RECESSION AHEAD?
SMICK, DAVID M.
RECESSION AHEAD? by David M. Smick IF YOU ARE PERPLEXED about the State of the American economy, join the club. For most traditional economists, the rules aren't working. No matter how tight labor...
...No matter how tight labor markets are, how seemingly overvalued the stock market, how dangerous the interest-rate spreads, somehow growth keeps spiraling higher...
...But the country may not be culturally prepared for another wave of Boeing-style layoffs, as the economy is forced to begin competing again with emerging-market economies slowly rising from the ashes...
...This is because hard-hit emerging economies, particularly in Asia, having shrunk their own imports for the last year, are trying to export their way out of trouble (just compare the price of a color television today with a year ago...
...Could a $300 billion trade deficit actually slow down the real economy and cause the dollar to crash, or is the trade deficit a mere benign statistic...
...Translation: Americans are buying large amounts of imports...
...The problem is that Washington could eventually face a difficult choice: absorb further corporate downsizing or succumb to protectionist pressure...
...Late last year, capital previously invested abroad poured into ultra-safe U.S...
...Notice too that global investors are notoriously fickle...
...economy overall continues its healthy expansion, data from the last six months show a U.S...
...Already, Washington's traditional bipartisan free-trade consensus has vanished...
...The Federal Reserve had no choice but to rush through three quick cuts in short-term interest rates...
...The resulting bull-market "wealth effect," giving consumers the confidence to spend, keeps generating growth far above the historic trend...
...Organized labor, which handed the Clinton-Gore administration a significant victory in last year's congressional elections, will demand its due...
...So shouldn't America's flying-carpet ride continue well into the 21st century...
...In the process, America has become a magnet for the world's capital...
...Tough as it is to bet against the current tide of optimism, consider a scenario not nearly so rosy...
...The European nightmare is that the next external shock, whatever it may be—a Brazilian devaluation, a Korean banking collapse, further declines in Japanese business confidence—will produce a new round of easing by the Federal Reserve...
...The early signs are not especially encouraging...
...Stay tuned...
...banking system by curtailing lending...
...trade deficit...
...Don't be surprised if candidates, including those in the Democratic primaries, begin to harp on the growing U.S...
...Don't forget, many of those economies will be operating with currencies devalued 40 percent to 70 percent against the dollar...
...manufacturing sector close to recessionary conditions...
...What if the almost perverse global capital flight to safety in U.S...
...During the Bush and Clinton years, American voters and politicians tolerated a massive restructuring and downsizing of the corporate sector...
...After last year's Russian default, emerging markets are out...
...That's the great unknown of the next several years...
...Today enamored of the United States as a safe haven, they could flip-flop and begin to see America as a high-trade-deficit country in the final stages of a historic expansion . . . with a troublingly large bubble in financial assets, all those overvalued stocks...
...Indeed, ask top European officials their greatest concern today, and they will tell you it is the possibility that the dollar could plummet, leaving the new euro highly overvalued at its inception...
...While the U.S...
...With Europe in transition to monetary union and Japan committing slow-motion economic suicide, it's not surprising that global investors seem to believe there's nowhere else to place their money...
...The economy appears to have achieved a kind of turbo-charged efficiency...
...Routine matters such as fast-track trade-negotiating authority are stuck in a Congress increasingly dominated by partisan extremists...
...Maybe the Greenspan-Rubin team can keep working their magic, but flying-carpet rides seldom last forever...
...Global investors would be tempted to hop off the speeding train—withdrawing investments here and leaving America's equity markets, and the real economy, seriously vulnerable...
...The presidential election is less than two years away...
...Maybe, but then again maybe not...
...financial markets had an ugly underside...
...This may sound great, but can the Fed continue to lower interest rates in the face of already massive and growing current-account and trade deficits...
...The United States, it seems, is at risk of becoming the world's consumer of last resort...
...Treasury bonds, causing quality spreads (the difference between corporate and government bond rates) to widen dangerously and threatening the U.S...
...Before labor goes along with another wave of downsizing, it will apply protectionist pressure in Washington, a city where no one trusts anyone and no one believes in anything...
...David M. Smick is the founder of Johnson Smick International, which advises global financial institutions, and the editor and publisher of the International Economy magazine...
...A weakening of the dollar would then be inevitable (at a time when the Asian economies might no longer be tied to the dollar...
...Unused industrial capacity is growing, at a time when employment and consumer demand remain strong...
Vol. 4 • January 1999 • No. 17
