-Caveat Lector- > > www.wsws.org > WSWS : News & Analysis : North America : US Economy > > Dollar fears send tremor through markets > > By Nick Beams > 29 July 1999 > > Back to screen version > > Barely weeks after spokesmen for the International Monetary Fund > and other global financial institutions declared that the > so-called Asian financial crisis had run its course, world > financial markets have been experiencing a new round of jitters. > This time, though, the cause of the nervousness is not “emerging > markets” but the situation in the United States. > > The immediate cause of the turbulence, which saw significant > falls on Wall Street and markets around the world, appears to > have been the testimony of US Federal Reserve chairman Alan > Greenspan to the US Congress last week. He hinted at possible > further interest rate rises following the Fed's recent decision > to lift rates by 0.25 percentage points. > > In addition to the fears of interest rate increases, the > instability is being fueled by concerns that the value of the US > dollar could start to slide against major world currencies in the > wake of continuing record US trade deficits. > > The trade gap for May rose to a record $21.3 billion, a 14.8 > percent increase on the previous month and the worst trade > performance since monthly statistics were first collected in > 1992. If present trends continue, and the indications are that > they will worsen rather than improve, the deficit for the year > will reach $225 billion, representing a 37 percent increase over > last year's record trade gap of $164.3 billion. > > In trading on currency markets earlier this week, the euro, after > falling to near parity with the dollar at the beginning of the > month, rose as high as $1.07. Overall, the US dollar fell by 5 > percent against both the euro and the Japanese yen in the space > of a week. > > The drop in the dollar prompted statements by incoming US > Treasury Secretary Larry Summers that the US remained committed > to a strong dollar. Speaking to reporters after delivering a > speech in Washington, Summers said: “As I've said many, many > times a strong dollar is very much in the interests of the United > States. That has been our policy and will continue to be our > policy.” > > Debt and share “bubble” cause concern > > > But the fear in international markets is that growing financial > problems in the US economy, including the stock market bubble and > the rising level of international debt, could overwhelm policy > considerations and aims. > > In his Humphrey-Hawkins testimony to the US Congress last week, > Greenspan pointed to both these processes. While repeating his > previous assertions that technological innovations had boosted > the productivity of US firms, he warned that “the interpretation > that we are currently enjoying productivity acceleration does not > ensure that equity prices are not overextended. > > “There can be little doubt that if the nation's productivity > growth has stepped up, the level of profits and their future > potential would be elevated. That prospect has supported higher > stock prices. The danger is that in these circumstances, an > unwarranted, perhaps euphoric, extension of recent developments > can drive equity prices to levels that are unsupportable even if > risks in the future become relatively small. Such straying above > fundamentals could create problems for our economy when the > inevitable adjustment occurs.” > > During his testimony Greenspan again expressed a fear that the > fall in US unemployment could lead to a push for wage increases, > necessitating a tightening of monetary policy. But even if wages > were held down there were other “imbalances” in the US economy, > which could have “important implications for future > developments”. > > One of these factors is the growth of indebtedness in the US > economy. With US savings levels now at negative levels—a > phenomenon not seen since the 1930s—investment has been > increasingly financed by the inflow of capital from overseas. But > this process cannot continue indefinitely. > > As Greenspan put it: “As US international indebtedness mounts ... > and foreign economies revive, capital inflows from abroad that > enable domestic investment to exceed domestic saving may be > difficult to sustain. Any resulting decline in demand for dollar > assets could well be associated with higher market interest > rates, unless domestic saving rebounds.” > > Questioned on whether the dollar could retain its strength in the > face of the record trade deficit, Greenspan pointed out that the > current account deficit was becoming “an increasingly larger > proportion of GDP and we've asked ourselves how long that can be > sustained without inducing imbalances to the structure of the > economy. > > “Theoretically that obviously cannot go on indefinitely, > something has got to give somewhere. Where it apparently will > give at some point in the future is a lesser inclination to hold > dollar claims on the United States.” > > While Greenspan assured his questioner that this point had not > been reached and the evidence was that capital was continuing to > flow into the United States, there is growing concern among > international commentators that a US financial crisis will erupt > sooner rather than later. > > In an article published last week on the Wall