-Caveat Lector-
[FT February 6 1999 ]
But will the runaway locomotive come off the
rails?
The American railroad engine
is running at full power, but the old "locomotive"
theory of global economic growth can scarcely
work if the international carriages have become
detached. Anyway, on its own and dangerously
unbalanced, will the runaway engine come off
the rails?
Many developing countries are desperate for
economic growth to raise their living standards.
For decades, this seemed to be achievable. In
the 1980s, GDP growth averaged 8 per cent a
year in south-east Asia compared with 2.8 per
cent for the US.
Strategies were worked out for surplus capital
to flow from the rich countries to the "emerging
markets" where returns would be higher. As
much as 20 per cent of British or US pension
funds, it was argued by the bulls, should be
invested for the longterm in the emerging
markets of Asia, Latin America and east
Europe (although Africa was always beyond the
pale). Fortunately, your pension plan never got
nearly that enthusiastic.
Late in the 1990s, though, something has gone
horribly wrong. US growth has accelerated to 4
per cent, but south-east Asia and east Europe
went into recession in 1998 and the Brazilian
crisis appears likely to plunge Latin American
as a whole into the same mess this year.
Nobody knows what is really happening in
China, although parts of Asia are now starting
to recover from the worst.
International investors have been repatriating
their money from almost all the emerging
markets. Global economic growth may be no
more than 1.6 per cent in 1999, making this the
weakest year since the recession of 1982.
The US blames Japan and, increasingly,
continental Europe, which has suddenly
decelerated, for this mess. It cannot understand
why the sleeper coaches are refusing to couple
up. Japan is simply imploding; its economy
appears to have shrunk by 3 per cent last year,
and the latest sharp rise in yen bond yields,
with the associated strength of the yen against
the dollar, might well trigger a further round of
economic contraction later in 1999.
Meanwhile, the euro-zone is obsessed with its
internal politics. This week, the European
Central Bank refused to reduce short-term
interest rates even though the German
economy appears to have hit a brick wall, core
euro-zone inflation is less than 1 per cent, and
the average unemployment rate in the region is
10.8 per cent and rising.
The Bank of England took a much more urgent
line and, on Thursday, docked an unexpectedly
large half a percentage point off its repo rate
although, at 5� per cent, this remains high in
global terms. The disturbing worldwide trends
must have played an important part in the
thinking here. We may be pleased at the cut but
perhaps we should be alarmed, too. The
London stock market celebrated but soon had
second thoughts.
To the Americans, the solutions are glaringly
obvious. The Japanese must "monetise" their
huge fiscal deficit - jargon for saying they must
inflate away the excess of paper claims
compared with the real wealth in the economy.
The Europeans must inject flexibility (or you
might say insecurity) into their labour markets
as well as loosening their fiscal and monetary
policies.
The trouble is, these other cultures are not
easily going to rip up the structures of their
societies in order to comply with an alien
American vision. The fast-ageing Japanese
population is obsessed with security, and
scarcely at all with growth. Inflation is a young
society's game, but the Japanese finance
minister is 79 years old. In continental Europe,
where ageing also plays a part, there is a
pre-occupation with solidarity, or social and
political cohesion - of which the euro, for all its
contradictions, is a powerful manifestation.
American policy recommendations can easily
be seen as self-serving. They are designed to
reduce the Japanese and European trade
surpluses and rescue the dollar from its
impending tumble. Temporarily, a wonderful
bubble has been sustaining the US economy
and, indeed, preserving the American
president. Demand has been boosted by a
Wall Street-based wealth effect (although one
should point out that a not unconnected
"poverty effect" is now engulfing much of the
third world).
The US is becoming a massive debtor,
however, and the overseas creditors, largely in
Europe and Japan, will have the final say in the
end about how long the spree goes on. This
week, fears of overheating affected the market,
and the Federal Reserve might pluck up
enough courage to raise rates next month,
although it ducked Wednesday's opportunity.
We may wonder, however, whether there was
something seriously wrong with the original
development model. Exciting new technology
was unleashed into a rapidly globalising world
economy. In many emerging economies,
imported know-how and imported capital were
employed to potent effect. For years, Asian
investment ran at twice the US level as a
proportion of GDP. Excess supply and
deflation may have been the inevitable
consequences, and not just in the third world,
either: thanks to better technology, Shell's North
Sea crude oil production cost is only $4.10 a
barrel, one-third of what was projected back in
1990.
The hope must be that deflation will turn out to
be associated with a falling prices boom like
that of the 1880s rather than a 1930s'-style
falling prices slump. If so, a few growth sectors
of the stock market will continue to boom, along
with bonds. But the demographics of Japan
and Europe do not give much excuse for
optimism.
At any rate, if the global slump arrives, the
Americans will have their excuses ready. It will
all have been the fault of those who refused to
jump on the gravy train, even though they were
sent tickets.
Louis Proyect
(http://www.panix.com/~lnp3/marxism.html)
______________________________________________________
Get Your Private, Free Email at http://www.hotmail.com
DECLARATION & DISCLAIMER
==========
CTRL is a discussion and informational exchange list. Proselyzting propagandic
screeds are not allowed. Substance�not soapboxing! These are sordid matters
and 'conspiracy theory', with its many half-truths, misdirections and outright
frauds is used politically by different groups with major and minor effects
spread throughout the spectrum of time and thought. That being said, CTRL
gives no endorsement to the validity of posts, and always suggests to readers;
be wary of what you read. CTRL gives no credeence to Holocaust denial and
nazi's need not apply.
Let us please be civil and as always, Caveat Lector.
========================================================================
Archives Available at:
http://home.ease.lsoft.com/archives/CTRL.html
http:[EMAIL PROTECTED]/
========================================================================
To subscribe to Conspiracy Theory Research List[CTRL] send email:
SUBSCRIBE CTRL [to:] [EMAIL PROTECTED]
To UNsubscribe to Conspiracy Theory Research List[CTRL] send email:
SIGNOFF CTRL [to:] [EMAIL PROTECTED]
Om
