grew only 12.6 percent in nominal terms and 6.1
percent in real terms. In the early part of this period, the U.S. economy
indeed lagged far behind the Japanese economy. Only in the second half of
the fourth year after the stock market reversal did the U.S. economy
begin-and then only marginally-to outperform the Japanese economy.
Then, after a temporary economic standstill in 1993, the delayed doses of monetary and fiscal medicine began to mend the Japanese economy all through 1997 as briskly as the recent pace of the U.S. economy.
The challenges facing the U.S. economy are at least twofold. One is that the U.S. economy has already used up an even larger dose of monetary and fiscal medicine over the past four years than the Japanese economy did during the first seven years of the 1990s. Another is that the U.S. economy cannot finance its economic expansion with its own internal resources, as has been exemplified by the ballooning current account deficit. This is unlike the Japanese economy, which retained a sizable current account surplus even in 1996, the seventh year after the bubble burst.
First of all, it's doubtful whether the American public is prepared to incur indefinitely larger and larger budget deficits to finance a further expansion of the U.S. economy in the current form. Tax cuts have benefited the wealthy, but the expansion of jobs has been almost nonexistent.
Secondly, the Fed is quite unlikely to raise interest rates despite the ballooning current account deficit and a falling dollar if its primary focus remains the continued growth of the U.S. economy.
All the contradictions arising from U.S. monetary and fiscal policy appear to be masked temporarily by massive interventions to support the dollar, primarily by the Japanese central bank, and to a lesser extent by the other Asian central banks.
Such operations in the currency market have amounted to larger and larger purchases of the U.S. deficit bonds.
The problems arising from such ad hoc measures are multiple.
First, the trans-Pacific trade imbalance has tipped further, resulting in the buildup of massive countervailing forces to be unleashed later in the currency and other financial markets.
Second, counting on the seemingly insatiable appetite of the American customer, the allocation of economic resources in the Japanese and other Asian economies appears to have been distorted to a larger extent than before.
Behaving like innocent merchants
In this trans-Pacific macroeconomic picture, Japan and the other Asian nations appear to be behaving like innocent merchants willing to sell on credit as much as their customers want. This framework has persisted for the past three decades or so, ever since the United States began to float the dollar in the currency market.
Sensible persons even without business expertise know the ultimate consequences of such relations between merchants and customers.
* * *
The author is director of the Trilateral Institute, Inc. (Sankyoku Keizai Kenkyusho), a private think tank based in Tokyo. His column runs on the third Wednesday of each month. He contributed this article to the Herald Tribune/ Asahi.(IHT/Asahi: February 18,2004) (02/18)
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