Street escalation, > entitled “Bubbles do burst,” Financial Times economics > commentator Samuel Brittan repeated warnings he made in an > earlier comment published in May that there was “an uncanny > resemblance between the upturn of the 1990s and the upturn > leading up to the 1929 crash. > > “Strong growth in the money supply, a rapidly rising investment > share within GDP, a widening current account deficit and a > personal sector spiraling into deficit are all classic indicators > of a domestic bubble. ... Although there is nothing wrong in a > current account deficit as such in the right conditions, the > rapid increase in the US deficit is one classic indicator of a > bubble economy, especially when combined with rapid domestic > money supply growth.” > > An article in the Financial Times of July 28 pointed to the > “fragile balance” in the world economy and recalled remarks by > former US Federal Reserve chairman Paul Volcker earlier this year > in which he noted that the “world economy was currently dependent > on the US consumer, who was dependent on the stock market, which > was dependent on about 50 stocks, half of which had not shown a > profit.” > > The article warned that a sharp fall in the US dollar could tip > the US economy into recession. Under the best case scenario, a > fall in the dollar would ease the US trade deficit, lower US > growth and gradually let down the stock market bubble. But there > are compelling reasons why such a gradual easing of the financial > crisis is not likely to occur. > > One of the main fears is that while a rise in US interest rates > would, under normal conditions, sustain the inflow of foreign > capital it could lead to a financial panic if it were feared that > this was the prelude to a rapid fall in the dollar. In that case > there would be an exodus from US stocks and financial assets by > investors who feared that any interest rate gains would be > overwhelmed by losses incurred as a result of shifts in currency > values. > > Another factor adding to the instability is the growing > indebtedness of US corporations. According to a recent editorial > in the British Economist magazine, American companies are now > buying back as much as 2 percent of their outstanding equity > every year. > > “On the face of it,” the editorial noted, “America is hugely > profitable: the latest quarterly earnings reports ... will > probably be pretty good. But they should be treated with caution. > If American companies continue to buy back their own shares, > anything that uses them as a denominator—such as > earnings-per-share, or return on equity—will automatically rise, > even if underlying profits are unchanged. Moreover, buying back > shares by issuing more debt means that corporate America is > becoming ever more exposed to risk.” > > Asian markets tumble > > > And while concerns grow about the stability of the US currency > and financial markets, this week's financial crisis surrounding > the South Korean chaebol Daewoo makes clear that the Asian > financial crisis is far from over, despite the optimistic > forecasts of a return to economic growth. > > The Daewoo conglomerate, which accounts for 5 percent of South > Korean GDP, was only saved from financial collapse by a $3.3 > billion rescue operation organised by the South Korean government > and its 69 creditors. Daewoo has a total of $48 billion debt, > some $5.5 billion of which falls due this year. > > The Daewoo financial structure is by no means exceptional. In > June 1998 its debt to equity ratio was reported to be 407 > percent, compared with a ratio of 508 percent for Hyundai and 482 > percent for LG. While the immediate Daewoo crisis has passed, it > is far from resolved and could well be the indication of problems > in the other chaebols. > > Korea's stockmarket fell 3.5 percent last Monday on lingering > concerns over the Daewoo debt moratorium, capping a 14.8 percent > drop over a week. Regional share prices also fell during the > previous week. The Indonesian market lost 10 percent, Singapore > 8.4 percent, the Philippines 7.2 percent, Malaysia 6 percent and > Japan 5.6 percent. > > ----------------------------------------------------------------- > ------- > > Copyright 1998-99 > World Socialist Web Site > All rights reserved > > Record trade deficit in US fuels tensions with Europe and Asia http://www.wsws.org/articles/1999/jul1999/trad-j22.shtml The U.S. Debt Bomb http://www.wsws.org/articles/1999/jul1999/econ-j08.shtml A<>E<>R ~~~~~~~~~~~~~~~ The only real voyage of discovery consists not in seeking new landscapes but in having new eyes. -Marcel Proust + + + + + + + + + + + + + + + + + + + + + + + + + + + + "Believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your common sense." --Buddha + + + + + + + + + + + + + + + + + + + + + + + + + + + + A merely fallen enemy may rise again, but the reconciled one is truly vanquished. -Johann Christoph Schiller, German Writer (1759-1805) + + + + + + + + + + + + + + + + + + + + + + + + + + + + It is preoccupation with possessions, more than anything else, that prevents us from living freely and nobly. -Bertrand Russell + + + + + + + + + + + + + + + + + + + + + + + + + + + + "Everyone has the right...to seek, receive and impart information and ideas through any media and regardless of frontiers." 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